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Money Times - July 17, 2018

Posted by Jill Kerby on July 17 2018 @ 09:00

INERTIA IS EVERY RETIREMENT WANNABE’S WORST ENEMY

Procrastination and inertia come at a cost. Fewer than 40% of private sector workers belong to a pension scheme or have a private plan of their own.  For many, this is because their employer does not offer an occupational scheme (or a PRSA group scheme to which they are otherwise obliged) and they have decided they either cannot afford a private plan of their own (especially if they are trying to save for a home) or feel they have no need for one.

This coverage figure has been dropping for the last decade and the government claims to be committed to introducing a universal auto-enrolment scheme by 2023. 

It can’t happen soon enough, but our current, complex, multi-type pension system needs serious root and branch reform, all parties – workers, unions, employers and the Oireachtas need to be on board …and time is running out. 

Nearly an entire generation of young, and not so young workers are at risk of depending entirely on the pay-as-you-go State Pension when they retire, just as the older population of Ireland is rapidly increasing. 

Irish Life, the country’s largest private pension provider has recently produced data from 2,000 Defined Contribution pension schemes which they administer for about 60,000 members.

The findings of this “Better Company Pensions’ report are alarming. The average age at which workers are starting a company pension is 37, but annual contributions from the worker and employer only amount to 11.4% of their salary.

As the table below shows, delaying funding a pension can have a hugely significant negative impact on its final gross value (the Irish Life figures do not take account all costs and charges and the net value will be considerable.)

The pension value examples in this table assumed that the worker and company contribute 11.4% of salary each year beginning at ages 25, 35, 45 and 55. Retirement age is 65 in each case. Each worker’s salary grows each year by 2% (starting from a base of €51,250 for the 25 year old, which seems high given that the average industrial wage is c€39,000.) It is assumed that the pension fund itself grows by 4% gross per annum.

The person who only starts their pension at 35 (which is two years younger than the average age Irish Life has noted) will be starting their contributions out of a salary of €62,474, due to the annual wage indexing that has applied. Their final gross pension fund at maturity will be €311,590, about €150,000 less than the pension fund of their 25 year old colleague who, even though on a much lower salary when they started saving, had a 10 year head start.

Using these assumptions, the 35 year old can expect a gross income of €11,780 a year for life, while the 25 year old, can expect an income of €17,490, nearly €6,000 a year more.

The picture is even worse for the 45 and 55 year olds who start their pensions much later with only 20 and 10 years respectively for their funds to grow. Not only do they have far less time for time and compound interest to do its magic, but they will need to be even more careful about the kind of investment risk being taken:  they may not have sufficient time to make up the periodic losses that are inevitable in investment markets.

Costs and charges and commissions will also inevitably eat away thousands of euro every year from their fund; these costs will have a disproportionate effect on pensions that are started later.

The single two most important factors in producing a satisfactory retirement fund and income, independent financial advisers and planners agree, is that you start saving as early as possible, that is, from your first paycheque and that you save enough. 

A 25 year old who puts away at least 10% of their gross income into a well-diversified, tax deductible, low cost investment fund for their entire working life (which could easily end up being 50 years) and who ideally also enjoys a employer contribution, is unlikely to ever have to worry much about a comfortable retirement, no matter how volatile the markets.

 

Starting a pension at age:

Retirement fund saved by age 65

Expected yearly pension at age 65

Starting 10 years earlier could give an extra

55

€84,470

€3,190

122% 

45

€187,050

€7,070

67%

35

€311,590

€11,780

48%

25

€462,830

€17,490

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*Source: Irish Life, 2018

 

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