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This article is part of our Change Generation project, supported by KBC. To read more click here.
DO YOU KNOW what an ARF is?
What about a PRSA?
Maybe you know what ‘annuity’ means, but if you don’t, read on.
There is plenty of advice out there about the benefits of starting a pension in your 20s and 30s, so we asked some experts to demystify the process for us.
1. Do I really need a pension?
David Malone head of communications and operations at The Pensions Authority:
Yes – because during your time at work you should ideally be saving for your time in retirement. That gives you the opportunity to have additional income to the state pension when you stop working. The state pension is €233.30 currently and if you want more than that to meet your needs in retirement, then you’ve got to save for it.
Maurice McCann, director at LHW Financial Planning:
You do – because the state pension is just not sufficient to keep someone in comfort in retirement and particularly because you aren’t likely to inherit large properties or assets. For 20 year olds who are trying to buy houses in a very tough market, pensions will come way down the priority list but it’s a critical part of your plan.
2. When is the right time to start?
David Malone from The Pensions Authority:
The optimum time really is, if you can, when you start work, particularly if you’re in taxable employment because the State supports you in saving for your retirement through the model of tax relief on pension contributions into approved pension arrangements.The sooner you start, the better because you benefit from the compound growth of the savings that you make. However in saying that, the tax relief benefits continue to grow as you get older, so the closer you get to retirement you can put away a larger percentage of your income into a pension and gain tax relief on it.
3. Some of the terminology and acronyms are confusing. What’s an ARF?
Alan Morton is the managing director of the financial advisory service, Moneywise:
I concur; they are mind-boggling – even for someone with 20 years working in the industry. ARF stands for Approved Retirement Fund and is simply a post-retirement vehicle to hold pension assets. An income is paid out each year from this basket of assets. Any assets remaining in the ARF on death go to your estate.
4. What’s an ‘annuity’ anyway?
David Quinn, financial advisor with Investwise, explains:
An annuity is a long term promise, made by a life assurance company, to pay the pensioner an income for life. The actuary will look at the retirement value of the clients pension fund, and using current interest rates, they will then offer an annual income payment. This income payment will depend heavily on age, and current interest rates. The older the client, the higher the annuity rate. Higher interest rates will also lead to higher annuity rates. As interest rates are at historic lows currently, so are annuity rates, which makes them unattractive in most cases.
5. How do I work out how much I should be saving?
Alan Morton of Moneywise:
Your first financial priority should be to buy a home. Don’t worry too much about a pension until this is done. If there is an employer pension contribution available, grab it with both hands, even if you must contribute. It is the biggest financial no-brainer that you will ever land, especially if you pay tax at the higher rate. As a rough guide, 15% of your salary should be paid in from age 30. If you’re starting out later, that % should increase.
This pension calculator from the Pensions Authority might come in handy for anyone thinking about starting one.
6. My rent is sky-high. There is no way I can afford to save 10% or 15% of my earnings into a pension right now. What should I do?
LHW’s Maurice McCann says something small is better than nothing at all:
I would always advise someone to start, even if it’s at a level well below what I think is optimum because one of the most important things is to get into the habit of having a pension. Once it forms part of your finances you’re slower to ditch it and even if you’re paying at a low level as your income improves and as you get bonuses, or whatever, it’ll be on your radar as paying it in.
7. If I’m a PAYE worker, does my employer have to contribute to my pension?
David Malone of the Pensions Authority:
No. There is no obligation on an employer to set up a pension scheme in Ireland under the legislation, however they must as a minimum provide employees with access to a pension. So where there isn’t an occupational PRSA in place, they must give employees access to a PRSA scheme, but the employer does not have to contribute to it.
8. Hold on a second. What’s a PRSA?
David Malone explains:
A PRSA is a Personal Retirement Savings Account. There are a lot of acronyms in the pensions world and The Pensions Authority as the regulator is currently involved in a reform process to simplify pensions, particularly in the context of communications to members. It’s all complicated enough so it’s important that plain language can be used where possible.
9. What happens to my pension if I change jobs?
David Quinn explains this one:
You never lose your pension if you leave jobs, but some are more flexible and portable than others. If you are in a company / employer sponsored scheme, you have the option to leave the pension in the scheme, as a deferred member. You also have the option to move your benefits to your new employer or a preserved pension in your name (retirement bond).There are many other variables related to defined benefit pensions, personal pensions etc. The system is far too complicated at the moment and there are moves afoot to simplify the whole pension system in the next 3-5 years.
10. I have a pension plan. How often should I review it?
Alan Morton of Moneywise:
In your 20s and 30s, once a year is enough. And demand it from your provider. When you hit your 50s, regular reviews become much more important. And don’t invest in low risk investment funds in the early years; it’ll cost you in the long run. But be prepared for volatility.
11. I’m 35 and have no pension. Is it too late?
Maurice McCann says you haven’t missed the boat by a long-shot:
No, particularly if you’re in a company scheme. There are people in their early 60s who come to me and say: is it worth my while bothering to join the company scheme? I would say, jump in and pour all you can into it, because if you have reasonable service with that company you can take up to one and a half times your salary tax free when you retire. That would be unusual though – most people will have joined by their 40s.
More information on pensions can be found here.
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Don’t take out a pension. This is not a country to better yourself for retirement. The less you have at retirement the better you can live off the state. Have your own pension and you won’t get a medical card or the State pension or other benefits. Don’t pay off your mortgage as if you have debt you will get State help.
@Paul Whelan. You are absolutely correct. Working hard and saving hard will get you penalised when it comes to retirement. Go to the government with your hands hanging and you will be “entitled” to full state pension, medical card, and all the bells and whistles.
You’re both assuming a state pension will be there for you in retirement. People are living longer through medical advances while also having smaller families. Relying solely on state benefits is not an feasible strategy. And as for incurring debt and hoping the state will bail you out…well that’s just plain wrong
Paul. This is the way the system is now. I have my own pension. People without a Pension and who rely on State pension are better off than me because they have access to a lot of other handouts. Wait until your time comes (assuming you are not yet a pensioner) and you will experience the system as it functions. I won’t quote you figures here but it is an eye opener that comes too late to remedy. Pensions are also taxed and USC charges apply. Even people with a 12k pension pay USC. Not many people realise that.
Saving for a pension is a major waste of time.
Cannot disagree with you more Paul. Pensions grow tax free making them one of the most efficient ways for people to fund for their retirement. While pensions had a bad name in the past for been mismanaged or not managed at all, underlying investment strategies have evolved to automatically safeguard a person’s pension as they approach retirement
Going by your logic there would be even more dependency on the state where it will not realistically be able to meet this demand. Look after your own future, as state pension may not be there.
Paul. You have a theoretical opinion. Mine is a reality. As I said above, State pension people are better off than me now. I wasted a lot of money and quality of life building up a pension that is worthless. You cannot predict the future. Insurance and pension schemes are legalised forms of corruption in today’s society. You have the confidence of a person selling insurance.
Saying that people should not save for their retirement is incorrect, theoretically and factual. Obviously your situation is a personal one so can’t comment on that but if people save throughout their lifetime they will have a pension in retirement. If they don’t, they’ll have nothing to rely on.
And don’t forget, when the Government needs some extra funds (to continue paying the gold-plated public service pensions, for example), they have given themselves the luxury of dipping into even the most modest private pension funds as they did between 2011 and 2016.
The whole industry needs to be cleaned up and simplified. At the moment it’s a mess of different rule changes over the decades. They need to come up with a long term plan and stick to it without tinkering. Also beds to be far more transparency on fees. The fact that most of the life companies don’t show PRSA fees in the info booklet is ridiculous.
Actually the fees and charges are outlined in the booklets…as it is a regulatory requirement.
The PRSA’s were to be the simplified one size fits all model. I gather it hasn’t worked.
“Not ALF… we said ARF!”
Non nonsensical and confusing.
Bloody clickbait tricking us into reading about pensions…
One strategy for beginning a pension (or any other form of saving) is to manage “lifestyle inflation”.
That is to say that, when you get a pay rise work out exactly how much extra you are getting vs what you were on previously and divert that to a pension / savings fund.
Anybody will attest that once you start spending a certain level, it is next to impossible (or at least extremely hard) to trim it back in order to divert some of that previously utilised money into something else. Don’t even let yourself “enjoy” the pay rise boost for 2 or 3 months, because the window of “not feeling it” will be lost then!
Everyone should be paying into a pension like almost every country in Europe. Expecting to be financed when you retire from the state is a nonsense. You pay tax to finance the society you live in, not contributing to your end of life income is foolhardy to say the least.
I thought that also Mary until I retired. I was wrong. I would advise people against saving for a pension. See my comment above. Speak to people on an average self generated pension.
Spot on Mary!
Finally something worth reading from KBC
Not one mention of the underlying charging structures which will have a huge impact on your final pension pot. Allocation rates (I.e. for every €100 contributed how much of that €100 is allocated to your pension and how much is eaten my charges) can vary from 95% allocation rates to 100%. Shop around when you’re setting it up and don’t be afraid to ask your adviser how they get paid. Make sure you understand the charges before committing pen to paper
@John Clare: PIP also = personal investment plan
What does a Personal Insolvency Practitioner (PIP) have to do with an ARF ?
Pensions are very easy to understand once you talk to a professional adviser who will go through all your options in simple straightforward language. Then review your pension at least every 2 years.
When dealing with banks for your pension remember they are just Tied Agents who cannot give independent advice and can only recommend one pension company which may not be suitable for your needs.
Get professional independent advice the historical facts prove that a pension is one of the best investments you can make.
http://www.PensionAndFinancial.ie
John@PensionAndFinancial.ie
Don’t bother with ARFs etc. you may get some tax relief now but it is basically a scam. When you encash then the government takes all the tax relief back plus USC. Better to purchase a property to rent. At least it will appreciate in value and you will have a far better income year on year. This means you have control not the unscrupulous sharks who take all sorts of “service” charges for their very dubious advice on their attractively named products. Anyone heard of Super CAPP. Of course the Government collude with the whole thing. Arf!!!!! Arf!!!!
What does a Personal Insolvency Practitioner (PIP) have to do with an ARF ?
Pensions are very easy to understand once you talk to a professional adviser who will go through all your options in simple straightforward language. Then review your pension at least every 2 years.
When dealing with banks for your pension remember they are just Tied Agents who cannot give independent advice and can only recommend one pension company which may not be suitable for your needs.
Get professional independent advice the historical facts prove that a pension is one of the best investments you can make.
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