herald

Saturday 1 November 2014

With our pensions in trouble, here's what you need to know

PENSIONS are in the news again. We have a crisis looming -- 80pc of the 993 Defined Benefit pension schemes are in deficit. That means 400,000 current employees may not get the pensions they expected.

Add to that the hundreds of thousands of self-employed who have seen their pension funds decimated, and it's tough times ahead for everyone. This week, we're focusing on how pensions work, some key terms and what you should do.

Company pensions are either Defined Benefit (DB) or Defined Contribution (DC). DBs promise a fixed guaranteed payment in retirement, plus a lump sum. The company takes the risk and must keep the fund sufficiently topped up. A DB pension is the one public sector workers enjoy.

A DC pension is not guaranteed, but dependent on how the underlying fund performs. The employer may or may not contribute to it.

The self-employed have Personal Pensions. They contribute to this entirely themselves and the return is dependent on how the funds perform.

How can I find out what my pension is worth?

You are entitled to an annual statement of its value. However, it's more beneficial to ask what will your likely pension be when you retire.

Ask your pension trustees to calculate it or contact the pension provider directly.

My company pension is not going to be enough. Should I start another one?

You can't contribute to different schemes unless you have a separate income source. You can augment a company scheme by making additional voluntary contributions (AVCs) which will be invested just for you.

Can't I just leave and look after myself?

Yes, you can leave a company scheme, but what will you invest in? You'll miss out on valuable tax relief and may not be able to make the returns a pension fund can. You will also miss out on your employer's contributions.

Can I reduce my pension contribution?

Some company schemes deduct a fixed percentage from salary. Others allow premiums at your discretion. Ask your HR department. It will affect the final pension you get.

I'm worried about my company going bust. Is my pension safe?

In a DC scheme, the pension fund is ring-fenced. However, you will only get what's in the fund at the wind-up. For a DB scheme in deficit, there are serious consequences. Law provides that the "pot" is divvied out in a strict manner: pensioners first, those nearing pension age second and younger employees last. They will get a pro-rata payment which may be nowhere near what they were expecting.

As the majority of Irish DB schemes are in arrears, the Pensions Board has given them until next summer to come up with a funding plan. This might mean employers and workers putting in more money, or everyone taking a hit.

I'm only 35. Why not just buy shares or property as my pension?

Well, many did just that and are nursing their losses now. Pension planning means the money is locked away, so it's a good discipline.

Relief

Also, tax relief is available on premiums and within funds which make them attractive. When you retire, you have to buy an annuity, or fixed annual income with the money, so you need a large fund to do this. Having to sell a property or other investment may not be ideal.

I don't have a pension -- how do I get one?

Since 2003 all companies must provide employees with access to a pension, even if they don't contribute to it. They must make salary deduction available along with information about rights. If you're self-employed, you can buy a personal pension -- you should get advice from a broker on how to do this.

It's very confusing. I need more information.

The Pensions Board has a great site (pensionsboard.ie) along with a calculator. Try citizensinformation.ie for news on State benefits.

Won't the State look after me?

Yes, but not well. The Contributory pension is currently a maximum of €230.30pw. If you're under 50 it won't be payable until you're 68 and only if you have enough PRSI contributions built up.The Non-Contributory pension is €219 a week and you must pass a means test. Relying on a Government pension will keep you barely above the poverty line, and future Governments will have increasing difficulty in even providing that with our ageing population.

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