DCSIMG

FUNDING YOUR RETIREMENT JUST GOT THAT MUCH HARDER

So much attention is being diverted to the Fiscal Treaty referendum, the ongoing problems with Greece, the instability of banks and the huge and growing mortgage arrears problem that it’s hardly any surprise that pensions – our low coverage numbers, poor contribution levels, high costs, poor performance record - just keeps getting pushed to the sidelines.

Last week, some deeply shocking 2011 census results were published by the CSO… and then quietly disappeared: the number of young adults living in this State has fallen by more than a tenth since 2006. Half the population is now income dependent on the other half.

There are now 42,517 or 12% fewer 19 to 24 year olds living in Ireland than six years ago while the older population (+65) has risen by 14.4%. There has been a bulge in the number of under 19’s in the population, which is a relief, but until this cohort enters the workforce in a less depressed economic climate we need to reassess the funding of our older population much sooner than the usual 2050 time bomb deadline.

Having a healthy number of 19-24 year old to enter a workforce is extremely important in any country that transfers such a large amount of earnings directly from the productive to the retired generation. Current social insurance contributions is what pays for the delivery of the €230 a week standard state pension payment every week (or €12,000 a year) to the bulk of the 535,393 pensioners living in Ireland in April 2011. In 2006 there were just 458,519 pensioners in the population.

Sorting out how the state – and private employers – can keep paying pensions to the retirees who have made social insurance and deferred income contributions is a massive challenge given how the state’s own unfunded liabilities amount to over €110 billion.

To give them both some credit, the Minister for Social Protection and the IAPF, the organization that represents private pension funds, are trying to find ways to ensure that everyone in the state ends up with some kind of retirement income when they retire, though I ‘m not sure what will be achieved by the Minister who has commissioned yet another study of our pensions, this time by the OECD.

I doubt very much if they’ll tell her much different from all the other big pensions studies the government has paid for over the past decade.

However, the state retirement age is being advanced to 68 by 2028, and in the case of private pensions, companies are shifting from the promise of a pension based on final income and years of service (defined benefit) to an income based on how much was contributed to it, and its investment growth at retirement (defined contribution).

DB schemes that are underfunded and cannot fulfill their promises are also engaging with the state to find ways to meet their obligations to retirees, mainly through a state guaranteed annuity that ensures the payment of the pension income for life.

Which leads me to a new private service that has just been launched by a well know and long established private pension consultancy, Moneywise.ie It’s founder, Owen Morton (one of the doyen’s of the pension business, and someone who mentored me about the pension industry 20 years ago) has been has been grappling for over 30 years on behalf of his clients with the task of finding them suitable pension solutions. The new service aims to provide a safe and sound retirement income.

Artificially manipulated low bond rates (by central banks) on which pension annuity incomes are based, have extended the pension nightmare for many self-employed and private company retirees who leave their jobs with a lifetime’s pot of money at age 65 and have the very difficult choice of either annuitizing this money and ending up with a disappointing annual income for life that entirely disappears upon their death (the annuity can revert to the insurance company), or the possibility of further investing their money in an ARF/AMRF.

The Approved Retirement Fund option has become a minefield because of investment and currency volatility/fear on global markets and the way the government keeps arbitrarily changing the terms and conditions.

Morton, by setting up a dedicated fee-based annuity and retirement office at Moneywise is aiming to give anyone who is retiring and doesn’t know what to do with lump sums or their entire fund the most in depth body of knowledge and choice regarding all the options available. The introduction of Canada Life’s hybrid Annuity ARF earlier this year, he says, is one of the most interesting new options to the market (I wrote about it last February) and needs to be considered carefully before the retiree goes to the conventional full annuity or ARF routes.

I think its very interesting – and encouraging – how the best of Ireland’s financial advisors are responding to the most difficult financial climate here by upping their own game: increasing their expertise with more training and education (via the international Certified Financial Planners diploma) and through specialization. (This lifting of standards is also being encouraged by the Central Bank and new legislation.)

Now into our third year of EU receivership, where the numbers of young productive workers are falling sharply, tackling the pension crisis needs to be brought back to the top of the economic agenda.

Until then, if you are new retiree, you may want to consult an independent, experienced advisor. You may even want a second opinion. Check out the new dedicated Moneywise retirement centre here: www.moneywise.ie/retirement

jill@jillkerby.ie

For all your insurance and health care needs contact Aviva: www.aviva.ie

 

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