Despite very generous tax reliefs and numerous initiatives by the Government, pension coverage among private sector workers in Ireland remains stubbornly low. According to the Central Statistics Office about one in three workers in Ireland have no supplementary pension arrangements and will be solely dependent on the State pension for their income in retirement. And when State employees are stripped out of the equation, that proportion rises to over 40 per cent.
The relatively low rate of take-up is quite puzzling given the highly attractive nature of pension investments. Pension scheme members get full tax relief on their contributions, subject to certain restrictions, tax-free contributions from their employer, and tax-free growth in their pension fund. Tax only becomes payable when they start drawing down their pension.
Annual contributions of €5,000 to an occupational pension scheme will only cost an employee €3,000 if they pay tax at the higher rate. And if their employer matches their contribution, as is frequently the case, they are building up savings of €10,000 a year at a cost to them of less than a third of that amount.
“I often explain to people that if you are a top rate taxpayer, you work for yourself from Monday to Wednesday and for the Government on Thursday on Friday,” says Bernard Walsh, director of pensions and investments with PwC Ireland. “If you put money into a pension, you get a portion of the Thursday back.”
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While the State auto-enrolment scheme due to commence in September 2025 will certainly bring many more people into the pensions net, there is still a need to improve coverage for the upwards of 800,000 workers outside of it.
The very long-term nature of pension savings may act as a deterrent to some people, according to Ashling O’Neill, a certified financial planner with Clear Financial. “There can be a present bias at play,” she says. “Some people prioritise the now over the longer term. Having money now is more important to them than having a pension in the distant future. That leads some people to think that it’s too early to start a pension. Younger people think it’s too far away to think about.”
Affordability is another issue. “A lot of people point to that as an important factor in them not having a pension,” says Walsh. “Even when people consider that they are going to have the money to spend in future, it instinctively feels like a tax because they can’t spend it immediately. The cost of living crisis has been a big challenge as well, understandably.”
He also points to an interesting dichotomy where people appear prepared to save for rainy days but only if those days are in the foreseeable future. “Look at the quantum of money in bank deposits at present,” he says. “There is more than €150 billion there. Irish people seem to want to have large amounts of prudential cash available but not want to take out longer-term investments.”
O’Neill agrees that insufficient disposable income is an issue for many people. “People in lower income brackets simply don’t have enough money to contribute. They need to prioritise things like rent and food. Even those earning more might have other priorities like saving for a house.”
Bluntly put, having a house in five years is a lot more important to them than having a pension in 35.
One suggestion to overcome this present bias and to address concerns related to having money locked away in a pension for a long time is to allow early drawdown of at least a portion of the fund as was permitted as a temporary measure during the financial crash.
Walsh is not so sure. “I’m not suggesting we should start looking for early exit strategies. In Australia, they are looking at opportunities to exit the auto-enrolment schemes for home purchase. But members would miss out on growth on the early part of pension savings as a result.”
O’Neill also has reservations. “I don’t know if early drawdown is the right route,” she says. “People were allowed to do that in the recession and some of them are now finding they have lost out on a significant chunk of their pension. Also, giving people tax relief on savings to buy a home could be messy.”
She believes the solution is better education and information. “Financial literacy is quite low in Ireland. The pensions industry should provide financial education to inform people about pensions. In my opinion, that would significantly improve coverage and mitigate problems with pension shortfalls in retirement. A lot of people don’t even try to understand pensions because they are portrayed as very complex. They aren’t that complex at all. All I need is 20 minutes with people and they get it.”
Walsh concurs, saying simplicity lies at the heart of the issue. “A lot of people see the world of pensions as complicated, difficult and opaque and that puts them off,” he says. “People have a natural tendency to steer clear of things they can’t immediately comprehend.”
Meanwhile, for those fortunate enough to have a pension the implementation of the IORPII directive [EU directive that set new requirements for occupational pension schemes] is continuing to have an impact. The directive aims to ensure that occupational pensions are sound and that pension scheme members and beneficiaries are well protected. New obligations under the directive have resulted in the great majority of occupational pension schemes deciding to wind up and transfer assets and, where relevant, contributions, to multiemployer master trust schemes or Personal Retirement Savings Accounts (PRSAs).
According to the latest Pensions Authority annual report, the result is that while previously there were about 14,000 new pension schemes registered with the authority each year, it is likely that only a handful will be registered annually in the future. “It is also likely that once consolidation is substantially completed, there will be about 500 or less defined contribution schemes: PRSAs are also likely to play a greater role than heretofore in pension savings,” added Pensions Regulator Brendan Kennedy in his statement accompanying the report.