Originally appeared in
It’s time to put pensions back on the table
Published in The BusinessPost on October 4, 2020.
It’s time to put pensions back on the table
No matter how far away you are from retirement, it is always a good time to start a pension or to build up your contributions. And the tax benefits are considerable, writes Siobhán Maguire
It wasn’t so long ago when the government’s ambitious Pensions Roadmap was a talking point for employers and the pension sector. Hopes of tackling Ireland’s pensions time bomb prompted proposals which included the introduction of an auto enrolment scheme – an effective way to get all Irish workers saving into a pension. But then a global pandemic took hold and pension reform was paused.
However, with Budget 2021 just over a week away, there have been calls for the government to put pensions back on the table with immediate effect. Brokers Ireland, the representative body for insurers and financial brokers, has called for assurances that pensions will not face cuts in the forthcoming budget.
The organisation, which represents 1,225 broker firms, said pension tax relief could be an easy target to help cope with the financial fallout of Covid-19, but that any such move would have devastating consequences for middle-income workers.
“The temptation will be immense because in a tight budgetary situation it could be viewed as an easy option, because those impacted, primarily middle-income earners, will not feel the hit immediately,” said Rachel McGovern, director of financial services at Brokers Ireland.
“It is an unfortunate reality that many workers, arising from the pressures and uncertainty around their jobs, have stalled or cut back on their pension contributions. In addition, we have over 1,100,000 workers in the private sector who are not making any contribution towards a private pension.”
McGovern said big questions remain around the auto enrolment pension scheme which was intended to begin in 2022, but with the pandemic fallout still being felt, this deficit is not expected to be met, given concern around affordability by some employer groups, especially in light of the pandemic,” she said. She said Brokers Ireland would be seeking a “positive commitment” from the government on realigning the current level of pensions tax relief.
“Since pensions are liable for tax, what is often forgotten in the debate about pensions is that the taxpayer gets a decent contribution from pensions savings when workers retire.”
Currently, pensions tax relief means workers on €35,300 or more get €40 back from every €100 they contribute towards a pension. Eoghan Gavigan, a certified financial planner and owner of BestPensionAdvice.ie, said this is something taxpayers should be making the most of.
“Pensions represent a great tax planning opportunity and too many taxpayers don’t take advantage of this,” he said. “In the same way as maximising your pension contributions, there are certain times, particularly at the end of the tax year, when it might be appropriate to make an additional contribution.”
Gavigan said an essential step in building a pension pot was getting started as early as possible.
“How early you start is critical. It’s far more important than how much you contribute at the start,” he said. “You’re unlikely to be pursued by a financial adviser to start a pension, as the way that advisers are paid in Ireland means that the real money is earned from taking over already accumulated pensions. Nevertheless, you should make a point of commencing your pension as soon as you can.
“If a person starts contributing to a pension at a young age most people find relatively soon that they have capacity to increase their contributions fairly painlessly as it becomes a natural part of your cashflow and the earlier you commence investing, the earlier you start to benefit from the compounding of returns, which is a very powerful driver of investment returns.”
Getting the right advice is also important, said Gavigan: “Sound investment advice isn’t about guessing which fund will outperform in a given year or getting rich in the market. Trying to time it really is not a good approach.
If you come at pension investing from the point of view of how much return you need to achieve your objectives, what your attitude to risk is, what your tolerance for risk is, and what your capacity for loss is, you can choose investments which should help you to grow your pension assets with only as much volatility as you can comfortably bear allowing you to sleep soundly, regardless of what is happening in investment markets.”
“No adviser can advise on your investment plan properly, without a financial plan. The plan determines the rate of return needed to achieve your financial goals. This in turn informs asset allocation.
“A key thing about this process is to remember that if you manage to achieve your financial objective, the additional satisfaction you get from beating it is less than the disappointment you will experience if you took too much risk and fall short.”
Eoghan Gavigan is a certified financial planner and the owner of Highfield Financial Planning hfp.ie
The material and information contained on this website is for general information purposes only. Neither the writer nor Highfield Financial Planning Ltd makes any warranty as to the completeness, accuracy or reliability of the information or the suitability or availability of products or services, referred to on the website, for any purpose. You should not rely on any information contained on this website as a basis for making any financial, legal, taxation or other decision. The information presented does not include all the considerations which are relevant to the topic discussed as to do so would render it un-readable. When considering any financial issue you should seek the advice of a suitably qualified adviser.
Warning: If you invest in this product you may lose some or all of the money you invest.
Warning: The value of your investment may go down as well as up. You may get back less than you invest.
Warning: This product may be affected by changes in currency exchange rates.
Warning: The income you get from this investment may go down as well as up.
