In the second of two parts, John Lowe of Money Doctors.ie shares the remaining 5 of the 10 things you need to know about pensions. A hugely important subject and one that needs to be addressed by over half the nation who have not got one. Having to rely on a State Pension of € 265.30 per week that may not be there in 20 years’ time is a daunting prospect. Starting your own pension NOW and maximizing the tax relief on pension contributions makes total sense if you have taxable income as an employee or made profits and have a tax liability in your company or as a sole trader or director.
- What should we do now once the pension plan is in place ?
You can work out with your adviser the amount of money on a monthly basis you will need to keep you in the luxury you have become accustomed to when you retire. This will include inflation, your attitude to risk and your primary retirement objective – e.g. do you have any desire to leave assets behind and merely wish to have enough income to see out your days ? You will also need to have an investment strategy put in place. Your fund needs to grow… otherwise you will run out of money unless it is an annuity – paid until you die but you have to live a long time to justify ( they are normally only guaranteed the first 5 years…after which if you die, the insurance company keeps the fund not your family )
- Review and review..
It is really important that you review your pension on a regular basis i.e. at least once a year. The size of your pension fund is driven by a number of factors – the performance of the assets your pension is invested in, fees and charges, the contributions that you make and the length of time between starting the pension and retirement age.
Most pensions are invested in a mixture of shares, property, bonds, cash and perhaps alternative investments. Fortunately, over the last 15 years bar a few “wobblies” these asset classes have grown handsomely. The last “wobble” was last February the Ukraine war hit the stock markets of the world. Most people with investments lost c. 20% to 30%…but like the Coronavirus plunge in March 2020 if they had done nothing, 5 months later in August 2020 it all returned to normal. Over any 10 year period, the stock market always comes out as the best of the asset classes. From 1991 to 2020 the average annual growth in the stock market was a healthy 10.72%.. For an individual with over 10 years to retirement age, this should not be an issue.
However, for those people who are closer to retirement age, there could be a detrimental effect on the final income that they will receive at retirement due to timing.. Therefore, it is crucial to review your pension every year.
- “Am sorted – my employer is contributing”
Having an employer make a contribution to your pension is very advantageous for two reasons:
- The contribution that your employer makes is not taxable either as an income or a Benefit in Kind
- It increases the overall contribution that goes into your pension fund which is free of tax on any profits.
However, many people who are lulled into a false sense of security because they are in an employer sponsored pension. They believe that this pension is somehow guaranteed and that it does not need to be reviewed, whether a Defined Benefit Pension or a Defined Contribution Pension. Many also believe 5% contribution from the employer along with their own 5% will suffice for their future retirement income. Try living off 10% now !
If you are in an employer sponsored pension, you should still review this pension on a regular basis as well.
- Obtaining independent advice
When you meet a Qualified Financial Adviser ( QFA – such as me ) for the first time, you should be given a Terms of Business. This will tell you what insurance and investment agencies the adviser maintains plus how the adviser earns their fees. Most firms are paid by the insurance companies. It is important therefore for you to know the remuneration the adviser earns from doing business with you.
- The 48 hour rule…
For most people, apathy ignorance and lack of time are the three killjoys when it comes to making decisions on pensions and most things financial. Another factor is the 48 hour rule. Attending a seminar or reading an article such as this is a complete waste of time if firstly this is relevant to you and secondly you then do not act on it within 48 hours because after 48 hours you’ll have forgotten about it ! Start a pension now before it is too late – you’ll thank me later for it.