Pensions are like fruit trees in that the best time to plant one is decades ago. Unlike trees, you can at least augment a pension so that you don’t end up with a weedy sapling in retirement.
“More and more people are finding they have gaps in their pension funding that need filling, it’s very prevalent,” says Trevor Booth, head of financial planning at Mercer. There are a number of reasons why this is so, and increased job-hopping is only part of it.
Often, a greater factor is that people simply struggle to envisage what their pension will ultimately look like, particularly with defined contributions plans, which are the sum total of all you have put in, plus any investment growth.
“It can be difficult to translate the size of their fund into what it means in terms of income in retirement,” says Booth. “For example, if they see €100,000, it seems like a big sum. But it will only translate into €3,000 or €4,000 a year as a pension. That’s a big shock.”
People very often don’t give enough thought to what their requirements in retirement will be either. Traditionally, the goal was two-thirds of final salary but that was a figure that arose in the era of Rolls Royce defined-benefit schemes, which are like hen’s teeth today.
While defined contribution pension plan holders do, of course, receive annual statements containing all the figures relating to their pension pot, the bottom line is easily missed, Booth says.
It’s typically only when retirement is 10 years away that they start paying attention. At this stage, it’s important to have a detailed discussion with a financial advisor to establish both what they will need, and what they are on course to receive, and how best to bridge the gap.
Even at that late stage there is much they can do, including increasing, and preferably maximising, their contributions. “Often, we’ll find that they have been putting in the minimum for years. At 10 years from retirement, a lot of people’s outgoings have been covered, such as mortgages paid off and children that are not dependents, so they have more disposable income.”
‘Huge impact’
Ten years of additional contributions can have a “huge impact” on the size of the ultimate fund, “particularly if they have been paying the minimum and are suddenly putting in two or three times that”, Booth says. “It also gives people a feel-good factor to know they are better prepared.”
One cohort that often finds gaps in its pension are business owners. Very often, all their effort and attention has gone into the business, to the detriment of their personal retirement planning.
“We see a lot of entrepreneurs, people who have had one or two businesses, some of which have worked and some which haven’t. Often, by the time we meet them they are in mid-career, or later, and trying to pack it all in now, putting in money when they can afford to do it,” says Tony Doyle of AIB’s private banking unit.
The tax relief system supports this, facilitating people who need to ‘force feed’ their pension at a later stage. Though it is always best to start a pension at 20 and fund it methodically, “not everybody can afford to”, he says.
In some cases, people may find they have a number of different pension pots, from a combination of occupational schemes, private pensions and PRSAs. "In some cases, you can benefit from economies of scale by combining them all into one pot. In other cases, an older policy with really attractive benefits may be too valuable to change but take advice on that because it's complex," says Bernard Walsh, head of pensions and investments at Bank of Ireland.
The closer you get to retirement, the more important your decisions become. “When you are younger, you want to make sure you invest in a manner that allows you maximum growth, and you’re not so worried about risk. When you are 10 or 15 years out, you need to start getting far more active in relation to your retirement planning.”
