Money Times - May 2, 2017

Posted by Jill Kerby on May 02 2017 @ 09:00


The Minister for Social Protection, bless him, thinks that 2021 is a realistic deadline for the introduction of a universal private pension scheme, based, perhaps on the successful Special Savings Investment Account model from the early 2000’s.

Readers may recall the five year SSIA scheme that ran until 2006 in which the government matched every four euro put into an approved savings or investment fund with €1. The maximum monthly contribution of €200 meant the account holder would receive a €50 euro top up from the State.  It proved to be hugely successful with over a million adults opened one account; many a new kitchen, let alone the down payment on an investment property was paid for by 2006 with the tax-free proceeds of the SSIA, considered to be one of the most generous savings incentive schemes in the world.

And that wasn’t just because the top-up was so generous. The SSIA was easy to understand and to set up. The savings option was cost-free and there were low-cost investment versions for those willing to look for them. It was transparent and since it was owned personally, account holders had the satisfaction of watching its value – the contribution and interest or growth – grow every month.

The fact that the SSIA’s final value was entirely tax-free was the icing on top: there’s nothing we love more than a tax-free asset.

Fast-forward 11 years and Minister Varadkar, who like every pension minister before him (and since I’ve been writing about personal finance, that is since 1991) acknowledges that ‘something must be done’ about the falling private pension coverage in this state and the fact that among those people who do have a pension, only a small minority are saving enough into their funds.

Mr Varadkar thinks a soft-mandatory (everyone without a pension is signed up, but can opt out), simple, transparent SSIA-like scheme in which the tax relief on current contributions becomes a cash top up is the way to proceed. 

However, he also thinks such a system – not unlike the universal private superannuation schemes in Australia and New Zealand can be introduced here within four years. On this front he is dead wrong: it took the British 12 years to introduce their new NEST soft mandatory universal scheme, with a low entry contribution level. It will be several years before workers and employers reach ideal savings rates.

The SSIA pension idea is worth considering, but the devil, will be in the detail: will employers be required to make contributions? (They don’t have to at the moment and are against compulsory funding.) How much will the State top up be? The 20%/40% tax credit on contributions is currently allowed? 

The Australians pay into the ‘Super’ with already taxed income but get their pensions tax-free. Here, contributions and growth are tax-free and we pay income tax only when the pension is drawn down.

At the moment, with the cost of housing so high and workers taxed at 40% on incomes above €33,800, Varadkar would be committing political suicide if they tried to force even a soft mandatory pension majority (c54%) of private sector workers who do not have a private pension.

Yet another recent survey by Irish Life confirmed that the pension participation rate has hit a near all-time low at about 46%. Of those in a scheme 76% are making contributions, but over half of them haven’t a clue how much their employer contributes. Irish Life reckons that 90% of people might not hit a target of achieving a pension of even a third of their final salary unless they save more. And where workers are members of PRSA group schemes, chances are the employer is contributing nothing.)

Millions have been spent over the past 25 years by the state supervising and regulating and raising awareness of pensions - and the danger of not having one - yet only 54% of the workers surveyed by Irish Life were even aware of the tax benefits of a private pension fund.

Is a universal, auto-enrolment pension the solution? Yes it is. Is there any great new resolve by the government, unions, employers and workers to finally introduce one? Hardly.

If you are a young, private sector worker without an occupational pension, ignore Leo Varadkar’s good intentions.

Time is not only your side.

Speak to your employer and demand at the least that (s)he sets up a low cost PRSA group scheme (a legal requirement for all but the tiniest of firms). Then badger them to also make a contribution. If that doesn’t work take out an individual one yourself and start saving into it.

Or do like Leo. Get a job in the civil or public service where pensions are generous and secure and ultimately funded from taxes generated in the private sector.

Rest assured that the Pensions Minister isn’t losing any sleep over how his retirement is being funded.



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