Less than two years ago pensions were one of the hot-button issues in the general election. Parties of all hues competed in a veritable Dutch auction to outbid each other on how low the pension age should go. Settled government policy that had been treated as an article of faith was ditched in favour of political expediency with the can eventually being kicked down the road to be dealt with by a hastily convened Commission on Pensions.
With what passes for normal life returning thanks to one of the world’s most successful vaccination campaigns, matters financial are coming into focus and pensions are rising up the political agenda once again.
For once, there is some good news for the Government. According to the latest Central Statistics Office data, 64.7 per cent of people in employment in the third quarter of 2020 had some form of supplementary pension coverage on top of their State pension entitlements. That represented an increase of almost five percentage points on the same period in 2019. This includes occupational pension provision from current and previous employments, as well as personal pension coverage where payments have been deferred for a while or are currently being drawn down.
Those headline numbers tend to disguise the new complexities facing people saving for their retirement. The world of work has changed fundamentally since the pension system was originally designed. The great majority of people no longer work for the same employer for the duration of their working lives and most of them will change career and employment on multiple occasions.
Couple that with other societal changes which are leading to people having families later in life and the goal of saving for a pension for 40 years and retiring at the age of 65 or even earlier becomes much less achievable.
“If you look at the class of 2021 leaving full-time education today, they are probably going to lead completely different working lives to the people who are retiring in 2021,” says Bank of Ireland head of pensions and investments Bernard Walsh. “Many of those people will have retired from the same employer they started their career with. Those people may have a defined benefit scheme or one that was replaced with a good defined benefit scheme in the last 10 or 15 years. There is a degree of finality for them at retirement. Those who are retiring now can probably expect their employer to look after them, but individuals starting their careers today have to take personal responsibility for their pensions.”
That concept of a full stop to a working life at a pre-determined retirement age must be called into question, according to Alistair Byrne, head of retirement strategy at State Street Global Advisors. “You have to start on the basis of people living longer and healthier lives,” he says. “That pretty much has to imply longer working lives. That point has to be made. If you work from age 20 until you are 60 to fund a retirement that lasts from when you are 60 until you are 90, that’s a very challenging equation. From that point of view, the retirement age must drift upward. The numbers just don’t add up.”
That is not necessarily a problem for a lot of people, he points out. “The research shows that many older people who are fitter and healthier than those that preceded them want to continue working. They want the sense of purpose and enjoy the social interaction with colleagues and customers among other things. That’s not to say they want to work in exactly the same way. They may move into a different role, work part time, or move into a phased retirement. That helps make the numbers add up. If you are not drawing on your pension assets in your 60s that helps.”
But it does pose challenges for some people. “There is a degree of inequity,” Byrne notes. “For somebody working in a hard manual job, the idea of working into later life may be more challenging. We need safety nets for those people. It’s also about transitioning to something else, something more suitable for the person’s age.”
Phased retirement
He points to the book 100 Year Life: Living and Working in an Age of Longevity by Professor Andrew Scott and Professor Lynda Gratton of London Business School, which has addressed these issues. “It looks at a multi-stage life where people live longer, work longer, and don’t have a single career,” he says. “Many people pivot to other things having started their career in another area. That requires a lifelong learning mindset where people adapt and develop new skills to keep their opportunities open.”
That opens up the possibility of a phased retirement where people’s needs to draw on their pension changes over time. “They may need to take some to top-up part-time income to start with and then take a bit more as time goes on,” says Byrne.
Shane O’Farrell, director of product with Irish Life Corporate Business agrees with much of that analysis. “People are living longer, so they will need to contribute more in order to have enough to live off for this extended period,” he says. “However, with a longer, healthy lifestyle they will possibly also have a longer, healthier working life and thus, have longer to contribute.”
And there is good news, according to Emmet Leahy, head of financial planning with Davy. “A lot of the core principles remain the same. We will need to save for retirement, and pensions is most efficient way to do it due to the triple tax savings available, on contributions, on investment growth and the tax-free lump sum on retirement. But there is an ever-growing need for personalised advice to ensure you achieve the retirement you desire. You can leave the complexities to the experts who will help you deal with issues such as the State retirement age likely going out to 68 and marrying your pension pot with that to ensure there are no gaps in the intervening years if you retire earlier than that.”
Leahy advises people to try to keep it simple. “It’s all about working out what you want and then using pensions in a way that’s right for you rather than getting stuck in the complexities and missing the overall picture. A financial plan is a great way to incorporate your unique situation and your career desires so you can facilitate a more flexible way to get to the comfortable retirement you deserve.”