Look after your future today
The Pensions Timebomb we often hear is that, over the next 30 years, Ireland’s population over the age of 65 is set to more than double from 22% of the adult population to 47%. We have one of the fastest ageing populations in Europe.
Most people in Ireland rely on the State Pension to provide most, or all, of their income in retirement. However, the State Pension at a maximum of €248.30 a week is designed to keep people out of basic poverty and won’t provide most people with the lifestyle they wish for in retirement.
As a country we don’t pre-fund the State Pension. We use PRSI contributions paid by today’s workers to pay pensions to today’s pensioners. We currently have, in Ireland, about 5 workers for every pensioner, in 30 years’ time this is projected to be just 2 workers for every pensioner. These projections which are a result in people living longer, having shorter working lives and fewer births call the sustainability of the State Pension into question. If the State Pension is under pressure with 5 workers for every pensioner, how will it cope when there are only 2 workers?
This isn’t just an Irish problem with similar issues in most developed countries. Indeed, Ireland currently has a younger population that many other European countries which gives us a chance to address this issue now. However, that time will quickly disappear if we don’t take action. Unfortunately, none of the options are particularly attractive and involve some combination of paying lower benefits, increasing taxes or working longer.
If we do want to have an enjoyable and fulfilling retirement, then we need to plan to have more income than the State Pension. Retirement savings are really just about putting aside some of the money we earn while working so we can sustain the lifestyle we want when not working. In order to encourage people to do that we don’t get taxed on those savings until we have the use of them. That means, for example, that someone who pays 40% tax and decides to put €100 a month towards their pension will only see their take home pay reduce by €60. At retirement they will be able to take some as a tax-free lump sum and the rest will be taxed as income. Any investment returns are also exempt from tax.
Most people end up with their own pension because they work for an employer that has a pension scheme in place. There are almost no circumstances in which you should not join an employer’s scheme. Someone else will have done all the work in setting it up and your employer will be paying into it. Not joining is like turning down additional salary. Once you have been in the pension scheme for 2 years you are entitled to you and your employer’s contributions even if you leave. There will be a pension payable at retirement age.
If your employer does not have a scheme, they do have to have a Personal Retirement Savings Account in place and allow you to make payments directly to it from your salary. If you are self-employed, you will need to set up your own pension. In these cases, it is worth talking to an independent financial adviser. There may be a cost for this, but you will get impartial advice.
Less than half the workforce in Ireland has a pension other than the State Pension. And with likely pressure on that in the future, we are storing up problems. The Government had set out a Pensions Roadmap to address this. However, progress has been slow. Part of the plan was to introduce Auto-enrolment, where all employers would have to have a pension scheme in place for employees who would be automatically included but could opt-out if they wish. The first employees were due to be included in 2022 but this looks very unlikely at this stage.
Other parts of the Roadmap included simplifying pensions as they have become very complex with lots of different products and rules. Increasing the age at which the State Pension Age is paid was also part of the Roadmap. This was already increased to 66 in 2014 and due to go to 67 this year. This has now been stalled with a Commission on Pensions looking at the issues. In reality, we do need to get used to working longer as we live longer and healthier lives. We also need to have ways to help those who do not want to or aren’t able to keep working into their late 60’s.
Long-term pensions policy does require making difficult decisions that can involve sacrifice now in order to have a better future. It is important that we do make those decisions now or we will be facing a very bleak future retirement.