A person who’s approaching retirement today, could spend as much time in retirement as they did while working. Planning for how you’ll fund it is vital. We’ve been speaking with comparison site Bonkers.ie on what it means for people in Ireland.
Listen to the podcast, or read the transcript below – updated for 2022 conditions – on what do you need to do in the 5-10 years before retiring.
What exactly is retirement planning?
Retirement in Ireland has changed a lot over the last 10-15 years. People are living longer and people want to work later into their careers, so working patterns are more flexible.
There’s a statistic now that the average person entering the workforce now will have 15 jobs throughout their career.
Retirement planning is helping people visualise their post-work life, and how that will stack up financially.
When should people start thinking about their retirement?
There are a few natural points to check in on what retirement looks like.
Clearly when you are early in your career, it’s simply about making a start on your pension.
There’s your late 30s or early 40s, typically when people’s earnings have gone up a bit, maybe some of the financial pressures around childcare, house deposits and so forth have reduced a bit. That is an important time for planning around funding your pension.
There is a second key period, which is 5-10 years before you intend to retire. Taking advice – and decisions – at that point, where you’ve still got power to change things is really vital. So those are the two kind of key pre-retirement times to engage with your pension.
And then obviously at the point of retirement, there’s a bit of thinking to be done as well.
If you’re approaching retirement and wondering how to make your pension pay, Moneycube can help. Just supply us some contact details below and we’ll be in touch to show how.
So what should someone who is 5-10 years away from retirement be thinking?
The first step is to look at what you’ve got. You’ve got to consider the sources that are going to provide your income in retirement.
People talk about pensions. But of course, our income in retirement might come from a lot of different sources. You might have a rental property, you might rent a room in your house, you might have a lump sum due to you on retirement. You might have some investments that you want to structure in the right way, so that they are delivering the kind of income you’ll require. There are a number of different strands.
But the first step doesn’t have to be sophisticated. Somewhere, you’re going to need a list of all of those elements. And then you’re going to have to add them up and see what that all looks like. So the first step is observing what you’ve got to date.
And then that’s when the thinking starts. What do I want to change here? How can I improve my situation?
What if someone doesn’t have a lot saved for retirement? What can they do?
There’s a lot of guilt going around in conversations around approaching retirement, that you should have done more by now. But planning for retirement isn’t about what-might-have-beens, it’s about making the most of what you have.
What are the levers that you can pull to maximise your pension position at a particular point in time?
The straight answer to your question is, yes, you can absolutely start funding a pension very quickly. And it’s a fact that the government really want us to save for our pensions, and they give some very generous tax relief for doing that, particularly as you approach retirement.
So you could be sheltering up to 40% of your income from tax, if you have control or influence over a company, you could be doing far more than that. So building a pension very, very quickly, you know, so there is an awful lot you can do at a late stage to boost your retirement.
How does someone put in a lump sum – do they make Additional Voluntary Contributions?
For many people, adding a lump sum via their employer is the most convenient way. It can be done through payroll, it goes into your existing pension on so forth.
If you’re putting a significant sum, it’s always worth looking around. There’s money to be won and lost in doing it in a way that’s tax efficient, low cost, invested in a suitable way for you. So there is no reason that you can’t look elsewhere to make a contribution and take advice on it and so forth. But equally, you know, there may be very attractive options within the company to do it.
The key point is there is a substantial tax incentive to put in fairly large sums as you approach retirement.
One other point to pick up on your question is, back to the guilt aspect. Not everyone has a lump sum to add. But for somebody who’s built up €100 or €200k of retirement fund: it’s not an insignificant sum, so I think that is also deserves careful consideration, and there’s a lot you can do with that as well, to make it a meaningful part of your retirement income.
What are the fees associated with pensions at retirement?
For us, fees are about transparency. If the fees don’t stack up, or you’re not being told clearly what they are, then that smells fishy to us.
That’s not to say everything requires to be rock bottom. You might want your pension invested in a property fund, or a private equity fund, for example. That will cost a little bit more than a vanilla investment fund. But the reason for that is that somebody’s doing work to drive returns in that sector and grow that fund. So it’s not purely driving down the cost. What I’d really encourage people to do is ask questions about fees, and get confident they’re getting value for their money.
So if there was a fund management charge of 2% or 3%: is there an upper limit that you would that you would be a red flag a warning sign for people to avoid?
I think there is. There are two things that people should look at in particular.
One is that annual management cost. Certainly 3% is an eye-watering amount. I would say you want to be paying 1.5% or lower. And there are lots of ways you can do that. Pensions are movable things. So just because you’re in one just now at a certain cost does not mean you are required to stay there.
The second thing that it’s worth paying close attention to is what’s known as the “allocation rate”. That is the percentage of the money that you pay in, which is actually landing in your pension account.
I reviewed a pension for a customer taken 20 years ago with one of the big Irish banks. And for every 100 Euro that that person is putting into their pension, €87.50 is landing in their account.
So the pension provider is taking €12.50 of everything that goes in on top of the fund management charge?
Correct. So what does that tell us? Two things. Firstly, the market has moved. What represented value 10 or 15 years ago does not represent good value and transparency today.
And secondly, it’s time to ask a few questions. We probably spend more time figuring out our holiday plans, then something which might save us tens of thousands of Euro over our working lives.
Should someone in their 50s be investing in different things than those in their 30s?
There is a sort of norm that you trend into lower risk assets as you approach retirement. So maybe when you’re 30, you’re all equities or company shares. And you don’t mind if on a one-year view, your pension drops, 20%, because it might grow 30% the next year, and you can live with that.
People tend to move into lower risk assets, such as bonds, from companies or governments, as they approach the age of 65. The point we make to our clients is that if you’re 65, you might be drawing on that money in 30 years’ time. So that’s 30-year money.
Are you confident that you want to be in near-zero growth assets, just for the sake of confidence that on a 12-month view, it’s going to stay stable?
This is why people should consider if they should take a little bit more risk with their retirement money, because it’s actually a longer term investment than they might expect.
How does the State pension fall into all this?
The State pension, by comparison with other countries, is relatively generous. It’s there to provide a basic level of income in retirement, about €253 per week. It provides a floor on your income. And given that floor, could you live with a bit more risk in your own personal pension plans?
The State pension is also changing, it’s expensive for taxpayers to fund. And government has therefore made the age at which you can access the state pension later, and later. Since last year, it has one of the oldest access ages now in Europe.
From 2028, you won’t receive it until you’re age 68. So the other piece of thinking that needs to be done is yes, that might be a core part of my income in retirement. But how am I going to fund say, three years until age 68, if I want to slow down from 65?
And lastly, with the introduction of auto-enrolment, there is the key question of whether the State pension will exist in its current form when most people working today finally retire.
If you decide that you want to continue working after age 65, can you still contribute and save into a pension?
Absolutely, you can and it’s worthwhile doing. If you retire and then decide to take on a new job, you can be drawing down your pension from your old job and paying into your pension from your new job and saving income tax along the way.
We’ve got customers, for example, who maybe have had a job for many years, retired from that job and took a new one, or maybe some consultancy work.
You can be drawing down your pension from your old job and paying into your pension from your new job and saving income tax along the way. So there are all sorts of levers you can pull.
And that’s back to the point at the start, which is, it’s no longer the case where we had a job for life, with one pension. Most of us will have 5 or more pensions by the end of the time we want to finish working or we start winding down.
The clever bit is thinking, how do I tap into this pot at the right time? I might need a lump sum at age 50 from one pension, say to clear my mortgage. Another pension, I’m going to leave till I’m 70. So that it’s growing tax-free and compounding nicely. Then with income from my part-time job, I’m going to save some income tax and pay into a fresh pension – so there are lots of ways to make pensions work for you.
I think I’ve three pensions at the moment. And I shudder to think how many I could have out there by the time I reach 65 or 70. Do you advise people to consolidate pensions?
First of all, you don’t need to have an elaborate way of tracking this stuff. You can have it on the back of an envelope in your sock drawer. But we would definitely say keep a list somewhere that somebody can track it down.
The money doesn’t disappear, even if you’ve forgotten about it. It is a service that we and others provide, tracking down old pensions, and either putting them somewhere you can actually lay your hands on them, or making them accessible once more.
Old pensions can hit surprisingly large numbers. If you haven’t checked in on that in seven years, you know, you might find it’s doubled, tripled in value. And there’s a significant sum sitting there, even though it was a job you held for just two or three years.
So yes, our advice is that it is definitely worth doing in terms of actually taking stock of old pensions. There are arguments for and against consolidating them; every case is different. Sometimes that is the right thing to do for simplicity and cost. Other times, if it reduces your optionality around taking lump sums at different times, keeping your pensions separate is advisable.
What are the main considerations for those approaching retirement in 5-10 years’ time?
It’s a bit like going to the dentist. I hesitate to make that comparison, because it won’t be a painful experience. The point is, going to the dentist now might save you a root canal in two years’ time.
It’s about not being afraid to reach out and look at the cold numbers. And once you’ve done that, take some decisions, act on it now, so that you give your money time to see the benefit come through.
The message is, take action, do not be bamboozled by nonsense language or anything that is unclear. Demand the time for people to make it clear, and put yourself in the driving seat of this stuff.
The whole thrust of the world of pensions now is to put the user in charge of their own money. You’ve got a huge amount of control. You’ve got a huge amount of possibility and options open to you. But on the flip side, you’ve got to actually grab that opportunity with both hands to maximise it.
What options are available when people reach retirement age?
Of course, every case is different. So it always pays to look and there may be little tweaks and tricks specific to the rules of somebody’s pension that make a difference. But in principle, the system is designed around being able to take a quarter of your pension pot as a lump sum on retirement
The first €200,000 of that pot is not taxed. The next €300,000 is taxed at the standard rate of tax, which is 20%, which is still an attractive deal for many people, compared to paying income at the top rate.
Then you’ve got two possibilities around the remaining 75% of your pension.
You can purchase an income for life from an insurance company (called an annuity), or more recently, it is now open to everyone to create what’s called an Approved Retirement Fund or ARF, which is essentially a tax-protected investment account for your money. And you can choose how you invest that, you can define the charges on it by selecting who you use to manage it for you. And you can draw it down at a certain rate to provide yourself an income.
Discover your options as you approach retirement. Just supply us some contact details below and we’ll be in touch to show how.
And what do people tend to do? I presume people take the tax-free lump sum. Do people tend to choose an annuity or an ARF?
The trend in the industry is against annuities. The reason is that, due to the wider economic situation around interest rates and bond rates, the amount of money you need to pay in order to get an acceptable level of income out from an annuity is quite high. They represent relatively poor value for most people.
The vast majority of people choose to go down the Approved Retirement Fund route, where you can put it into higher risk higher growth assets and generate a return off of that. And ideally, you know, you’re taking 4% or 5% per year, which is being replaced through growth that you’re receiving in your fund
The thing to think about is, do you really want to be doing that, when you’re 80 or 85? You might at the age of 80, decide, I’ve been fine managing my money directly. But now I’d like to have an income for life. And at that point, you will get a more attractive annuity rate or income for life offer from a financial institution, because based on life expectancy, they don’t expect to be paying it out for so long. So you know, the actuaries are doing their jobs there and figuring it out for all this!
What income should people be aiming for in retirement?
It varies hugely of course. But it’s fair to say, in retirement, there is a reset. Your expenses typically drop, and most people want to receive 50-65% of what they were used to. And as I say, there might be different strands to it. If you’ve just taken a lump sum, you might intend to live off that lump sum for some time
Do you have any final words of advice for those approaching retirement?
Our advice is that three things really count when you are 5-10 years’ from retirement:
- Act now. The sooner, the better. It won’t be a root canal on the first consultation!
- The second thing is to remember that it is almost always the case that there’s something you can do today to improve your pension and wealth position. There’s so much control now, there are lots of levers you can pull to optimise your pension circumstances.
- The third thing is to remember that it is a journey. None of this stuff gets solved overnight. You take those decisions, put them into action, and you give it time and you go through that loop of building up your assets, monitoring them, investing in them, over and over again. That’s why acting today is the key to getting real wealth in retirement.