Retirement is increasingly viewed as a new transitional life stage. Gone are the days when the gold watch on your 65th birthday marked an end to working life. Longer lifespans and better health are changing retirement planning as retirees want to make the most of life in their third act. They also need to plan for increased costs in areas such as healthcare and to ensure their retirement savings last for their lifetime or even beyond.
“Thanks to the many advances of the last century, those of us in the industrialised world have received not just the gift of a much longer lifespan, but a longer health span as well,” says Jochen Kienberger, chief growth officer at Allianz Global Life. “This means that over the generations, our expectations of retirement have changed and will continue to change. While a longer lifespan is clearly a gift, some younger retirees and people approaching retirement are concerned about whether their savings will be sufficient to last throughout their retirement.”
Against this backdrop, he says, recent research conducted by Allianz shows people are increasingly recognising the need for reform of pension systems.
“Interestingly, this view is also supported by many early retirees and those approaching retirement,” says Kienberger. “Contrary to common stereotypes, respondents aged 50 to 64 are among the most willing to accept measures such as working longer, postponing retirement or receiving lower public benefits.”
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Kienberger’s advice for people approaching retirement is twofold. “First, reflect on what is important to you in retirement and how you want to make the most of the gift of a longer life and better health. Second, talk to a financial adviser about the best financial plan to support your personal goals and plans for retirement.”
Indeed, the first and generally the most important decisions facing retirees are financial. “At retirement, members of defined contribution (DC) pension schemes and PRSA (personal retirement savings account) holders have several options for accessing their pension savings,” explains Davy pensions specialist Helena Dorrigan. “Many choose to take a retirement lump sum of up to 25 per cent of their fund, with the remaining balance transferred to an approved retirement fund (ARF), allowing the fund to remain invested while providing a flexible income in retirement, subject to certain minimum income levels.”
Alternatively, the balance can be used to purchase an annuity, which provides a guaranteed income for life, she adds.
“Some DC occupational pension scheme members may also be eligible to take a lump sum of up to 1.5 times salary, depending on length of service, with the remainder used to buy an annuity. PRSA holders have the additional option to leave their 75 per cent balance, after taking their lump sum entitlement, invested in a vested PRSA, which operates similarly to an ARF. In terms of the taxation of lump sum entitlements, the first €200,000 of any retirement lump sum is tax free, the next €300,000 is taxed at 20 per cent, and any amount above €500,000 is taxed at the individual’s marginal rate.”
She echoes Kienberger, saying: “The key point is to seek professional financial advice in the lead up to this important time to ensure you choose the retirement option most suited to you and your family’s circumstances.”
According to Munro O’Dwyer, who leads PwC Ireland’s retirement and pensions consulting business, people can look to alternative and potentially tax-free sources of income before drawing down from their ARF. “They can use their tax-free lump sum or other assets to live on for a period. This will delay drawdown while their ARF continues to grow tax free and will help to ensure that it will last through their retirement. They may also choose to continue working part-time and use that income, but it will be taxed of course.”
These decisions should be made in light of income needs, appetite for investment risk, health, life expectancy and other sources of retirement income, says Dorrigan
“Taking a lump sum can provide valuable capital for purposes such as repaying debt, funding major expenses or creating an emergency reserve, but it will reduce the amount available to generate retirement income,” she explains. “Where appropriate, we encourage reinvesting this lump sum in a personal diversified investment portfolio to help provide additional security throughout retirement.”
An ARF may suit those who want flexibility and are comfortable with investment risk, she notes. “The fund remains invested and can continue to grow, while income can be drawn as needed. However, there is no guarantee that the fund will last throughout retirement. Regularly reviewing your ARF and withdrawal strategy is highly recommended.”
An annuity may appeal to those who value certainty and security. “In exchange for their pension fund, the retiree receives a guaranteed income for life, providing peace of mind that income will not run out, regardless of market conditions,” says Dorrigan.
“In many cases, a combination of options can be appropriate. For example, you may purchase an annuity that covers your fixed expenditure and then use an ARF to fund your discretionary lifestyle requirements.”
For those who don’t intend to spend the kids’ inheritance, there is the question of inheritance planning. “Retirees should also consider the legacy implications of their choices,” Dorrigan advises. “An ARF can transfer to an ARF in a surviving spouse’s name with no inheritance tax implications. ARFs also have the benefit of being transferable to children over 21 at a special income tax rate of 30 per cent. In the case of an annuity, they typically have a 50 per cent spousal benefit but this can vary and needs considering before making any choices. There’s typically no benefit for other relatives in the event of death.”
Regardless of what choice is made, prudence is recommended. “It is important to draw income at a sustainable rate and review withdrawals regularly to ensure they remain aligned with the value of the fund and future spending needs,” says Dorrigan. “Regular financial reviews and professional advice can help retirees adapt their strategy as personal circumstances, markets and legislation evolve.”
