bonkers.ie Looks Closer: So you're approaching retirement age? Here's what you need to know.
A person who’s approaching retirement today, could, theoretically, spend almost as much time in retirement as they did while working. Which means retirement planning is something that needs to be taken seriously and considered carefully. So, in this episode of our Looks Closer series, we chat with Moneycube Co-Founder and Chief Financial Advisor to get the lowdown on what you need to know as you approach your golden years.
What is Moneycube?
MoneyCube is a Central Bank regulated advisory business. We operate an online platform that provides advice to companies and individuals on pensions and investments. It’s well known that there’s a lot of frustration in the Irish market on the types of returns people have seen for a long time on their bank deposits.
What makes us different is we like to think we’re good at speaking English about financial services. We spend a lot of time communicating about pensions and investments and showing that this stuff is simpler than you might think once you get to grips with it.
There’s a lot of smoke and mirrors in the financial industry and we pare all that back.
What exactly is retirement planning?
Retirement planning is different for everyone but essential for most of us aiming to hang up our boots in some form and have some years in retirement. That means not working that 9-5 grind in the same way.
Retirement in Ireland has changed a lot over the last 10-15 years. People are living longer and people want to work later into their careers, so working patterns are more flexible.
There’s a statistic now that the average person entering the workforce now will have 15 jobs throughout their career.
When should people start thinking about their retirement?
There are different phases to the planning process. If you’re just entering the workforce, it’s very different from being mid-career.
Typically by late 30s to early 40s is when people’s earnings will have gone up a bit. Maybe some financial pressures around childcare, house deposits, etc. have reduced a bit. This is peak time for planning around funding your pension.
There’s a second key period, which is in the 5-10 years before you’re planning to retire where you make decisions while you still have some power to change things.
What should people five years from retirement be looking at doing?
The first step is to look at what you’ve got and observe what will fund your income in retirement. Your income in retirement can come from lots of different sources - you might have a rental property, you might rent a room in your house, you might have a lump sum due to you on retirement, you might have some investments you want to structure in the right way so that they’re delivering an income in the right way.
There are a number of different strands, but the first step is to make a list of all of these elements. You’ll want to add everything up and see what that looks like.
After you observe what you have to date, then you should start thinking about what you want to change to help improve your situation.
What if someone doesn't have a lot saved for retirement? What can they do?
There’s a lot you can do at a late stage to boost your retirement income. The Government really wants us to start saving for our pensions and they give some generous tax relief for doing that, particularly as you approach retirement.
Additional Voluntary Contribution - how does someone put in a lump sum?
For many people, adding a lump sum through their employer is the most convenient way. This can be done through payroll and can then go into your existing pot.
It’s always worth looking around, particularly if you’re putting a significant sum into your pension. There are ways to do it so that it’s tax-efficient, low cost and invested in a suitable way for you.
If someone has built up €100,000-200,000, that’s not an insignificant sum so it also deserves full consideration. There’s a lot you can do with that amount.
What are the fees associated with pensions?
If the fees don’t stack up or you’re not being told what they are, then that’s a bit suspicious. I’d encourage people to ask questions and press about issues so that they feel they’re getting value for their money.
You might want your pension invested in a property, which will cost more than a vanilla investment fund. That’s because someone is doing a lot of work to drive returns and try to grow that property fund.
I’d recommend people look at two things:
- Firstly is the annual management change. 3% is an eye-watering amount. You want to be at 1.5% or lower. Pensions are moveable things, so just because you’re in one now at a certain cost doesn’t mean you’re required to stay there.
- The allocation rate is also worth paying attention to. This is the percentage of the money that you pay in that’s actually landing in your pension account. An allocation rate of 87% may have represented good value 10-15 years ago, but it doesn’t represent good value today.
Should someone in their thirties be investing in different things than those in their fifties?
There’s a norm that you trend into lower-risk assets as you approach retirement.
Maybe when you’re thirty you’re focused on equity and company shares. Maybe you don’t mind on a one-year view if your pension drops 20% because it might grow 30% the next year.
In the industry, people tend to move into lower-risk assets such as bonds from companies or governments as they approach the age of 65. People should consider if they should take a bit more risk with their retirement money because it’s actually a longer-term investment than they might expect.
How does the State pension fall into all this?
The State pension is relatively generous in comparison to other countries. It’s there to provide a basic level of income in retirement, it’s only about €240 a week.
What it does do is provide a floor on your income, so you could review your own personal pension and see if you could take more risk because you have the safety of the State pension.
It’s also changing though. It’s expensive for taxpayers to fund so the Government has made the age at which you can access the State pension later and later. It’s one of the oldest in Europe. From 2028 you won’t receive it until you’re 68.
So while this might be a core part of your income in retirement, you need to think about how you’ll fund the three or so years that you won’t have the state pension.
State pension entitlement
It’s a dangerous assumption for people to think they’ll receive the state pension in full. Without wanting to scare people, it’s well worth checking out with the Department of Social Protection. They’ll tell you quickly what your entitlement is.
A lot of Irish people have spent time working and paying into the UK state system. It’s easy to check out online what your entitlement is there and you might be pleasantly surprised.
If you decide that you want to continue working after age 65, can you still contribute and save into a pension?
Absolutely, you can and it’s worthwhile doing. If you retire and then decide to take on a new job, you can be drawing down your pension from your old job and paying into your pension from your new job and saving income tax along the way.
How can people manage multiple pensions?
Keep a list of the pensions you have so that someone else can find them too. Pensions aren’t attached to companies the same way as they used to be. There is also a service for tracking down pensions.
There are arguments for consolidating pensions. Sometimes it’s the right thing to do and other times it reduces your options.
What are the main considerations for those approaching retirement?
The main watch out is to review your pension situation now and act on it. Don’t be put off by the nonsense language and ensure everything is made clear for you.
Pensions are now about putting the user in charge of their own pension. There’s good and bad to that. You have a huge amount of control and a huge amount of possibilities and options open to you. On the flip side, you have to grab the opportunity with both hands and maximise it.
What options are available when people reach retirement age?
Every case is different. The system is designed to be able to take a quarter of your pension pot as a lump sum on retirement. The first €200,000 is not taxed and the next €300,000 is taxed at the standard rate, which is 20%. An overall cap exists for pensions at €2 million.
People use this to pay off their mortgage and to make plans post-retirement.
You can purchase an income for life from an insurance company, or more recently, everyone has the option of an approved retirement fund.
This is essentially a tax-protected savings account for your money. You can choose how you can invest that, you can define the charges on it by selecting who you use to manage it for you and you can draw it down at a certain rate.
What do people tend to do?
People tend to avoid the income for life due to the wider economic situation around interest rates and bond rates. The amount of money you need to pay in order to get an acceptable amount of income out of an annuity is quite high. They represent poor value for most people.
The vast majority of people tend to go down the approved retirement fund route, where you can put it into higher risk and higher growth assets and generate a return off that. Ideally, you’re taking 4-5% per year, which is being replaced through the growth you’re receiving in your fund. The thing to think about is do you really want to be doing that when you’re 80?
You might decide at 80 that you now want an income for life and at that point, you’ll get a more attractive income for life offer from a financial institution because based on life expectancy they don’t expect to be paying it out for long.
What income should people be aiming for in retirement?
Most people will want to have about 50-65% of the income they’re used to but it does vary.
Do you have any final words of advice for those approaching retirement?
Act now, the sooner the better. There’s almost always something you can do today to improve your pension and wealth position. You can do a lot to optimise your pension position. It’s a journey too, so none of this gets sorted overnight. You need to give it time to build up your assets, monitor them and invest in them.
Take a look at our helpful guides
If you’re looking for more information, you can learn more about pensions in this helpful guide.
We have a variety of different personal finance guides available that will help you in making other informed financial decisions.
On bonkers.ie we also have a range of comparison tools readily available to help you start saving money today. You can review bills and compare available deals for services such as gas and electricity, broadband, insurance and banking products to see how much you could save!
Get in touch
If you have any questions about what was discussed in today’s podcast or about pensions in general, let us know and we’d be happy to help!