BY JOHN ELLIS, FINANCIAL ADVISOR
It’s that time of year again when people are considering how much they can afford to put in their pension. For so many people the only benchmark is how much needs to be invested to get the maximum relief for the tax year.
Unfortunately for many the view is if there is no tax relief it’s not really an option, forgetting that not only is tax relief available on contributions but that the fund in the pension grows tax free ie. no income tax, PRSI, USC or capital gains tax.
Of course, you will have to pay tax on the proceeds of your pension when you retire but 25% is tax free up to €200,000 and the remaining funds invested will be taxed as it is drawn down. But it can be less that you might think.
Pension provision is more than a tax planning vehicle. For many people it is the means to a change of pace rather than the ending of the working life with most wanting to continue working even if financially secure in retirement.
This indicates that financial security is important but it’s not the only ingredient for a happy retirement. We value our mind just as much as our money and we want to feel connected which is a realisation that has formed for many after the pandemic
To give retirement planning new meaning, we need to really understand what it means for retirees of today and future generations. And so, Standard Life regularly conducted research to “identify and better understand all aspects of the retirement process, from people’s attitudes, expectations and behaviours to our present retirees’ lived experience”.
The research was conducted through the Retirement Pulse; a nationally representative and independently administered online survey. They interacted with up to 1,150 people across Ireland including all age ranges, social backgrounds, and levels of financial security.
According to the research many people are looking forward to retirement and there’s plenty of evidence to illustrate how holistic planning ahead of time has a profoundly positive impact. People who own and engage with their pension are more likely to feel confident, optimistic, and empowered in retirement.
But with many young people, Millennials, their mindset isn’t focussed on pensions due mainly to struggling with the housing market and evidence shows that they are less likely than others to own a pension. More than three fifths do not have a pension and, of those that do, a quarter confirmed they don’t take an active interest in it, nor do they take advantage of the tax relief available on contributions. They need to listen to their elders, as with the benefit of hindsight many retirees regret not giving more thought to their pensions throughout their working life.
Unfortunately, due to current crisis and the continual talk of poor State pension prospects many are feeling anxious, with 42% of 18–24-year-olds saying that thinking about retirement makes them feel anxious or scared leading to feelings of apathy in those in their late 20s and early 30s. These emotions resurface from the age of 45 and while “the scales tip towards a more empowered disposition, with more Gen Xs and Baby Boomers rejecting the suggestion that retirement is scary, there’s still a significant number that are fearful as the prospect of retirement looms closer”.
The report shows that, despite female pension ownership growing, they still track behind men overall (45% versus 55%). When analysed by pension type (public, occupational and personal) women are far more likely to own a public pension and less likely than the national average to own an occupational pension. They are far less likely to take an active interest in their pension (27% disagree to taking an interest versus 16% of men). Therefore, they’re far more likely than men to say they don’t know how their pension is performing (30% versus 11% of men).
To overcome these and other problems outlined in the report Alan McCarthy Head of Distribution in Standard Life says: “The lens through which we’ve traditionally viewed retirement needs to change because the way in which people experience retirement continues to change. The study elevates this understanding by identifying the spectrum of attitudes and exploring the range of factors that influence how we feel about and plan for retirement.”
So, the idea that pension provision is only a vehicle for tax purposes needs to change.