While no one wants to wish their life away, retirement will happen for most of us at some stage, and when it does, nobody will want their standard of living to significantly slip. With the State pension – which only becomes payable at 66, later than when many people retire – currently worth €12,912 per year or €248.30 weekly, the shortfall will likely need to be made up with a private pension.
Starting out
With the average mortality rate in Ireland currently between 83 and 85 years old, most people who retire at 60 will have to plan for at least 25 years of income. While the figure needed is calculated according to the individual's lifestyle and needs, a pension of about €40,000 per year before tax will need a pension pot of approximately €800,000 to €1 million to satisfy that.
According to Paul Kenny, course leader at the Retirement Planning Council and former Pensions Ombudsman, recent publications suggest that most people need about a third of their final salary on top of their State pension. "That's the target you've got to set yourself. An awful lot depends on what structure you put in place to achieve that target. First of all, when do you start? And the short answer is: the earlier the better."
To help set a target, he advises using a pension calculator. “It will help you to manage your approach to the target that you set yourself. The question then is how much do you pay into the pension? How much can you afford to pay? Bear in mind you’re going to get tax relief on the contributions within certain limits.”
There are age-based limits with how much you can contribute to a pension. Under the age of 30, you can contribute up to 15 per cent of gross pay, up to age 40 it’s 25 per cent and those aged 60 and above can contribute up to 40 per cent for an income of up to €115,000 maximum.
Choices, choices
The Pensions Authority gives advice on the types of pensions available. "If you are employed, you may be covered by an employer-sponsored occupational pension scheme or relevant public sector scheme.
“If you aren’t covered by these or if you are not an employee, you may be able to take out your own personal retirement savings account or retirement annuity contract.”
Private sector occupational pension schemes, known as company pension plans, are set up by employers and often match contributions made by employees up to a certain percentage.
Risk versus reward
Having reached retirement though, the planning doesn’t end there. Whether, after taking your tax-free lump sum, you plan to buy an annuity – which guarantees an income for life, but is not inheritable – or invest in an Approved Retirement Fund (ARF), making sure there’s enough money left to last throughout the retirement is equally important.
Kenny says, “Take advice about how you invest your money.” People’s tolerance for risk will vary from one individual to another, but age also makes a difference in the decision-making process. “It depends on how you intend to manage your fund when you get to retirement age. If you intend to buy an annuity for example – which is not great value now due to low interest rates – you might put a lot of your money into bonds rather than ordinary shares.
“Younger people with time on their side might invest in equities and properties to try and maximise the return, because those are the sort of securities that will tend to match inflation, much better than bonds.”