I am working in my office right now and was trying to come up with this month’s segment. My father in law came out to ask how business was and we got talking about Pensions. I was stressing how some people do not really value the concept of saving for retirement. He said, “Thank god I have my Pension secured, I know a lot of people who used to have a good standard of living who are struggling now in retirement”. His words, not mine.
As such I thought I would write about a question that has come up quite regularly from people who have arranged to meet with me to discuss non Pension products. That question is an inquisitive “Are Pensions actually worth paying into?” It is too broad a question to completely explore in this segment, but I will try to at least give people something to think about.
The biggest immediate benefit of saving in a pension is the tax relief you get at your standard rate. To save €100 into a savings plan, you have to invest €100. To save €100 into a Pension would cost up to 40% less after tax relief. You also get tax free growth on an investment in a Pension; you pay regular tax on any growth on normal savings/deposit accounts.
I am finding that some people actually like the fact that they cannot get their hands on their Pension until retirement. That is to say, they know that they can’t spend it impulsively like they would if it was available to them.
One of the things that many people find understandably difficult is putting themselves in their own shoes in the future. Imagine you are retiring next month and you have nothing but the state Pension, how would you manage? Some people have chosen to rely only on rental properties for their Pension and I would suggest that between 2007 and 2012 some of them have had a very stressful retirement.
Saving into a Pension doesn’t have to be your only source of retirement income (you can purchase rental property aswell). I find that once people start a Pension they don’t actually miss the money that they are putting aside. They also don’t think of it as something they can spend now and as such they have started the good habit of saving now for their eventual retirement.
People can argue the merits of saving into a Pension, but I would ask people to really think about how they intend on subsidising a drop in income at retirement. Whether you are an individual or a couple, the same conditions may apply once you cease working. The big question is will you have saved provisions to subsidise it.