Sellers of pensions place an emphasis on warning future retirees that they could be scraping by on a very small stipend in their old age, unless they start making provisions now, writes Una McCaffrey

As the new year festivities peter out for another 12 months, pensions have once again stepped up to enjoy their annual few weeks in the limelight.

The reason for the apparently random succession, apart from dragging the adult population back to financial reality after the holidays, is tax relief. The relief in question applies to two categories of workers: self-employed people or those unlucky enough to fall outside a company pension scheme.

People in these two groups who set up a pension before the end of this month can offset payments made for the purpose against last year's taxable income (2000/ 2001).

In other words, the Revenue Commissioners will allow them the rare opportunity to backdate their tax relief. The offer also applies to people in the same two categories who make additional contributions to existing pensions.

This tax deadline explains the multitude of pension advertisements currently featuring on billboards and radio commercials around the Republic.

Financial advisers and pension providers are trying to inject a sense of urgency into proceedings so they can win as many new clients as possible in coming weeks.

Reassuringly, the message underlining the commercial gain is a worthy one. Recent figures show about 75 per cent of people who qualify under the backdated tax relief rules have not yet made financial provision for their retirement, despite the incentives.

The reality is that if they do not do so in good time before they leave work, these people, at current state pension rates, will be living on €147 (£115.70) per week when the time comes.

This figure sits badly with the results of a survey last year that asked a sample adult population how much income they would need to live comfortably upon retirement. Almost 50 per cent said that they would require more than three-quarters of their current income levels, which suggests many of us will receive a rude shock when we reach 65 years of age.

The business of selling pensions places much emphasis on warning future retirees that they could be scrabbling by on an alarmingly small stipend in their old age unless they make provision now.

Another point crucial to pensions sales is that starting payments early is almost as important as starting them at all.

An Irish Pensions Trust illustration with industry-standard terms reveals that a male who hopes to retire at 60 needs to start investing 10 per cent of his salary at age 25 to realise a pension of just 48 per cent of that income when he leaves work. When the starting date slips to age 35, that pension becomes less than one-third of the previous income. Beginning contributions at 40 will net the same male a pension of just 23 per cent of his income at 60.

Other frightening vistas are not hard to find. Mr Paul Overy of fee-based advisers Financial Engineering Network has calculated that an individual who plans to work for another 30 years before retirement would need to start making a monthly payment of €342 (£269) now if they hope to fund an annual pension income of €10,000. This illustration, based on annual pension fund growth of 7 per cent (net of expenses) and inflation of 3 per cent, does not seem to scare everyone, however.

As Mr Overy points out, the very people who would benefit from advance planning appear to remain oblivious to the dangers of leaving it too late.

"The only people who have ever approached me to talk about pensions, as opposed to me approaching them, are aged 55 or over," says Mr Overy. "The problem with a 55-year-old approaching me is that €342 is tiny compared to what you'd have to put away over a 10-year period."

The other thing to remember about pensions, says Mr Overy, is that alternative investments will never provide the same benefits or incentives.

"There are a lot of people who say, 'I'll put money into something else', but the bottom line is, if you're a 42 cent in the euro taxpayer, for every euro you put into an ordinary pre-tax or post-tax investment, it's costing you more than a euro to do that.

"To put a euro into a retirement fund, however, you only need to invest 58 cent."

Which brings us neatly back to the subject of tax relief. There is no ceiling on the value of pension investments that can be made before the end of this month, but tax relief limits do kick in.

These vary according to age (see table), stopping at 30 per cent for those aged 50 or more, and apply to income from non-pensionable employment or self-employment, less capital allowances, trading losses and certain other charges such as mortgage interest.

In practical terms, the relief available means that tax bills for the last tax year will be reduced, as money invested in a pension fund is taken into account. For example, a 42 per cent taxpayer with a tax bill of €5,000 who invests €2,500 in a pension plan will reduce their tax bill by €1,050 (€2,500 at 42 per cent), and so the statistics continue.

The ceilings work on a strictly annual basis, meaning that relief not claimed this year will be lost forever, rather than being tagged on to next year's allowance.

Once they have been convinced of the need for retirement provision, the next step for pensioner hopefuls is to take a long, hard look at how exactly they want their money to be invested over the next 30 years.

Current trends, reflecting the volatile stock markets of late, are falling in favour of reasonably conservative investments, says Mr Tony Lawless, pensions marketing manager with Irish Life.

"With turbulence in the markets, we're noticing a lot of investors, especially those that are more cautious or nearer retirement, opting for guaranteed funds that give a guaranteed rate each year."

These type of policies, while offering the attraction of relative safety, are never going to provide investors with the highest returns, however.

Mr Lawless says that, although more aggressively managed funds have probably become less popular amid the turmoil of past months, now is actually a good time to invest in an equity-based fund because the market is low.

"This is especially true for pension investors who should take a long-term perspective. Equities have always outperformed in the long run," he says.

Irish Life has also observed an increasing demand for "passive" fund management, according to Mr Lawless.

This applies where people invest with indices rather than with active fund managers who choose individual stocks.

"It works by looking at decisions that all of the major fund managers make and using these decisions to invest in relevant indices such as the ISEQ or FTSE. The advantage of this type of fund is that it consistently outperforms the average fund, unlike active fund managers who can either outperform or underperform," says Mr Lawless.

Mr Overy's clients, arguably well-informed by virtue of being clients of an independent financial adviser in the first place, are currently fans of sector-based funds.

"You don't necessarily need to go for managed funds. More and more people are choosing sectoral funds. 'Managed funds' is really a misnomer because they're just mixed funds," he says.

Ultimately, Mr Overy says that personal attitude to risk is the main factor to bear in mind when choosing the pension fund for you.

The final point to consider when starting a pension in 2002 is that January 31st is not the only pensions deadline for self-employed or non-pensionable employees this year.

In line with the transition to our new, calendar-year tax period, personal pensioners who wish to backdate tax relief on pension payments made in the course of the most recent tax 'year' (April 2001/December 2001) need to make those payments before October 31st.