27 August 2014

Irish Examiner – Joe Gill

I am blue in the face and sick to my back teeth with this topic. I can tip in to apoplexy if the wrong buttons are pressed. I am hopelessly failing to get the attention of those who need to hear the message loudest. The exciting, stimulating, drop everything subject is what? Pensions. Before you nod off, or wrap this page around chips, give me two minutes of your time.

A survey in the US shows that one in three employees have no, zero, nada savings put aside for their retirement. Among those poor wretches over 65, 14% have nothing put away. Among the youngest, those between 18 and 29, fewer than 69% have absolutely zip in their pension accounts.

It is not hard to believe these statistics are similar in Ireland. Years of cutting away defined benefit schemes and the growth of companies that no longer offer such largesse leave individuals with a heavy responsibility to look after their own affairs. Unfortunately, too many individuals choose to ignore their long-term financing needs and up front spending patterns at the expense of their long-term money health.

It is far too easy to avoid a pension scheme when young because it relates to the fuddy duddy years that are decades ahead. Why sacrifice the short-term satisfaction of buying goods and services in exchange for a dusty old file that gets updated once a year and cannot be touched until you are at an age that feels a long way off ?

The pension industry does a poor job in overcoming the prejudice towards its products among younger people. Terminology remains opaque, the products are often packaged in a patronising format and access to them is simply too difficult.

Government does not help either. Applying the Universal Social Charge to pensions was one foot-in-mouth initiative, while the absence of any real political shouting on the matter is another weakness. Despite pensions having a built in tax break that is hugely important in a country where income tax rates are frankly penal, the attraction of investing in pensions seems dull.

Personal responsibility is the key message here. Every year that passes in your working life is an important year passed to build through compounding a fund that pays for your retirement. If your idea of retirement is worrying about fuel and food bills, and having no scope to enjoy the years beyond work, then carry on regardless. If your brain is engaged around having a strategy that goes beyond the next shopping outing, then read on.

Take out a pencil and paper and write down €25,000. That’s about two-thirds of the average industrial wage and is a good proxy of how much is needed on retirement for the average employee. It assumes the mortgage has been paid off,kids have left the roost and spending needs are nothing frenetic. That annual income of €25,000 requires how much of a personal pension fund? About €825,000 using current low risk assets. That figure is in today’s money and is not adjusted for the inflation you must fight during your working life. Assuming average inflation of just 3% your fund needs to be €1.1m in just 10 years time to pay you an inflation adjusted return of €25,000 in today’s money.

Are you putting away enough to hit these numbers? If not, who do you think will give you money when retired? Friends, relatives, the Government? Think again. When you are over 60 and start crying because your weekly income struggles to meet your basic needs, it will be a lonely and horrible place. Just ask the 14 in 100 Americans over 65 who have empty pockets. It’s a nasty reality that needs a whole lot of growing up to address.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.


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