Do you have more than one pension?

When I am carrying out a financial review with people, I look at all of their finances and quite often there are areas that require further research. One such area is tracking a person’s pension / pensions from older employments.

What I am finding is that people may have forgotten details or don’t have much knowledge about these older pensions. So, I can help them obtain details such as where the policy is being held, what their current options are and making sure that they are clear on the pros/cons of what they can do.

Questions that arise:

•   Can / should I encash it ?

•   Can / should I move it ?

•   Do I lose out by doing anything with it ?

•   Is my money safe ?

I find some clients leave their pensions in their older employer schemes more out of fear rather than looking at their options and forming a strategy. This leaves them exposed on a number of accounts. There is a chance they may forget about the policy or the pension administrators may not keep in contact with the clients (example: change of clients address or contact details).

In general, the biggest benefit of moving your pension out of a former employers’ pension plan is that you will have direct control over it and you do not need to concern yourself with contacting an extra 3rd party which could include Trustees and/or your previous employer. You can usually move it into a new pension arrangement or a Retirement Bond in your own name.

Depending on a person’s circumstance, it can make sense to preserve the benefits in what is called a Retirement Bond. This is your own personal pension and importantly, it preserves the exact benefits that you would have had in your employers’ pension.

What a lot of people do not realise, is that if you were to move your old pension arrangement into, for example, a PRSA pension plan, you could be missing out on benefits that do not transfer over to a PRSA. A lot of pension schemes have a tax-free lump sum option which is not available in PRSA’s. This means that there may be cases where people are losing out by moving their pension into a PRSA.

Another benefit of a Retirement Bond is that if you have preserved benefits in these plans, you normally have access to them from age 50. If you have merged your pensions together or moved it to an active PRSA, you may have to wait longer to drawdown the benefits.

Redundancy and Tax-Free Lump Sums

I know I have done pieces before on the lines of “why would I need/use a financial adviser” but over the last few months I have engaged clients in a manner where they were delighted afterwards. The general sentiments were “I couldn’t of done that myself, I wouldn’t have known what to do”.

One client was asking me to help with their retirement options. They found the current brokerage looking after their pension were not great at explaining their options. I discussed their options with them, contacted the pension provider on their behalf and was able to get clarification on their Tax free lump sum. There was a question mark over whether they were still entitled to their tax free lump sum because they had signed a waiver when they were made redundant from their employment.

I made our client aware that there is a way of processing your claim that may allow you a pension tax free lump sum, even if you have signed the waiver. This option could be taken away with future pension legislation changes and is not available for all clients, but in this scenario I was able to confirm to my client that we can get her a Tax free lump sum from her pension.

In another situation , a client contacted me about their retirement options. Firstly, for some reason the pension company had not highlighted a tax free lump sum on their options (which I cleared up). Secondly, this client had a particular medical condition which meant I was able to look to get them a better Annuity (pension for life) offer. This is called an enhanced (impaired life) annuity and its basically more money in your pocket for nothing other then confirming your health details. If you meet a certain criteria you can basically get more income for your money.

Most people do not seem to realise that they are very likely paying commission on their policy if there is a broker that is looking after their plans (even if that broker is not advising them). Most pension arrangements have a broker managing them.

I get paid a commission for this service and clarify exactly what I am receiving. Not just that, I generally have been getting as much, if not more, for my clients while being able to provide them with my expertise and relative independence (I do not work with/for one company but have agencies with most of the major Pension/life offices).

Are you 10 years or less away from retiring?

You’ve spent your working life saving and you can almost taste retirement. The decisions you make from here on could have a considerable impact on the size of your retirement savings pot and whether or not you can achieve the required income you need once you stop working.

I work with clients to help them see a snapshot of how their current strategy will look at retirement. If needs be we look at alterations they may need to make to achieve their goals. Here are some of the things we discuss:

1. What are your expenses now and what might they be at retirement?  Although you may be well-practised in budgeting, many people don’t know what income they will need when they retire. Make a budget or get financial planning advice on how to integrate pension savings into a retirement plan. This will also allow you to see how much money you need for everyday life and for additional events such as holidays and hobbies in retirement.

2. What will be your sources of income post-retirement?  Once you’ve got an idea of what income you’ll need, it’s now time to start identifying where your income will come from. There are a few common sources of retirement income, such as pensions, rental income from property, savings, state pension.

3. Make the most of your pension contributions now.  As you’re later in your working life, it’s possible that you’ll be at the peak of your earnings which might make it easier to put extra money into your pension. Many people throw in significant lump sums into their pensions as they get closer to retirement.

4. Check your investments.  Once you get closer to retirement - say 10 years to go – it might suit you to amend your pension portfolio into ‘safer’ or low volatile investments. I heard many stories from the financial crash of 2008 about people who “lost a huge portion of their pension value near retirement”. Part of the problem was that many people didn’t understand where their money was invested or the volatility of their pension strategy.

5. Combine your pensions or maintain separate?  Having your pensions together could make them easier to manage, as well as help you to make more informed choices when it comes to saving for retirement. On the flipside, there are scenarios where it makes more sense for some people to have more than one pension.

6. Start thinking about your retirement options.  Do you know what options you will have with your pensions at retirement? How will that help you achieve your retirement goals?

Let it grow….

I have my own small allotment area locally that brings me great satisfaction. I took up this hobby for multiple reasons but mostly to learn how to grow my own vegetables/fruit and a place to go and relax.

At the very start, I accepted that mistakes would be made, that sometimes things wouldn’t grow or go the way I had hoped. I also accepted that I wasn’t completely in control of how to nurture the garden (like the weather, pests etc).

I also made a conscious choice to allow my allotment to be relatively imperfect. Unlike many things in life (I can be a perfectionist), I don’t get stressed about weeds growing in some parts, or mud in others. If something isn’t going right, I am not afraid to start all over again. The journey is one that I just accept as it is.

I had planted a few drills of potatoes earlier this year. After I returned from holidays the stems of them looked like they might be dying or suffering from blight. The area around the potatoes looked grim and I thought I would be digging up a load of rotten potatoes. Well, the good news is when I dug them up, they weren’t just healthy, they were massive and bountiful.

Well, if you apply the same thought process to pensions, sometimes people feel their pensions are in a bad place if the value has gone down (particularly after a significant drop in value). But once you are not digging up encashing your pension, it doesn’t necessarily mean that you will be getting a bad return. It is important to remember that neither you or me or pension companies or investment managers are in control of the factors that influence fund performances. We can only try to navigate the conditions as they arise and hope that we end up with healthy spuds returns at the end of our journey.

There is also another element of pensions that I feel applies here. People who have a basic understanding of investments (where values can fall and rise, but usually over the long-term, pension managed funds do better overall) can usually accept that there are factors beyond their control. Things like pests inflation and weather interest rates can be very difficult to foresee but panicking after these events usually leads to bad decisions being made.

If you can accept that the journey to and after retirement has good/bad weather during that timeline, you stand a better chance of allowing your garden pension to recover in the bad times.

Company Director pension funding potential update

Running a business can be a very busy undertaking and sometimes setting up a pension for your future retirement can be pushed down on the long list of things to do. Without having your own pension provisions, you will be fully dependent on the State pension at retirement, should you qualify for it. Depending on your company status (e.g. Sole Trader, Limited Company), there are a number of pension options that may be available to you which include an Executive (Company) Pension, a Personal Pension, a Self-Administered Pension Scheme or a PRSA.

As a company director, Revenue will allow you to build up a pension fund that will provide you with a pension pot of 2/3rds of your final pensionable salary. The only limit relates to the Lifetime Pension Fund Limit (Standard Fund Threshold) which is currently €2,000,000.

As of 1st January 2023, the Finance Act has now introduced a new update to Personal Retirement Savings Accounts (PRSA) which may make this type of policy a more beneficial and attractive option for company directors.

Employers can now pay substantial contributions to a PRSA for an employee or company director that is no longer subject to Benefit in Kind (BIK). Unlike contributions to an Occupational Pension, the contributions will not be limited to salary and service, existing scheme funding or retained benefits.

As a company director or small employer, you now have the option to extract a larger portion of profits directly into a PRSA, in which all contributions paid will receive immediate corporation tax-relief in the year that it is paid.

For example, theoretically with the current legislation status, if a director is an employee, taking an annual salary from their company, they can make a potential employer contribution of up to €2,000,000 into their PRSA. This is a sizeable figure, but it does show the possibility available, which may perhaps only be for a limited time (Revenue could always close this option at a future date).

This will mean that PRSA’s can offer you a more flexible and suitable means to retirement saving and planning according to your particular financial needs. Some business owners may also see this as an opportunity to fund the pension of a spouse/partner who has been employed in the business but, for whatever reason, never previously set up a pension fund. Another important factor is that in the event of death, the complete PRSA pension fund can be paid in full to the estate of the deceased PRSA member, whereas some other pension plans have restrictions on the maximum allowable lump sum payable.

Women and Pensions: What you should know

It is important for everyone to have a plan in place so that their standard of living doesn’t fall when they retire. While women generally live longer than men, they are less likely to have adequate income in retirement.

Women generally end up with smaller pensions than men.

One of the reasons for this is because women can face challenges during their working lives not necessarily experienced by men. Their career paths are more likely to alter course to allow for temporary or permanent leave to mind children, take care of loved ones or even take a career break. And while this pattern is changing with more men taking on the role of carer, many women still undertake this role.

In 2024 the Government is expected to attempt to bridge the State pension funding gap with the introduction of some measures including enhanced State Pension provision for long-term carers. Another initiative to increase the number of employees in Ireland with access to pension cover is Auto Enrolment, with funding by members, employers, and the state. However, will these measures be enough to adequately fund for your lifestyle in retirement?

Some things to consider…

§  Will your employer still contribute to your pension if you are on maternity leave?

§  If you take extended leave or reduce your working hours, will you have enough contributions to qualify for the full State Pension when you retire?

§  If you have a pension from a previous employer, do you know how much it is worth?

§  If you are married or have a civil partner, do you know how much income their pension will provide in retirement?

§  If you take extended leave or reduce your working hours there could be a knock-on effect of losing out on employer contributions towards your pension.

If you are currently in employment and do not have a pension plan, it is not too late to start one. Any gaps in employment due to extended leave or reduced working hours can be factored into your pension savings forecast.

If you already have a pension plan in place, it is a good idea to review it each year to ensure you are on track for your retirement pot.

If you are approaching retirement, find out how much income your pension is likely to provide you in retirement. If there is a shortfall you still have time to increase the amount you are saving into your pension.

Speaking with a Financial Adviser can help you review where you are today and work with you to develop a plan to meet your future needs and goals.

Head vs. Heart

I recently sat down with a client who was just starting his retirement. He was taking his tax-free lump sum from his pension and the choice he had to make next was to either purchase an Annuity or to re-invest in an ARF (Approved Retirement Fund) with the balance of his pension funds.

• An Annuity is purchased using your pension funds and is a simple retirement payment option that guarantees to pay you a particular amount every month throughout your life in retirement.

• An ARF (Approved Retirement Fund) allows you to remain invested in the market with the ability to control your investment and take a flexible income in retirement.

It was clear after reviewing all his finances, that he did not need to rely on his pension to retain his current lifestyle in retirement (he had other savings separate to the pension). After considering all factors, from a financial perspective it made perfect sense for him to re-invest his funds in an ARF and retain ownership of his pension options, to try grow the pension. He could afford for his pension to effectively go to zero and he would not be significantly impacted. Purely from a financial perspective, the ARF was a more suitable option.

However, my client showed me a folder of all the records he had kept and continued to keep of his pension values. He described how he and his wife felt when their pensions reduced in value. So, I asked him would they continue to feel this anxiety even if there were small fluctuations in their pension values? To which he replied “Yes.”

In the end I advised my client to go with his gut, which was to buy the Annuity. Three months after the transaction, I was speaking with him again and he said he was enjoying his retirement and was really happy he didn’t have to think about the pension anymore. People think they have to re-invest their funds, they have to grow their money but that is not always the case. The right financial decision is not always the right life-balance decision. In this case the choice my client made was the correct one to allow him to enjoy his retired life.