With Ireland’s pension gap now the second highest in Europe, it is time for many of us to face reality and take action. The gap highlights 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. So what’s driving the gap?
Firstly, we are all living longer and while this of course is a good thing, labour force participation has yet to adjust to this reality, leading to increased pressure on retirement income funding. The current prevailing retirement age is 65. However, the qualifying age for the State Pension is 66 and this is due to increase to 67 in 2021, and 68 in 2028. Increasing the retirement age will go some way to reducing the gap, but such drastic action raises new challenges for those who have not planned early enough or adequately for their retirement.
Secondly, low bond yields have caused annuity rates to decrease (and stay down), impacting on the income retirees can expect from their pension funds.
Thirdly, demographic changes pose a significant challenge to our pension system. CSO data reveals that there are currently 5 workers for every retiree. By 2050, it’s estimated that there will be just 2.3 workers for every retiree. These changes will put pressure on government finances as the cost of state pensions and healthcare for the elderly increases. Simply put, you cannot be sure the State will provide the same level of pension income provision as is currently the case.
Finally, pension savings also differ greatly by gender. Traditionally there has been a variety of reasons for a further pension gap for women, in terms of coverage and value. With the current pay differential in Ireland standing at nearly 15% between men and women, this in turn leads to a further pension savings gap. Some women also take breaks from employment when they have children which can lead to gaps not just in private pensions, but also in State pension entitlements.
It is clear that many people will need to work beyond the current prevailing retirement age of 65 to fund their retirement income needs.
Bridging the Gap
There is no simple solution but central to pension reform proposals is the government’s aim to develop a system that provides universal coverage, which should significantly improve our nation’s provision for retirement.
Leo Varadkar recently gave assurances that the government will publish a five-year roadmap for pension reform before the end of the year and that auto-enrolment will play a central part. Auto-enrolment will remove the element of procrastination and force people to make a start on their pension. Equally important to increasing pension coverage is for the government to maintain all pension tax incentives. These include tax relief on contributions, tax relief on investment returns and a tax free lump sum at 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.
At Cantor Fitzgerald Ireland, we provide personalised tax approved pension structures that offer you investment flexibility, control and transparency. As independent specialists, we offer impartial integrated investment and pension advice. To speak with a Portfolio Manager or Account Executive, phone the Cantor Fitzgerald dealing desk on 01 633 3633.
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