Just how prepared are we for our future?

Finance | Thu 12 Dec | Author – Business & Finance

With the recent changes in rules around pensions following recent budgets, financial professionals, City Life asked the question ‘Just how prepared are we for our future, and what do recent changes in pensions and investment legislation really mean for us?’

Over three quarters of respondents are planning to fund their retirement by either making, or planning to make, regular pension contributions. 10% said they plan to make non-pension type savings and investments, while another 10% said they plan to assemble a property portfolio.

Thankfully, just 3% said the State will look after them; this is reassuring as recent reports show that the State simply cannot take any additional strain, as it already faces a €324bn pensions shortfall.

With tax relief retained at the marginal rate for most pension contributors, meaning  that those saving into a pension plan will receive up to 41% of the contribution back in tax relief, half of those who completed the survey said they will leave their contributions unchanged, while 35% said they plan on increasing pension contributions. Just 2% said they plan to reduce their pension contributions.

Deposit Interest Retention Tax (DIRT) on deposit accounts was effectively increased to 45% (41% tax and 4% PRSI) in the recent budget.  This means that savers are now retaining just above half of any interest paid to them. It appears that a wide range of options are foremost of respondents’ minds with regard to their savings. There was an even split between those planning on investing in property; investing in shares; investing in a fund of shares and other diversified assets; investing more in a pension; and retaining their deposit account.

Scarily, 4% of respondents said they plan to put their money under the mattress – possibly a hangover from the financial crisis, which is still quite raw and very fresh in people’s minds!

Savings with An Post are currently DIRT exempt and there was split views among respondents on this. 25% of respondents feel that this is fair enough, considering the fact that by using an An Post account, we are effectively lending money to a ‘broke’ Irish State that needs to attract as much money as possible; while 25% are on the other end of the scale and feel this isn’t fair, as it is distorting the savings market. The other half of respondents are indifferent on this and feel this is not really a big issue.

In the Budget, the annual levy on pension funds was extended to 2015, and two thirds of those surveyed feel it will continue after 2015, while 30% think it is impossible to call. If it continues it means that those with bigger funds will pay significantly more to the State into the medium term, with frustration building as to what the levy will actually fund going forward.  It has been highlighted in media recently that it will form part of various rescue measures for defined benefit schemes in serious deficit, which seems somewhat unfair on those funding their own pensions on a defined contribution basis.

The maximum pension fund allowable (from a tax perspective) is reduced to €2mn, and this could provide a person with up to €80,000 per year in retirement income, depending on when they retire and certain other variables. The majority of survey participants feel this is fair, while almost a quarter feel it’s too low.

The State Pension provides people with close to €12,000 per year in retirement income. When planning for their retirement years two thirds of those surveyed said they assume it will be less than now, 17% think it could have been abolished by the time they retire, while 23% optimistically assume it will be higher than it currently is.

Commenting on the survey findings, Eamon Dwyer, CEO, City Life said: “This research suggests that consumers are starting to take more control and have become more educated when dealing with their retirement provision. The vast majority of those surveyed think that the State Pension will reduce, that they will either maintain or increase their pension contributions, and that they view a pension plan as a vital part of their retirement provision. They can take greater control of their pension provision and what their standard of living in retirement is going to look like by proactively seeking the right advice from independent firms who offer specialist pension advice, as pensions remain quite a complex area.”

Dwyer added: “The shifting of the pensions landscape in Ireland is forcing people to reconsider their approach to retirement planning. The focus today has to be on developing a target for when a person plans to retire.  If a person requires a certain income in retirement they will need to save, it’s quite simple!  How they get from here to there can be done in many ways, but with clear advice on tax and investment strategy, there needn’t be any surprises.  By speaking with an independent advisor, who can recommend the correct pension manager rather than the “only” one, the pension saver puts him or herself at the centre of the process.  It doesn’t matter if a person is in a company scheme or in a personal arrangement, they should always seek independent advice.”