The FBD Blog – investments, insurance, pensions, savings in Ireland

As we are all aware Ireland’s finances are under significant pressure at present and in late 2010 the EU and IMF were called upon to help ensure Ireland’s economic survival with an €85 billion bail out. However not all the €85 billion came from the EU and IMF, around €17 billion of the fund came from our own National Pensions Reserve Fund. The National Pension Reserve Fund was set up to counteract what the experts call the ‘Pensions Time Bomb’.

Pensions Time Bomb:

The pension’s time bomb comes as result of three factors in an economy:

1. An Ageing Population:  There are currently some 530,000 people aged 65 or over. In only 5 years time, this will have increased to something like 650,000.  By 2021, i.e. in 10 years time, the number over 65 will be about 770,000, or some 220,000 more than today. That’s a projected increase of 45% over a 10 year period alone. In 20 years time, there will be over 1M people aged 65 or over. Over the same period of time the numbers of people working or paying taxes to support the state pension will have almost halved.
2. Increasing longevity: At present a male aged 65 is expected to live for 15.9 years and a female for 19.3 but by 2036 these life expectancies will have increased to 20.6 and 23.8 respectively.
3. High Salary Inflation: The cost of living will continue to increase over the coming years and so to will our income giving us a higher standard of living while working and in retirement. This was shown in the last ten years when the cost of the State Pension went up from €1.6 billion to €4.2 billion.

What this basically means is that all of us working today will want a decent income in retirement to keep our standard of living at an acceptable level. We will want this level of income for a longer period of time given we will be living longer but the bad news is there will be much fewer people to pay for our state sponsored retirement.

The even worse news is that the Government has raided the savings they accumulated to pay for our pensions in the future to keep the country afloat. This will result in the State pension being reduced significantly in the future leaving us with a less comfortable retirement than the generation before us.

What can we do to secure a comfortable retirement?:

A personal pension is still the most tax efficient way for the self-employed to fund for their retirement and in 2011 higher tax rate payers can still benefit from tax relief of 41% on contributions to their pension funds.

I would urge all self-employed to take the time to review their retirement plan in 2011, not only from a contribution level perspective but also to ensure that

1. They are funding for a comfortable retirement
2. They are getting the greatest value for their contributions available in the market.

With this in mind I have outlined below a recent example of a client who asked me to carry out a review of his pension.

• Tom pays €6,756 in pension contributions annually. Having identified all the charges incurred under Tom’s current pension plan I compared it with what was available from the various life companies in the market with the following results:

Following the review Tom’s pension was immediately worth €917 more as the new life company to which he was transferring his pension gave him a bonus of an additional 2%.  Tom’s pension also benefited from the better value charging structure to the amount of €667 per annum in contribution charges and €219 in management charges.

While these savings are significant in their own right, what is really astonishing is that when actuarial projections were completed on both policies charging structures, Tom’s pension fund will be worth almost €100,000 more on retirement following his review assuming investment returns on both policies of 6%. Tom was also more content with his investment fund choice after reviewing his attitude towards risk and diversification of assets for his contributions.

-Niall O’Higgins