Here at Cantor Fitzgerald, we say ditch the diet/detox in January and put your pension at the top of your new year’s resolutions. Clearly the financial choices you make (or defer as the case may be) will have a huge impact on your future.
While financial security in the short-to-medium-term can be provided by a good salary and benefits package, in the longer term the best way to achieve it is through a pension. The problem for most of us is when we think of the future or specifically retirement, it can be easy to put it on the long finger! Having said all that, one thing for sure is that we are all getting older and every year brings us closer to retirement, so whether your retirement is near or far away the below are some useful tips.
Start a Pension
This may sound like an obvious one but if you haven’t started a pension already take the plunge and start it today. Tax relief is by far the greatest advantage of saving into a pension. Income tax relief is still available on contributions made personally to a personal pension plan, PRSA or employee /Additional Voluntary Contributions (AVCs) to a company pension scheme. Income tax relief is available on up to 40% of the contribution for a top rate taxpayer, or 20% for a standard rate taxpayer.
According to 2020 CSO figures, 6 in every 10 workers had supplementary private pension coverage (outside of the State pension). While there is no obligation on an employer to provide and contribute to a pension scheme for employees, there is an obligation on all employers to give each employee access to a PRSA. A PRSA is a Personal Retirement Savings Account that is a personally owned pension that lets you save for retirement even if there is no occupational pension scheme in place through your employment. An employer, must at a minimum, facilitate a PRSA through payroll so that employees can avail of this type of pension. Additionally, if you are self-employed and want to start saving for your retirement a Personal Pension or a PRSA will be the most suitable contracts for you. It’s a good idea to seek advice from a financial advisor who will guide you through the process and help you select the right plan for your circumstances.
Review your contributions
Assuming you have already joined a scheme/established a pension contract, you should review your contribution levels and if you have the scope to and can afford it, increase your contributions or consider making an Additional Voluntary Contribution (AVC).
Providing for retirement is one thing, providing enough for retirement is another. If your pension contributions won’t deliver the lifestyle you want in retirement, upping your contributions is the way to address this. I’m often asked what is a good pension pot?
There are a few ways to look at answering this question, a good starting point for most clients is to aim for two thirds of pre-retirement income. However this may not be enough for everyone and will be dependent on the lifestyle that an individual will want in retirement. Seeking the advice of a financial advisor puts you in the best position to establish your goal and set out the necessary steps required to meet your long-term objectives.
Review your contracts
A job is no longer for life which means that most individuals have multiple pension contracts that will accumulate from their previous employments and these contracts are often scattered across various pension providers. Changing your job doesn’t mean losing control of your accumulated pension pot related to that employment. In my experience, when sitting down with prospective clients, most will generally not have a full handle on how their retained pension benefits/contracts are managed and quite often their retained benefits do not form part of their active investment strategies. Essentially the contracts are being left idle and without proper management.
Another common question I am asked is: “should I consolidate my pension contracts?” On the face of it, it seems obvious that you should combine your various pension arrangements in one place as it is tidier and there is only one company or provider to deal with. However, a recommendation to consolidate is often more complicated and should factor in your specific personal and financial circumstances. Increasingly we see that having two to three pension contracts can provide clients with additional flexibility when it comes to retirement and consolidating contracts can sometimes mean losing that flexibility. Having multiple pension contracts shouldn’t mean that your investment strategy isn’t a coordinated one. Your pension contracts should talk to each other and essentially work in unison in order to best achieve your retirement goals.
So What Are the Big Pension themes for 2022?
You are likely to see plenty of column inches this year on the issue of pension auto-enrolment. What exactly is auto-enrolment? Employees will be automatically enrolled into a new pension scheme unless they are a member of their employers’ scheme. Employers would then be obliged to contribute a percentage of an employee’s salary to help fund their retirement.
The aim of auto-enrolment is to close Ireland’s pension gap. The pension gap is the difference between what people are currently saving for retirement compared with the level of income they will need to receive when they reach retirement age. According to the 2020 CSO figures, 37% of those who didn’t have supplementary pension coverage cited that they never got around to organising it. Auto-enrolment will take the procrastination out of it for employees and employers alike. A system that provides universal coverage will undoubtedly improve our nation’s provision for retirement. It is essential that policy initiatives are developed to help individuals to start earlier, save more and strategically invest their capital in order to meet the financial challenge of longevity. While the State has an obligation to provide a framework for private sector workers to save for their retirement in a simple and cost-effective way, now more than ever, retirement planning is increasingly becoming a personal responsibility. A revised launch date for auto- enrolment has yet to be targeted by government but given the complexity of the system a timeline of 2024 looks to be likely.
Laura Reidy is Head of Pensions at Cantor Fitzgerald Ireland.
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