Pensions – The Easiest Money You’ll Ever Make!

Published in The Journal on 19th Sept 2021

Like that dental appointment you keep forgetting to make or switching your health insurance, pension plans often get swept under the carpet will all that other mundane ‘stuff’ we really ought to deal with instead of ignoring. As the annual pensions season rolls around (pensions awareness week runs 20th – 24th Sept) talk turns once again to the pension deficit, retirement age to qualify for the state pension and auto enrolment…have I lost you yet?! But what if I told you that a pension plan will earn you the easiest money you’ll ever make? This is in fact true, for a number of reasons:

• All gains and income from pension investments are tax free while in the pension. Investment gains are taxed highly in Ireland, at either 41% for funds and ETF’s, or 33% for stocks and property. With Stocks and Property, income is also taxed at income tax rates. Investors have flexibility in how their invest their pensions, and are not restricted just to the standard ‘off the shelf’ pension company funds. This tax free growth is an advantage often overlooked as people tend to focus on the tax relief on contributions.
• Employer Pension Contributions are the most tax efficient investment available. Many people undervalue this when negotiating new employment contracts. In some cases, particularly for high earners, a lower salary and higher company pension contribution would be much more beneficial.
• Pensions are incredibly good value now. Contracts on the Irish market start from as low as 0.35% per annum. To put that in perspective, that is €350 per €100,000 for the pension structure, investment funds, online access to view accounts and customer support from the provider (it doesn’t include the cost of advice).

It is a neurological fact that our brains find it difficult to imagine our future selves which can make it challenging to plan and invest in the future. According to 2020 CSO figures 64.7% of the population have pension coverage of some form (outside of the State pension) which is an increase of almost five percentage points on the same period in 2019. While this increase is a positive trend it still means that a very significant proportion of people (35%+) are relying on the State pension.

Pension coverage is lowest among younger age groups with as few as one in four 20 to 24 years olds contributing to a pension scheme. However, there is a cohort of younger investors with an interest in the markets who are keen to open online trading accounts. They’re often unaware that they can do the same within a pension structure, either through a stockbroker, or the Self Invested Option available through a life assurance company. This can be a much smarter move in terms of the rate of return and tax benefits to be gained.

Younger investors are also keen, and rightly so, to invest in ethical, sustainable businesses. This is the fastest growing sector with investment sector and most investment managers are focused on aligning their product portfolio with environmental, social, governance (ESG) criteria. However, there has been some criticism about fund managers ‘jumping on the band-wagon’ and analysis of how effective this ESG focus is in affecting real change. Both advisors and investors should take a good look at the specific criteria being used to filter out companies or funds that don’t fit ESG standards, and how effective this screening process is.

It was recently reported that the Pensions Commission is set to recommend that an increase in the State pension age to 67 should be delayed by at least seven years. I definitely agree that a delay in extending the retirement age is a positive development. Given the low level of pension coverage in Ireland, most people rely on the State Pension to supplement their own pension benefits. Forcing individuals to work a further year or two is unfair. We would prefer to see a policy which encourages higher contribution rates, possibly through voluntary PRSI payments, which would allow individuals to retire at their own chosen point in time. That said, there are challenges which need to be faced. We need to improve pension coverage overall, possibly through accelerating auto-enrolment and employers taking a more active role in pension funding. The State Pension is not sustainable on its own, so all stakeholders – employers, employees and the State – have to pay their way!

For those who haven’t started a pension, worry and inertia are paralysing and don’t do anybody any good. I would encourage anyone who can, to just start a pension, even if it is for an absolute minimum monthly contribution. Take it step by step – completing the application forms and setting up a direct debit is a big step for many but it’s the most important one – you’ve started! And the benefit of growth over time will hopefully act as an incentive to contribute more. The good news is, it’s never too late to start as the tax relief alone makes it a very good investment option, even if the final pension provided is small. Do your future self a big favour and start a pension today…oh, and don’t forget to make that dental appointment and switch your health insurance while you’re at it.