‘WARNING: RETIREMENT RUT AHEAD’

If we needed a road sign to tell us something important about what lies ahead for the majority of our retirements, it would read simply ‘Warning: Retirement Rut Ahead’. Rut can give the meaning of furrow or pothole! It’s defined as a fixed or established mode of procedure or course of life, usually dull or unpromising.

That is worryingly what is facing the majority of workers in Ireland today.

Let’s remind ourselves what we all want in retirement. Here goes, it might sound something like….. “I want to be able to retire at 68, and buy a holiday home in Spain. I want to be able to spend 6 months abroad each year in a sunnier climate and have enough money and income in retirement to live a full and active retirement”. Does this sound like something we aspire to? And now for the reality check.

Reports about the gap in retirement funding for workers in Ireland happen every year. Standard Life recently commissioned a survey of 1,000 individuals about their retirement plans. The current statistics per Standard Life's survey are quite stark with no real signs of improvement in the past number of years:

  • Only 47% of workers are contributing toward their pension funds
  • 53% of workers have no pension plans
  • Excluding the public sector, 60% of workers have no retirement plans
  • Average pension fund today is €80,000
  • Buying power of the average pension fund is just €3,100 per annum or less than €60 per week

General statistics and forecast:

  • Workers will qualify at age 66, 67 and 68 to receive state contributory pension depending on their year of birth
  • State contributory pension today is €12,116 approx. for qualifying workers from age 66
  • Approximately 570,000 pensioners in Ireland today and 5 workers for each pensioner
  • Forecast that 300,000 more pensioners will be on state pension by 2026
  • By 2055, the ratio of workers to pensioners will be down to 2 to 1

With these statistics and forecasts, will the state pension possibly be increased in years to come to support the pension in retirement deficit in Ireland? I don’t think so. Already the state has increased the entitlement age for the state contributory pension from 65 to 68. The government currently is paying as it goes from current taxation to fund the current stock of pensioners as the pension reserves were raided at the time of the bank bail-out/bust in 2008. What do I predict? I predict that governments will actually increase the retirement age in the future again. This only underlines the onus on workers to provide for their own pension for when they want to retire.

In 2013, The OECD recommended mandatory enrolment in pension scheme for workers in Ireland. Of the powers that be in Ireland today, in 2015 the then Tánaiste Joan Burton announced a Universal Retirement Savings group would begin developing a roadmap and timeline for introducing a new pension scheme for all workers in Ireland. Jack O’Connor (SIPTU) has this month again called for government action to introduce a mandatory pension scheme for workers while Minister Leo Varadkar has said he favours auto enrolment but feels it could take 10 years to implement!

Are we all resigned to passing the book to our government to set the rules here when the system is set up for workers to do this themselves. Why not take control and use the system. If you didn’t realise before now, workers have significant tax relief incentives which mean longer term retirement savings into approved pension schemes attract marginal tax relief and this makes pension funding for your retirement years abundantly more effective than a regular savings plan for your after tax net income.

There are three tax free retirement plan pillars. Contributions are tax free going into pension fund, tax free growth over the life of the pension fund to normal retirement age, and tax free lump sum on reaching your normal retirement age. It is win, win, win. When you factor in these tax incentives, the cost of making a meaningful contribution to your pension starts to feel a lot less intimidating. Financial security and peace of mind in your retirement is as good as gold. The need for planning and independent financial advice is paramount, but starting or boosting your pension funding now will be one of the best financial decisions you will ever make.