Will pension shortfalls make us grumpy old men and women?

The way our pensions are going most people will end up grumpy old men and women in retirement.

Most are underfunded and over half of private sector workers have no pension at all.

The Government's long term solution - apart from periodically threatening to make us 'work till we drop' is to 'auto-enrolment'. which means most people will be put in a pension scheme whether they like it or not in the not-too-distant future.

Everyone aged between 23 and 60 earning more than €20k a year will be enrolled in a pension in their job under the proposal.

But if they don’t want to be in a pension, they can always opt out after six months.

And the sweetener is that employers will have to make a contribution to match yours – and the Government will also contribute (probably).

As ever, you can’t keep everyone happy.

The minimum contribution for employers and employees will be just 1.5% for three years.

This will increase by 1.5 percentage points every 3 years up to a maximum of 6% at the beginning of year 10. 

Some critics – trade unions and brokers - said that’s a bit of a slow burn if you’re in a hurry to build up your pension.

I punched the numbers into a pension calculator for someone on €50k a year aged 40.

A 1.5% pension contribution – matched by your employer - wouldn’t get you a pension worth much more than €1000 a year even over 38 years – and 3% or 4.5% won’t go much further.

Even at 6% contributions, the maximum to be matched by your employer,  your projected pension would be just over five grand a year – plus whatever state pension you qualify for. That’s a total income of €18k.

However, the Government contribution has yet to be decided and that could add a couple of thousand more – and you can always bump up your contributions if you want to build it up faster.

The real reason for the slow build up I imagine is to protect employers from a sudden hike in costs.

The key point here is that this is an optional bonus for workers. They can take it,  leave it, or increase it.

But if they do take it, their employer - and hopefully the State to a lesser extent - must match their contributions up to the relevant level, which is a valuable benefit that didn’t exist before.

When you add on the bonus of tax relief, then you can get an awful lot of bang for your buck when you bump up your pension.

For a net outlay of €210, you could get €700 when contributions max out at 6%. Here’s how it would work:

How €210 can turn into €700 with matched employer contributions

Salary

 70,000.00

 350.00

You pay 6% of salary monthly

Employer matches your 6%*  

 350.00

Total contribution

 700.00

Gross cost to you

 350.00

Less tax relief

 140.00

Net cost to you of €700 contribution

 210.00

* Figures based on 6% matched contribution by employer.  Some employers do this already but it will be mandatory within ten years of new pensions scheme’s introduction. A Government contribution - yet to be decided - should add a further boost your pension

There’s nothing new about this. Many employers already bump up their employees’ pensions, sometimes by as much as 15%, never mind 6%.

But those employers are often high-falutin’ finance firms or multinationals – the crème de la crème of employers.

The new proposals will ensure that all employers have to row in, which will reduce the rampant pension inequality in this country.

No doubt some employers will bitch about the extra costs with Brexit on the horizon but matching a 1.5% payment in three years time isn’t that onerous. The Government has, if anything, erred on the side of caution here.

And that perk will only slightly make up for the fact that our pay has been lagging way behind economic growth for years. It’s about time some of the benefits of the boom were redistributed into our pockets.

Regina Doherty headed off potential criticism that people will have to pay high charges. Charges are limited to half a percent a year, which is on the reasonable side. Brokers complained about this, claiming it won’t pay for decent advice, but they would wouldn’t they?

My beef with this week’s announcement is that we don’t know yet how much the Government is putting into our pockets – and how much it will take out elsewhere to make up for it.

A key part of auto-enrolment in other countries is the contribution from the state. Ms Doherty is coy about exactly how much that will be – if anything.

But speculation has focused on a rate of €1 for every €3 invested by employees, which would be decent.

Minister Doherty assured us that that the mandatory pension scheme would not replace the  non-means-tested State contributory pension, which she described this as the “bedrock” of the system.

Alas she is in no position to make such guarantees on behalf of future finance ministers in ten, twenty or thirty years’ time.

Her own party urged everyone to put their money in pensions for years – and then raided our pension pots to raise cash during the financial crisis.

However, that’s just conjecture. As things stand, it does make sense to sort out our  pensions.

While it won’t totally defuse the “pensions timebomb” the mandatory scheme is long overdue and should be a good day for workers.

And if the Government keeps up its end of the bargain and adds on a decent contribution, it could make us all a little less grumpy in our retirement.

The pros and cons of pensions

The final deadline for self employed people to file their tax returns online is fast approaching  on November 14.

And as the ad campaigns tell us, they can indeed save a fortune by salting money away in their pensions.

Those on PAYE can also make the same savings by upping their additional voluntary contributions to their company pensions by the end of the year.

I heartily recommend investing spare cash in your pensions.

It’s still a good idea to get a pension but it’s important to know the downsides too.

So here they are five pros - and five cons – of pension investment:

Pros

Time

Pensions are a slow-burning long term investment. This means there’s time to even out the ups and downs of market fortunes.

Growth

It also means you benefit from the wonderful affect of compound growth.

Usually,pension investments do well over time. Over the first 7 months of 2019 Irish managed pension funds show healthy average growth of 14.6%. And Despite the market turmoil, over the last 10 years, Irish managed funds have returned an average of nearly 10% per annum,” said Philip Doyle of advisors Ocean.ie

Tax relief

40% tax relief on pensions make them an investment ‘no brainer’, although there are limits depending on your age.

How much can I put in my pension? 

Age % of Earnings

Under 30 15%

30-39 20%

40-49 25%

50-54 30%

55-59 35%

60 and over 40%

Employer contributions

Even better, when your employer matches your contributions, as they all will have to in three years’ time, you double your money again.

State contributions

The State is also set to top up your pension further as part of the auto enrolment scheme. 

Cons

You have to pay tax when you take money out

Pension companies go nuts telling us about tax relief when you put money into your pension. They never mention that you have to pay tax when you take it out! But you can still get 25% of your pension pot tax-free up to €200k, you may be paying tax at a lower rate in retirement, and pensioners can have a much higher tax exemption threshold.  

Charges

How do you think pension companies pay for all those ads telling us how great pensions are? By taking charges and fees from your pension fund. These can be onerous but the proposed mandatory pension scheme has reasonable charges capped at half a percent per year.

The Government can (and did) grab your money

When the Government urges us all to get a pension, it doesn’t mention that the big fat savings pot where we all save our pension money is an irrestible target when it needs money fast. Between 2014 and 2015 a pensions levy took out up to 0.75% of our total pension assets every year, which doesn’t sound than much but it was a massive hit.

Owning your house is your best pension

If you don’t own your own home, I think buying one deserves priority over your pension. Imagine retiring and having to pay rent in the current private market? That money you save on rent is also a tax free bonus and you can also trade down hour home in retirement if you need cash, tax-free.