PERSONAL FINANCE:THE SIZE OF the pensions that some suddenly retiring politicians can look forward to once the election is done and dusted has left many people shaking their heads in wonder.

Some ministers will walk away with an annual pension of over €120,000 and a severance package worth in excess of €300,000. It is, by any measure, a lot of money, particularly as some of them will have spent less than 25 years in the Dáil. Others will have barely turned 50 before they claim their first pension cheque.

Our politicians are, of course, the lucky ones and most of us are not going to be in such a position of riches when retirement time comes, no matter how assiduously we provide for our pensions.

When it comes to planning for life after work, things have been made all the more difficult because of a combination of reduced salaries – thanks to pay cuts and tax hikes – and dramatic changes to the pension systems which were unveiled by the finance minister, Brian Lenihan.

Pension contributions are no longer deductible for PRSI purposes and they are not deductible for the universal social charge (USC), which has replaced the health levy and income levy. It is only going to get worse over the next three years and once the Recovery Plan is done with, pensions will only qualify for tax relief at the lowest rate of 20 per cent.

The relief will drop to 34 per cent from 41 per cent in 2012 and fall to 27 per cent in 2013, before finally reaching 20 per cent in 2014.

The Government estimates these measures will deliver savings of €155 million this year and up to €940 million in a full year when fully implemented – €700 million from private pensions and the balance from lower reliefs in relation to the public service pension levy.

In addition to these changes, the income level above which people cannot claim relief on pension contributions has been lowered to €115,000, from a high of €150,000 and the standard fund threshold – the maximum allowable lifetime limit for tax-relieved pension funds – has also fallen, by 57 per cent from a high of over €5 million.

This last move will probably only make a difference to the very wealthy, but the other changes will hit anyone with a pension. While every €100 paid into a pension pot in 2010 cost a tax payer just €49, once tax reliefs were factored in, in 2014 it will cost them €80.

People care about their pension and the options it gives them. A Bank of Ireland Life survey carried out last autumn found that 21 per cent of employees said that they would like to retire on or before 55 years of age, while a further 43 per cent said the ideal retirement age was between 56 and 60. Some 90 per cent said they wanted to retire before the age of 68. They may want it, but it is unlikely to happen for many of us, as the retirement age is set to be pushed back repeatedly over the coming years.

The age at which people retire is not as much a concern for many as is the lifestyle they will have when that day eventually comes. The same survey reported that 75 per cent of employees said they did not believe they could get by on the State pension of €230 per week and 83 per cent expressed concern that they wouldn’t have sufficient savings or income to live on.

One option open to people this year would be – to borrow a word from the Government – frontload some pension contributions in order to claim more tax relief.

Ian Mitchell is a consultant with Deloitte Pensions & Investments and he says that “as long as cash flow allows it, then obviously it is really good planning because you will get twice the relief today than in 2013.” He does say, however, that it would be foolish to borrow money to maximise pension contributions over the next two years and questions how much disposable income someone earning €80,000 will have to add to their pension pot given the level of tax increases and pay cuts.

Rather than looking to squeeze a few bob more out of the system, Mitchell believes people need to recalibrate their expectations of what a pension actually is.

“It used to be seen as a fund for sheltering tax. That will inevitably change as the reliefs shrink but it is still a good way for people to save for their retirement. People now are effectively getting tax relief of around 50 per cent on their pension contributions and that may fall to 20 per cent between now and 2014, but it is still a good deal.”

He also points out that just because something was flagged in the last budget, it does not mean it is actually going to come to pass.

“Even in the worst case scenario, 20 per cent tax free is strong.” Mitchell says people “are not looking to get a big, immediate return as may have been the case in the past. If they can get 5 per cent a year from now until retirement and fund their pension properly they will be okay.”

His bottom line is that people should take advantage of whatever tax breaks exist, don’t take risks with their money and fund a pension properly. “If you are in a good employee scheme, for every €3 you put in there is €10 invested on your behalf,” he says.

To generate a pension income of €30,000 a year, hardly lavish when you consider what our dear leaders can look forward to, a person will need to have a pension pot of €800,000. Someone who is 40 now would probably need to be putting in €15,000 a year.

Of course, the reality is many people can not afford anything like that. The landscape has changed dramatically and for some, any class of a pension has become a luxury too far.

When it comes to pensions, financial advisor Frank Conway draws a distinction between the philosophical and the realistic. From a philosophical perspective, he says, pensions make sound financial sense. He says that even after the full impact of the Government changes are felt, there will still be tax benefits. He cautions that “the reality for a lot of people now is that they can’t afford the luxury of a pension at all. For people with a lot of debt, they are much better off paying that off first. It is crazy not to clear a €5,000 or €10,000 credit card debt first.”

Conway, who has recently launched an online financial helpdesk, moneycoach.ie, says that for many people, the issue now is “one of survival and even people in their 40s who might otherwise have been thinking of pensions are saying they don’t care about 65 they want to get to 45 or 55 first.

“Over the course of this week people are going to really start feeling the pain and that pain is going to last for four years. Put simply, it would be mad to put money into a low-performance pension if you have a high-cost loan hanging over you.”

He says that it is “an absolute requirement” that people pay their mortgage first, something which can be a real challenge for a couple if one of them has lost their job and the other has taken a 20 per cent pay cut.

“This is a very depressing thought but it is a very real.”