Imagine for a moment that someone offered you an investment with a guaranteed instant return of 66 per cent and tax-free savings on its growth for as long as you keep paying into it. You’d either bite their arm off or laugh in their face because it sounds way too good to be true. But that’s exactly what a pension offers people who are paying tax at the 40 per cent rate.
“You can benefit from tax relief on any money you pay personally into your pension,” says AIB head of customer financial planning Michael Cosgrave. “The amount of tax relief you can claim depends on whether you are a high or low income taxpayer. If you pay income tax at the higher rate and paid €100 into your pension, then you can benefit from €40 from Revenue, making the real cost of that contribution only €60.”
An instant gain of 66 per cent on your €60 contribution.
And there’s more. “A standard company pension scheme will match your contributions up to a certain amount,” says Bernard Walsh, head of pensions and investments at Bank of Ireland. “If you don’t put anything in, nor will your employer. This means missing out on free money.”
Cosgrave adds: “If you are not taking this up, you are effectively turning down a pay rise.”
And yet more than a third of Irish workers do not have any pension coverage other than the state pension. The situation is worse still when you strip out the 430,000 civil and public servants who are automatically enrolled in pension schemes as a condition of their employment. When those workers are excluded, the proportion of private-sector workers totally reliant on the state pension rises to around 42%.
With the state pension only paying €13,800 a year, it is clear that vast numbers of people are going to struggle financially in retirement.
“The number of people without a pension is quite extraordinary when you look at all the benefits there are,” says Walsh. “There are a couple of challenges. The biggest one is inertia. Irish people have an ‘amárach’ approach to life. We almost have to be given a deadline or forced into doing things.
“If you look at CSO data for Q3 2022 the number one reason why Irish people don’t have pensions is they never got around to it. But it can be done quite quickly. Typically, an hour-long meeting is all it takes to set up a pension. It can take longer if you want, of course.”
That same CSO research revealed that 40 per cent of people without a pension said they couldn’t afford one.
“Absolutely the cost of living comes into it,” says Walsh. “People have a nervousness about taking on new financial obligations. They don’t want what they perceive to be a financial millstone around their necks.”
There is also the issue of perceived complexity, according to Cosgrave.
“There is a lack of understanding of the benefits of pensions and the importance of an independent income in retirement,” he points out. “The pensions industry has historically been far too complex, which has led to the low coverage levels we see today. This is in the process of being improved through a simplification agenda but there is still a distance to travel to achieve this goal. Low take-up can also be attributed to lack of awareness on where and how pension advice can be found. That is one of the reasons why AIB life was set up, to be able to offer pension products and advice across Ireland through our 120 financial advisers.”
Bank of Ireland research also points to a complexity issue. “We carry out regular surveys and just 46 per cent of respondents to the latest one said they understand how pensions work,” Walsh notes. “Less than two in five said they understand the tax advantages of pension savings.”
The promised but much-delayed national auto-enrolment pension scheme may make a difference.
“Auto-enrolment will be a very welcome addition to the pensions landscape and will help in a number of ways but it won’t be a silver bullet to solve the issue,” says Cosgrave. “Instead, a greater focus on customer outcomes is required from both providers and regulators to remove unnecessary complexity from the industry and to make it far easier for customers to take out and manage their plans for their retirement.”
Restrictions associated with pension savings also come into play. Unlike the case with a standard savings or investment product, pension scheme members do not have ready access to their funds. Walsh believes this is part of the reason why Ireland’s high savings rate is not translating into pension coverage.
“All the research highlights the fact that locking up money for a long period of time in a pension feels like too much,” he says. “However, a lot of people don’t realise that if they have money in an occupational pension scheme of any kind, they generally have access to it from the age of 50. They can draw down the benefits at that time.
“The reality is that people can get anxious about putting money into a pension because of the sense of it being locked away. Pension savings should be taken in the context of people’s other needs. They should first decide what they need for short-term savings and for emergencies and then decide how much they can afford to put aside for their pension.”
Cosgrave emphasises the need for good advice when people are considering pensions.
“Pensions can seem daunting, with talk of tax relief, investment strategies and compounding,” he says. “It’s very important that people remember that at their heart they are just long-term savings accounts the Government top up for us through tax relief.
“Pensions are here to provide an income for us when we retire from paid employment. And like any other savings that we have, what we get out of them will be a reflection of what has gone into them. Because of the power of compounding over time the earlier we can start a pension the better but it’s just as important to make sure you understand what your pot will give you in retirement and ensure that you understand how much you will need to put away now to deliver on what you are looking for in retirement.
“The amount you need in retirement is different for everyone but this is an area where a good financial adviser can help enormously.”