Jill Kerby

Why Counting on a state pension just doesn’t add up

Politicians do not concern themselves with the long term effects of their decisions.  The here and now and the next election is about as far as they can focus, and nothing exemplifies this short-termism better than the way state pension systems are run.

The latest ‘Mind the Gap’ European pension update from the insurer Aviva unfortunately shows, once again, that most people at the receiving end of state and private pension have the same short-term view when it comes to retirement funding.

Here in Ireland, 75% of those questioned here in Irelenad, who were a decade away from retirement, are still counting on their state pension to help finance their retirement. They believe they will need at least 50% of their final salary to ensure an appropiate level of comfort.

This might be a perfectly reasonable, and even attainable presumption, if two things were also in place – a solvent state and an already substantial individual pension fund.

This Irish state cannot afford the existing €12,000 a year pension promise to every qualifying PRSI contributor who turns 65 and is only paying out the cheques because of the financial life support package from the EU/ECB/IMF.

Meanwhile, anyone who still thinks they’ll be claiming that €12,000 (or its inflation adjusted equivalent) in 10 years and that it will supplement the 50% of their salary that they told Aviva they will need to live on in retirement, should also think again.

If such a person’s final salary is, for argument’s sake, €50,000, and the total pension they want is €25,000, then they will have to have saved over €200,000 into a pension fund in order produce another €13,000 worth of private income to supplement the €12,000 they will get from the state.

Unfortunately, judging by today’s experience, the average private Irish worker is more likely to retire with a pension fund worth about €100,000, than over €200,000 and this will produce an income of €6,000 if they are lucky.  This also explains why 59% of the same age group told Aviva they expect to keep working after they reach retirement age.

Let us hope some form of state pension is still be around if they are to avoid having to work forever.

Meanwhile, as unprepared as pre-retirees are, the Aviva survey revealed that 34% of the 18-34 year olds polled say they will need 100% of their final salaries to have a comfortable retirement.  The remaining 56% admit they’re more concerned about funding today’s bills than any they face in retirement.

Both groups are in for the shock of their lives some day. 

As for our well-pensioned politicians, well, they lost the plot years ago.  They has their chance 20 years ago to introduced sustainable tax and funding structures for all pensions – private, public service and state – but didn’t bother. 

Now we’ve run out of money and time, the two most important retirement factors of all.

Follow exit signs

I received a note from a reader last week who thought I might be interested to know that his life and pensions broker – a commission paid salesman, really - had written to him to suggest that he shift the money he had in a predominantly equities-based Irish Life savings fund into an all-cash fund. 

The reason for this alert – the broker was of the opinion that his client could lose yet more of his money if he left it in shares.

“Wealth protection” is the common mantra of most advisors these days. One cynic of my acquaintance believes this could be nothing more than a ‘churning’ opportunity by a know-nothing life assurance salesman who will pick up a commission if he can shift the reader into another asset.  Perhaps not the first time: most life companies still allow a free switch or two a year between their different funds.

Whatever the motivation, I think the broker was at least doing this reader a favour by alerting him to the level of concern there is about markets in light of the great uncertainty about the indebted eurozone countries and whether we can avoid defaulting on our debts, as well as the impact that the end of quantitative easing by the US Federal Reserve Bank will have on America’s ability to meet their own debt repayments and the support of stock prices.

Anyone with an investment fund or private pension should have it reviewed – ideally by an experienced fee-based financial advisor who can determine how exposed you are to either a single asset – like shares – and whether it would be safer to diversify, or exit the market altogether and seek the safety of cash and indexed bond funds and some ‘real’ money like gold.

While they’re at it, ask your broker to pitch in by reducing the fees, charges and commissions that weigh down the value of your investments.

You can laugh or cry

Recent announcements by the Taoiseach and Tanaiste that there would be no increase in income taxes or social welfare cuts in the December budget show what a pair of comedians they are.

Last Saturday morning, the Minister for Social Protection got in on the act when she announced the setting up of an Advisory Group on Tax and Social Welfare that will “harness expert opinion and experience to address a number of specific issues around the operation and interaction of the tax and social protection systems, recommend cost-effective solutions as to how employment disincentives can be improved and better poverty outcomes, particularly child poverty outcomes, achieved and to identify the specific practical institutional and administrative improvements to their operation.”

Out of the 15 people named as the Minister’s new advisors, 13 of them are public servants, one is a trade unionist and one is a private sector human resources director.

I’ve no idea how much these mainly government employees will collect in fees and expenses, but with that torturous mission statement, the meetings are sure to be a barrel of laughs.