Money Times - October 18, 2016

Posted by Jill Kerby on October 18 2016 @ 09:00



Last week’s Budget may have raised the State pension by €5 a week starting next March, but it did nothing to encourage workers to save more into their existing private pensions or AVCs (Additional Voluntary Contribution top up plans that many public servants have) or to start one. 

The Minister for Finance could have reinstated the 4% PRSI tax relief on pension contributions that was removed in 2011 or declared that the USC refunds he was announcing would have to be directed into funding private pensions. Instead he took the politically expedient route of keeping older voters onside with the extra €5 and the 85% reinstatement of their Christmas bonus.

But that’s going to cut no ice with the fact that today’s younger workers are never going to get the same State pension benefit as their elders. Their PRSI contributions are still not invested; the amount collected right now via taxation is not enough to meet current pension benefits, let alone a bill that is going to double in size by the time they’re ready to retire (unless they start having very large families again.)

It’s a ticking can full of explosives, that is so bent out of shape from all the kicking down the proverbial road, that it would have gone off in 2010 if we hadn’t been saved by the Troika bail-out. 

I doubt if any politician, from any party, will ever be brave enough to push through the tough changes needed to stop it blowing up: later retirement; higher income contributions and lower, means-tested benefits and the phasing out of the tax-based, pay-as-you-go system for a universal, transparent, invested one that includes all public and private workers.

Even if a miracle happened and there was political commitment to reform the doomed state pension (at it’s current benefit level), the private pension system isn’t much better. The system is too complicated, costly and not transparent enough. Worker and employer contributions need to be sizeable and compulsory; costs need to be lower and subject to ongoing review.

The only good thing to say is that younger you are, the better chance you have even now of putting enough money together to avoiding having to work forever, or becoming dependent on family, friends or charity in your retirement.

I may be deeply cynical of politicians and senior civil servants ever addressing the pension system, but the Pay & File deadline coincidentally falls in October, Budget month and may help to raise awarness.

You can reduce your annual tax bill by making contributions into a personal pension or AVC by October 31 (mid-November if you file online.) You can claim a 20% or 40% income tax deduction on the pension contribution, depending on whether you pay standard or marginal rates of income tax.

However, buying a pension fund for the tax break, is a poor substitute for having a proper retirement plan that aims to produce the kind of income you want to live on in your old age.

There is a vast difference in the quality of pension/ retirement advice in this country.  It comes down to partiality and remuneration: pension product salespersons earn their living from the commission they receive from the pension manufacturer. A fee-remunerated financial planner is paid by the client for their advice, whether they buy a ‘product’ or not.

For the most part, commission-paid brokers only sell pension products supplied by popular life and pensions companies. They undergo rudimentary training. Financial planners who are members of the Society of Financial Planners of Ireland undergo a advanced financial and investment training to an international standard. (See www.sfpi.ie)

That said, not all SPFI members are fee-based and some experienced, impartial, fee-based advisers are not members of the SFPI.

But proper financial planning starts, not with a retail pension plan recommended by a manufacturer and their agent, but with your financial expectations. A  financial planner pulls together as much information as they can about your entire financial position, your risk profile and retirement expectations and then, where possible, comes up with a plan to achieve those expectations.

Funding a financially “comfortable” retirement is getting more expensive, not less in a world of zero yield bonds and deposits, the so-called safe assets for pension funds. It’s why dependence on the State pension is growing, not diminishing and why widespread pension reform is so important.

You have a deadline: October 31. Top up your existing pension and claim the tax relief. If you’re a young worker, join the company scheme if there is one, or buy your own.

But don’t just buy an old pension.

Find a proper financial planner/adviser with lots of pension experience and ask them to help you take the first right steps in shaping a long-term affordable, dependable retirement plan.



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