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Money Times - March 27, 2018

Posted by Jill Kerby on March 27 2018 @ 09:00

Will You Outlive Your Pension? Let’s Hope Not

 

I once knew an elderly man who said one of the great delights of his old age was that his teeth would outlive him. He was someone who had survived the Great Depression, the Juno Beach landings and was born long before the marvels of modern dentistry (especially in rural Quebec and fluoride-free Montreal).

 I hope my pensions – my private one and the State one - outlive me.

The government’s intention, as laid out in the most recent report on the state of pensions in this country (I’ve lost track of how many there have been over the past 27 years since I’ve been reporting them) is that the broad changes  proposed in the Roadmap for  Pensions Reform 2018-2023 will do just that and make the three pension pillars – the State Pension, Private Pensions and Public Sector Pensions – affordable and sustainable.

Last week this column looked at how a new SSIA-like auto-enrolment pension should increase pension coverage from its current low rate of just under 50% and how by linking PRSI contributions to years worked will provide people with a better idea, at any stage in their working lives, of the kind of total retirement income they can expect.

The PRSI changes are especially critical given the wholly unsatisfactory treatment of workers – most of them women retiring since 2012 - who were forced to or voluntarily gave up employed work for a number of years, only to return to the workforce.

The annual averaging of their PRSI contributions over their lifetime has worked against at least 42,000 people who have been shortchanged. The anomaly was finally recognized and ends officially on March 30. Those affected will be returned to their full pension entitlements by the first quarter of 2019 and can expect a benefit refund for post-2012 loss of income. 

The restoration was necessary if only to ensure that the ‘total contributions approach’ could be included in the just published Roadmap which states that

in the future a minimum number of payments – still undisclosed – will be necessary to qualify for a full State pension and pro-rata pensions will apply for everyone else.

The government will also consider allowing workers “without a full social insurance contribution record increase their retirement provision by choosing to continue making PRSI contributions beyond State pension age and up to the actual date of retirement,” something that already happens in the UK.

This is an important development since the Roadmap also makes it clear that compulsory retirement dates need to go, especially the traditional 65 birthday which then results in workers having to apply for Jobseekers Benefit until they reach age 66 and can claim their State Pension. (Anyone retiring from 2021 will need to be 67 before their state benefits can be claimed so could end up on a Jobseeker’s payment for two years if forced to retire at 65.)

Not only are most Irish workers (outside of heavy industrial or farm sectors) more than capable of working well into their 60s, many people in our post-industrial society only start their full-time working careers in their 30s after years of graduate education, training, internships and contract employment. 

For them, a compulsory retirement in their mid-60s is unlikely to ever produce sufficient combined private/State pension income.

The Roadmap also sets out reforms to public sector pensions, but mostly enshrine changes that have already happened – like the extra Pension Related Deduction that was introduced as a consequence of the post 2008 financial crisis; from January 2019 it will be turned into a permanent Additional Superannuation Contribution.   

Also, public servants hired before April 2004 will have a new compulsory retirement age of 70 (though any 23 year hired by the government in March 2004 is unlikely to be surprised to find that all their friends in the private sector will also be retiring at 70 by 2054.)  

Are these two changes enough to guarantee the sustainability of this pension pillar?  Both the State and Public Service pension systems are woefully underfunded at the moment and future unfunded deficits are already reckoned to be in the hundreds of billions of euro.

The Roadmap claims, at least for public service pensions, that these measures will be enough. But success – the continuation of indexed, service-related pension of up to 50% of career-averaged earnings – will still be entirely dependent on pay-as-you-go general taxation. There is no mention of a new, invested, National Pension Reserve Fund.

The Roadmap for Pensions is an ambitious document and worth reading, (see www.social.ie ) all the more so since it will need a steady stream of taxation to keep funding our State and public sector pensions,  and positive global investment returns to support private sector pensions.

If only for these reasons, if you haven’t made any provision for your retirement yet, the best response of all to this Roadmap…is to hire a good, independent, impartial pension adviser. 

Time may not be on your side.

The TAB Guide to Money Pensions & Tax 2018 is available in good bookshops. See www.tab.ie for ebook edition.

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