BY JOHN ELLIS, FINANCIAL ADVISOR
LAST week we looked at various excuses that people use to not invest into a pension plan.
Now, you are one of the prudent few and your retirement date has arrived. You’ve been planning and saving for years, if not decades. You may be dissatisfied with your final pot, but anything is better than nothing.
The average pension pot at retirement in Ireland is €90,000. The harsh reality is that, while €90,000 may appear to be a substantial sum, it is nothing when it comes to pensions.
Assuming an annuity rate of 3.15% this will give a level payment of €54.51 a week assuming you don’t take the tax-free cash option. If you take the 25% tax free cash, you will have a pension of just €40.88 a week.
Should you take the Approved Retirement route you will have no guaranteed payment, and this will leave you vulnerable to inflation and stock market crashes.
Let’s assume you have a reasonable fund built up over the years. You have an inherent problem.
How can you make your money last for two, if not three, decades of retirement? And you need to face your mortality! The single most difficult part of handling your money in retirement is that you don’t know when you will die or whether you will need expensive medical intervention or care in later life.
Employees in defined benefit plans have certainty about the amount of money they will receive monthly, as well as the guarantee that it would be paid until they die. However, this type of protection has all but disappeared outside of the public sector.
Whichever route you choose, you’ll eventually reach retirement and receive a product providers final statement – as one advisor said, it’s like “Here’s your pension pot”, bye bye and best of luck to you.”
(Others, for whatever reason hear nothing and don’t realise they have money languishing in a fund somewhere.)
Will you get a lot of help? Probably not, unless you find a competent Financial Advisor who will help you through the maze of “drawdown” plans, investment possibilities, fund choice, the Approved Retirement Fund vs Annuities discussion, and when and how, or should I collect the 25% tax-free lump payment.
But none of this will make it any easier to save enough money in the first place. You’ll need to save more than €300,000 to retire on a €25,000-a-year income, which includes a €12,911 a year state pension plus private pension, which many consider to be the minimum.
Rip-offs have a huge chance of happening. That is why the Central Bank is at pains to inform people of their entitlements and rights. You hear of funds that were promoted as unbelievably good value ending up bankrupt and losing clients hard earned pensions never to be regained.
And sometimes you just have no idea what you have in your hand.
Case in point – a client called in earlier this year. It transpired he had a paid-up company pension with a local employer who has long ceased trading. Out of the blue he received a letter to say he had now reached the scheme retirement date and here were his pension options. He was entitled to a lump sum of approx. €4,500 and a guaranteed pension of €4,300 for the rest of his life.
He was content with the offer and asked me to arrange the drawdown. What he didn’t know was he had a traditional with-profit pension with very valuable underlying options.
To cut a long story short he received a tax free lump sum of approximately €43,000 and the balance of funds were invested into an approved retirement fund to provide a retirement income.
He sold his valuable guarantees you may say. He did. But he knew what he was doing and was able to make an informed decision. It is imperative to seek good financial advice.