Ah, the million-dollar (or euro in this case) question of how long will my pension last in retirement? Unfortunately, there is no-size-fits-all answer. However, we have taken the time to break down some information to help you along the way.
A recent study by the Irish Times discusses how Irish workers dramatically underestimate how much they will need in retirement.
We also surveyed the public in February 2021 asking people “how much do you think you will need in your pension fund to live the lifestyle you would like in retirement?”
(Pension Support Line – Qualtrics, 2021)
As you can see from the above responses, a combined 66.66% of those surveyed chose either €200,00 or €500,000.
If we look at the larger figure and for argument’s sake say we will work for 45 years, we will need to contribute a minimum of €10,000 per year every year to reach our goal.
With the gap between the average wage and State pension at approximately €549 per week, this can potentially cause a huge issue.
Have you been keeping on top of your pension and do you have a concrete plan in place for retirement?
If not, it may be time to act. Having a plan in place will allow you to enjoy the retirement you deserve.
How long will my retirement be?
We are living longer, healthier lives and therefore, it is important you have a long-term plan in place.
After working hard all your life you do not want to spend your retirement counting pennies.
For this reason, planning your pension to aid your lifestyle in retirement is essential.
The Central Statistics Office figures show the average life expectancy for a male is 78 and a female is 82.
If we take that most people now retire at 66, that means you will have significant time to enjoy your retirement.
Although this may be difficult while living on a modest €248 per week State pension.
However, no need to panic, it is never too late to start and the best time to start a pension is today.
Why should I have a retirement plan?
It is worth noting, there is no one-size-fits-all approach when it comes to retirement planning. Everyone will have a different set of needs and circumstances.
Above all, having a plan in place will give you peace of mind as you approach retirement.
If you have the opportunity to try and accumulate wealth for your retirement, it would be foolish to not do so.
A pension provides you this opportunity in a tax-efficient way. A pension can also provide a tax-free lump sum on retirement. We dive deeper into the different pension types and how they are structured here.
It is also worth noting, we did not mention the fact you may still have liabilities while in retirement. Whether that be a mortgage or other bills and utilities.
Unfortunately, just because you have stopped working does not mean the bills will stop.
This just reinforces the importance of having a pension. If you can supplement your income from the State pension to a level that gives you a comfortable retirement.
What type of retirement would you like?
Admittedly, again this will vary from person to person. While some might plan to survive on the €248 a week State pension.
Others might be planning that long-awaited cruise to Barbados. Perhaps you would even like a couple of ‘stay-cations’ as is the new norm.
Either way, you will need a plan in place.
You want the years were to approach retirement to be stress-free. The easiest way to ensure this is the case is to plan early.
Assess your options and take a holistic view of your whole situation. Our team has been doing so alongside clients and has seen every type of scenario.
The phrase “what gets measured gets managed”. Due to the fact pensions are very black and white, this phrase is particularly relevant.
Discussing your needs with a Qualified Financial Advisor will help you design a clear strategy to meet your goal in retirement.
When we look at retirement planning and assessing how long your pension will last, there will be several factors in place. These factors will have a direct impact on the amount of money you have in your combined pot.
Things like your State pension income, inflation, any private pensions, or any loans/mortgages will all have an impact. Therefore, it is worth looking at each in more detail.
In case you have not read any of the above, the State pension is currently €248 per week.
We know, you will not exactly be living the highlife on €35 a day.
However, it will still have a direct impact on your retirement lifestyle.
The State pension is broken down into two elements, contributory and non-contributory.
The State pension contributory is paid to those with enough PRSI contributions.
The non-contributory is paid to those who do not meet the requirements.
However, we are here to focus on how much your pension will last in retirement.
Inflation is one of those hidden costs that sneak upon us. It may only be a couple of percent each year, but it adds up over time and can have a significant impact on your fund.
For instance, think about when we give out about the price of what something used to be. Like when we say how Freddo bars used to only be 10p.
This is inflation as the cost of goods and services rises over time.
Therefore, your money will not go as far. That €248 per week will buy you a lot less in 15 years as it does today.
As a result, you must plan for your long-term future. Having a larger pension pot will help you even as hidden costs such as inflation eat into it.
Let us look at a simple example from the past. If we take different euro amounts in the year 2000 and compare it to 2020, it will look something like the below.
|Initial Value||Equivalent Value|
|€1 in 2000||€1.41 in 2020|
|€5 in 2000||€7.04 in 2020|
|€10 in 2000||€14.09 in 2020|
|€50 in 2000||€70.43|
The above illustrates the impact inflation can have. €1 in 2000 would now cost €1.41.
This will work the opposite way on your pension fund. If you have a lump sum inflation will eat into the amount over time. Having an efficient investment strategy can combat this which we discuss here in more detail.
Many of us build up a private pension over the years. In some cases, you may have multiple.
Whether you have paid into a personal pension or were part of a company pension scheme, this will hopefully help you financially in retirement.
Many who were part of company pension schemes long-term will have a significant sum built up. Although, you must assess all available options.
Pensions can often be confusing so having the right advisor by your side is crucial. Luckily, ours have over 100 years of combined industry experience.
There are different types of pensions so let us look at some in more detail.
Occupational Pension Schemes
These are company pensions. You may have worked somewhere for X number of years where both you and your employer contributed.
These types of pensions are broken into Defined Benefit or Defined Contribution Schemes.
Defined Benefit (DB)
This scheme will set out a specific benefit that will be paid out on retirement. This is usually calculated by considering factors such as years of service along with salary.
Defined Contribution (DC)
This differs from a DB scheme as it is an accumulation of contributions made throughout the period. Often both an employee and employer will contribute a percentage of the employee’s salary each month.
To conclude, the main difference between the two is that a DB scheme promises a specific income in retirement. In comparison, a DC scheme will depend on how much was contributed and how that fund has performed.
Personal Retirement Savings Account PRSA
Perhaps you were in employment that did not offer a pension scheme. In that case, you may have paid into a PRSA.
The balance of your PRSA will have a significant impact on your retirement. If you have a large sum you may not be reliant on the State pension.
Each pension arrangement whether it be a PRSA or an occupational pension scheme will have different criteria and options regarding access.
A PRSA can be accessed from age 60. Below we will go through the process along with how remaining funds can be accessed or invested according to Revenue rules.
Option 1 – Annuity
Firstly, a simple way of explaining annuities is that they will give you a guaranteed income every month for the rest of your life. As a result, they are attractive to those wanting stability and to avoid any potential risk.
|Accumulated fund at retirement||€100,000|
|Less tax-free lump sum||€25,000|
|Balance available for annuity||€75,000|
|Income from the annuity||€3,750 (per annum for life)|
(above are based on an annuity rate of 5% excluding additional features).
Options 2 – Approved Retirement Fund (ARF)
Secondly, after satisfying AMRF rules, you may have the option to invest the remaining balance in an ARF. An ARF is an attractive option to those wanting investment flexibility combined with ease of access.
Option 3 – Taxable sum
Thirdly. in certain circumstances, you may be eligible to take your balance as a taxable sum. However, this will be according to Revenue rules. If you have no other pension benefits and the total value after your retirement lump sum is under €30,000, you may be eligible for this option. This is a ‘trivial option’.
It is worth noting that each case may have a different set of circumstances. If you are in a similar situation to the above it is worth consulting a Qualified Financial Advisor.
Each potential option will have benefits but also drawbacks. You should consider your overall financial situation before deciding which route to go down.
Fees and Charges
Time for us to look at the bit nobody likes fees and charges. However, if you go with the correct advisor, they will be worth their weight in gold.
We know it might be difficult to part with a percentage of your overall fund. Instead, think of it like this. Would you want to go to a doctor or dentist for free? I would hope not.
You should think of your financial advisor in the same light. The correct advice will save you money (and stress) in the long run.
Although all the above is true, it is worth us looking at fees and charges and how they could potentially affect your pension fund.
Fees and charges may differ within certain limits.
Any charges associated with your pension will be on the correspondence you receive each year. This is your ‘Annual Benefit Statement’.
However, these statements can be difficult to decipher.
The pension industry loves acronyms. AMRF, ARF, PRB along with plenty more.
When it comes to your statement, the ones to look out for are your (Annual Management Charge) AMC and your allocation rate.
This is the annual management charge on your pension fund. These can differ and although may seem like a small amount, can have a significant impact over time. These can range from 0.25% up to 1.5%.
Allocation Rate –
This is the percentage of your fund that is being invested in your chosen fund. To break it down, not every euro you contribute may be used to buy units. For example, if you invest €100 and the allocation rate is 98%, the life insurance company will invest €98, not €100.
Policy Fee –
This is a fee charged by the life insurance company. For example, this could be €5 per month.
Breaking down these acronyms is great, but what does it mean for you and the overall value of your pension fund.
These can have a significant impact over time. Let us look at a real-life breakdown.
For this exercise, we will assume an allocation rate of 100%. It is also worth noting income tax and your relevant bracket will also have an effect.
However, for this exercise, we will ignore that and keep things simple.
Below we will look at two scenarios. One will have a slightly lesser AMC and no policy fee. Both have the same investment return. This will allow us to illustrate the impact of fees and charges over 30 years.
Case Study 1
|Policy fees (annual)||€60|
Case Study 2
|Policy fees (annual)||€0|
Although this is a very simplified version, it highlights the effects a small difference can have. The total difference over 30 years was €65,011.
It is worth noting, the above is for illustrative purposes and to help explain how they work rather than showing how to calculate.
You must be aware of the fees and charges associated with your pension fund. This will directly correlate to the amount you have at retirement.
As a rule, you should look at your Annual Benefit Statement and discuss any questions you have with your financial advisor.
Any loans or reoccurring payments you have will impact your retirement. Although they do not affect the amount in your pension fund, the need to ensure they are paid may affect your lifestyle.
You may be retired, but your loans are not. Ideally, as we enter retirement, we would have any pre-existing loans paid off. However, this may not be the case for everyone.
Redundancy may help with your ability to clear any outstanding loans or mortgages which is great. Although we are here to focus on your pension and how it may affect it.
As the world attempts to deal with the effects of the Covid-19 pandemic, redundancy will be a reality for many of us. Perhaps you are nearing retirement age and would like to assess your options.
If you leave employment and therefore cease to pay contributions to that occupational pension scheme, you have various options available such as:-
Leave benefits in the current scheme
You could leave your pension within your previous employer’s pension scheme. Trustees will manage and monitor the scheme. However, it is worth bearing in mind you will not have control over investment decisions. Furthermore, benefits are managed as a whole.
Transfer to a new employer’s scheme
You could avail of the option which allows you to transfer your pension benefits to a scheme with a new employer. As a result, your benefits will then be subject to the rules of the new scheme. Investment options will also be governed by trustees of the new scheme.
Transfer to a Buy-Out-Bond
This is option is designed for those looking to transfer a pension from previous employment. It differs from the previous two options as it will give you full control over your benefits. You will have the ability to decide on investment and fund choices. There is also the possibility of potentially accessing your funds from age 50.
Transfer to a Personal Retirement Savings Account (PRSA)
This final option is an alternative arrangement where you can transfer funds to. However, there are certain stipulations when it comes to transferring eligibility. You must:
- Be in the scheme 15 years or less
- The scheme is being wound up or you changed employment.
- You will be required to get a Certificate of Comparison drawn up if your fund value is over €10,000.
It is worth noting that with a PRSA, access will be from age 60 at the earliest unless retiring from employment.
As you can see, the above options all have different rules and stipulations. They will all have benefits and drawbacks along with fees and charges.
If you have been made redundant and would like to assess your pension options, you must do so alongside someone experienced in this area.
What happens to my pension if I die?
Another we do not like to talk about. However, unfortunately, it is a reality for us all.
Just like you set up your will, it is important you know how death will affect any pension benefits you have.
The fact in many cases your pension could be your largest financial asset makes it more significant. It is worth noting, different pension arrangements will be affected differently on death.
If you are a member of your company pension scheme and die while still working, your estate will be entitled to a ‘surrender value’ of your pension. This is a fancy way of saying the contributions that were made to your policy by both you and your employer. Of course, there are specific rules associated with different schemes and each situation may be different. Revenue rules will also come into play.
With a personal or private pension, your entire pension is usually paid as a lump sum to your estate.
Perhaps you have already retired and went down the Approved Retirement Fund (ARF) route. In this case, it is inheritable on death to your spouse or civil partner and will become an ARF in their name. Although they will avoid inheritance tax they are still liable to any income tax on withdrawals.
When we combine death and finances it is never simple. There is no one-size-fits-all answer that comes under an umbrella. Therefore, each case should be treated individually.
If you are looking for information on how your pension will be affected by your death consult a Qualified Financial Advisor.
How does Cash Flow modelling work?
Everything we have spoken about so far will influence how long your pension will last in retirement. There are many factors and the more you and analyse each the better.
Although we cannot tell the future, we can attempt to put structures in place that will lessen our risk.
Cash flow modeling is the process of assessing your current and forecasted wealth. We want to get a long-term picture of how your finances might work.
It will consider any assets, debts, income, and expenditure you may have and create a forward projection.
It will help map out different scenarios and highlight any potential shortfalls you may have in the future. Using such software along with speaking to an industry expert will help give you peace of mind.
What are the risks associated with a pension?
As with anything in life, there will be risks involved. Whether it is walking across the road or scuba diving in the Pacific Ocean.
There are different levels of risks associated with different options and pensions are no different.
However, there are regulations in place, and a scale helps us understand the risk associated with a certain product.
You may have seen numbers that correlate with different fund options? Or perhaps you have never noticed. Well, either way, let us look at them in more detail.
European Union law required that all life insurance companies use a scale that indicates the level of risk associated with each of their funds.
In Ireland, this scale goes from 1-7. This helps us compare the risk associated with different fund choices.
However, it should be noted that although the numbers (1-7) are universal, life insurance companies may take into account different factors when using the scale.
Therefore, you must consult an industry expert who understands your risk profile and your attitude to risk.
Where is the pension fund invested?
So, we have looked at several factors that will have an impact on your overall pension fund and in turn your retirement.
Things like inflation, risk, and fees/charges are important. But are all somewhat irrelevant if you do not know how or where your pension is invested.
When we hear about our pension being invested many of us shut off. We assume it is someone in a suit somewhere looking at something resembling our old Teletext screen.
Well, that is somewhat correct. There will be a fund manager in charge. However, it is important you understand the options they (and you) have available.
Pensions are usually invested into a range of different asset classes. By diversifying an investment across different classes, you reduce risk.
Think of the phrase “don’t put all your eggs in one basket”.
These are shares in companies that are bought and sold on the stock market. You own a small share in the company and will be entitled to dividends on profits.
Two common types of bonds are (Treasury Bonds) and companies (Corporate Bonds).
Often this includes commercial property such as offices, industrial & retail premises.
These investments will earn short-term interest and are accessible on a short-term notice.
How is a pension taxed?
There are some misconceptions surrounding pensions and any tax liabilities you may have at retirement. So, let us do some myth-busting.
Firstly, look at how your personal tax implications will change at 65.
Whereas everyone under 65 years of age pays 20% income tax on everything earned up to €35,300 per year. The tax threshold above this is 40%.
When you turn 65 with a dependant spouse, this threshold jumps to €36,000.
In simple English, you will pay zero income tax on anything up to that €36,000.
It is also worth considering the benefits you had with your pension on route to retirement.
Such as: –
- Tax relief on contributions at either 20 or 40%.
- Tax-free growth.
- 25% tax-free lump sum on drawdown of your fund.
- Tax-free income in retirement up to €36,000.
It is clear that a pension has many advantages. Both in pre-and post-retirement.
At this point, we should also note you will pay tax on annual withdrawals from pension arrangements such as ARFs. We discuss this in more detail on our Approved Retirement Fund page.
How do I make a retirement plan?
It is never too late to start planning for your retirement. We have gone through the different factors that may affect your overall pension fund.
Your retirement should be a time to enjoy the hard work you have put in during your working life.
If anything is still unclear or you have questions, feel free to contact us and arrange a consultation.
We hope the above will help you gauge how much you will need in your pension at retirement!
Our advisors take a non-jargon approach when it comes to pensions and can help you assess all potential options.
How do I book my consultation?
The easiest way to book is the option that suits you most. You can call, email, leave your details in the contact box or even book through our live calendar.
We offer a complimentary consultation with a Qualified Financial Advisor. Our advisors have over 100 years of combined industry experience and will be glad to help.
Phone – 01 890 3518
Email – email@example.com
*This blog should be used for information only and not taken as financial advice.