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.

Buying an Annuity at Retirement

What is an Annuity?

An annuity, commonly known as a pension, provides you with security of income for life during your retirement. It is paid monthly into your bank account. It is purchased with some (or all) of the retirement savings you have built up throughout your working life.

An annuity can be an attractive option if:

·         Your pension fund will be your main source of income in retirement

·         Your main priority in retirement is a secure regular income rather than passing on your fund to your dependants

The amount of income you receive depends on the size of your pension fund and the annuity rates in force at the time you purchase your annuity.

What is an Enhanced Annuity?

An enhanced annuity is the same as a standard annuity, except that it takes into account your health status and lifestyle health risks in determining the level of regular income payable to you. With an enhanced annuity you may be entitled to a higher regular income than you would under a standard annuity.

Where medical conditions may go against you when applying for some life policies, with an Enhanced Annuity having an underlying medical condition may lead to you possibly getting a better deal or more favourable terms. Cancer, heart or neurological conditions, diabetes, stroke or some lifestyle factor such as smoking are just some examples. Life expectancy is also one of the main dictating considerations in calculating annuity rate risk and this unique annuity addresses that issue.

What sort of medical information will I need to provide?

In general, the more detailed the information you can give, the more likely it is that you will receive an offer of an enhancement.

Some of the details required are:

1. Your weight and height

2. Your smoking history (past and present)

3. Any medication you are on (it’s best to have the names and dosages ready)

4. Full history of any medical conditions or incidents in your past

I want to also provide a pension for my spouse/civil partner; how does that work?

The medical history for both you and your partner will be assessed and quoted based on your joint medical history. The annuity may be enhanced if either of you have a medical history, which means the extra income applies to both of you. If you both have a medical history, the enhancement will be respectively bigger. A doctor must be able to verify the information provided in respect of your dependant.

It’s Not Too Late…

Are you over 50 and thinking it’s too late to save into a pension?

Never fear…although it’s regularly said that the time to start a pension is yesterday, it is not too late to start in your 50’s. For some, it is a time in life when there may be less expenses and perhaps more disposable income. The picture of life in retirement is going to look different for everyone, but it’s worth thinking about what lifestyle you would like when you retire and what income would allow you to live comfortably in that lifestyle.

Starting a pension at 50 with an aim to retire at 66 would give you 16 years to grow your pot. One major advantage is the ability to contribute 30% of your income while receiving tax-relief should you wish. This rate increases to 35% between the age of 55 and 59 and is up to 40% from age 60 onwards.

In Ireland, there is a contributory state pension of around €13,000 a year (The Pension Authority, 2021) which doesn’t kick in until you turn 66. The amount you receive as a state pension will depend on your number of Pay Related Social Insurance [PRSI] contributions. Do you think you could retire and get by on €253.30 per week? If not, now is the time to act.

Usually as we get closer to retirement, we have more disposable income for multiple reasons. Children no longer financially relying on us, mortgages and loans paid off and our salary has hopefully increased significantly. What a lot of people do not realise, is that they can probably afford to contribute more to their pension than they may think.

If you are on the higher rate of tax and invest/save €192,000 into a pension during the 16 year term above, you would receive €76,800 in tax-relief. So, it will cost you €115,200 (€600 per month net cost to you) to have €192,000 in a pension before you even factor in any potential growth.

At a very conservative rate of 3%, this could leave you with a pension pot of €245,000. That would give you a cash lump sum of €61,250 for your retirement party and you could easily drawdown an annual salary of €9,100 (or more if you wanted) on top of that to supersize the state pension.

Paid Up Pensions…what to do with them?

A paid-up pension is a pension that you may have had with a previous employer and upon leaving employment and ceasing payments, you may not have enquired about or moved to your own name.

How do I get information about my old Pension?

In most cases you should be receiving annual benefit statements with general details (including the value) of your pension. Though if you have moved to a new address, you may not be receiving this information annually or at all. If you are unsure where to look, the company’s human resource department (or Employee Pension department if there is one) is a good place to start.

Can I bring my pension with me when I move employment?

In most cases, when you leave employment, you have several options. You are entitled to request “leaving service options” which sets out what choices are available to you. This can intimidate and confuse people but if it’s explained correctly, I find people are more confident making the decision to move their pension into their own name.

Will I lose out if I move out of the old Pension arrangement?

The only way of knowing is by enquiring about the benefits currently included on the pension plan, but in many cases, you can gain from moving your pension funds into your own name.

One of the main advantages is that you get direct access and information sent to you personally about your pension. Many people like to have complete control over their pension without having to contact a Trustee (or past employer) anytime they want information regarding their policy.

What can a Financial Adviser do for you?

Part of our job is to help people arrange their pensions together into an efficient / transparent portfolio. In simple terms this means you know exactly what you have, where you have it and when you can access the funds. In certain cases, individuals are surprised to learn they may have access to part of their pension once they reach age 50.

Cashflow Planning

The heading makes the task sound a bit boring, and slightly business-like… but the actuality of this term is something we all do in everyday life! Each month, most of us will have bills to pay, maybe a mortgage/rent, household utilities, insurance…followed by food/clothing bills, savings and hopefully some funds to put aside for a social life or something nice to enjoy as a reward for our hard work. This short-term planning is an important and smart habit to have and can help us be prepared for any unexpected bills or events that may occur along the way.

A secure online financial planning system we use for creating financial reviews can help with the long-term cashflow planning. It allows safe access to a portal where you input your expenditure/liabilities, savings/income and most importantly, your objectives now and further into the future. The more information you can input, the clearer the picture can be for your financial adviser and the more accurate the recommendation. It helps to highlight any areas where you may need to perhaps direct funds towards protecting yourself and your family or maybe towards saving for big life events such as starting a family, college fees, buying a property or preparing for life in retirement, to give some examples. Or maybe you have a dream of cruising around the world and want to figure out how you can make it happen!

Although this system helps identify the areas you need to focus on and it is planning for the long-term, nothing is ever set in stone and life can change in a heartbeat. The results and graphs can show you various scenarios throughout your life and the impact they may have on your finances.

Once we provide the results and recommendation, it is up to you to decide on the next step. As life can be ever-changing and unpredictable at times, we feel it is important to review your cashflow status every one to two years or should your circumstances change. So, as you have your monthly planning habits, an annual check-in on your cashflow plan will help give you peace of mind knowing you are using your money wisely and as best you can to achieve your goals.

Apart from mapping out a financial plan for the future, it is also a good opportunity to review any existing life policies or pensions you may have. Once you give signed instruction to a provider, your adviser can contact the life and pension companies on your behalf for further policy details. If you would like to see more information on cashflow planning, just visit www.drumgoolebrokerage.ie/planning.

Saved Smart… what’s next?

Potential options for a €200,000 Pension

Last month we looked at how you can potentially turn €120,000 of savings into a pot of €200,000. Our sample subject took the advice provided and placed €40,000 of their salary into a pension for 5 years, between the ages of 60-65, to build up a pension of €200,000. They received tax-relief of 40% on these pension contributions. So, what can they now do with their pension savings?

There are different potential retirement options available in what is called an Occupational Pension plan. For the purposes of keeping this simple, I will discuss the retirement options that are available in most pension arrangements. The options for our sample retiree will be as follows:

Value at 65:    €200,000

Tax-Free Lump Sum: 25% of the fund = €50,000

Balance of Funds: €150,000 - can be used to provide a level of income for life in one of the following two ways:

1.    Annuity

You place your €150,000 with a pension company and they pay you a guaranteed income for the rest of your life. At the moment, a 65-year-old may get an income of roughly €5,325 per year (subject to income tax)

The biggest pro of this option is that you are not reliant on fund performance. The biggest drawback is that once you have purchased the pension, you cannot make any changes and once you pass away it ceases.

2.    ARF/AMRF (Approved Retirement Fund / Approved Minimum Retirement Fund)

This is where you reinvest your €150,000 and draw an income out of the proceeds. The biggest benefit is the flexibility (you can take different amounts when you want) and this will pass onto your estate/partner upon your death.

The biggest downside is that you can theoretically draw it all down and/or the fund value does not perform as well to make back what you take out of it.

“I pay income tax on my pension when I retire?!”. This is something I hear from time to time, but remember, you will have had tax relief when you put money into your pension, you gained tax-free growth on your savings, and you received 25% of the fund tax-free at retirement.

Not just that, at retirement you are earning less income, with a sole pension of €150,000 and only the state pension. A lot of individuals (and couples) will pay little to no income tax on their €150,000.