RECESSIONS come with great – as in huge – consequences. Businesses go under, people lose their jobs while others are forced to immigrate. The tax take falls and government debts rise.
It’s not a pretty picture.
Unfortunately, it isn’t just existing businesses, jobs, even homes that disappear when a great recession, like the one we’re experiencing now, happens. Some people’s financial futures disappear too.
In the last two weeks, this column has looked at preserving your savings and wealth and the importance of making proper healthcare provisions. This week, it’s retirement in all its guises: occupational and private pensions, public service pensions, and the old age pension.
The only certain thing about pensions in this great recession is that all three of these pension pillars has been or will be undermined in the coming years. Only a very independently wealthy or foolish person will ignore the signs that our pension expectations or promises are not going to be met.
The latest occupational managed pension fund results for July from Rubicon Consultants show that typical returns are down, this year to date, by 2.7% and by 3.8% over the year. With retail price inflation is running at over 3.5% and the government pension levy confiscating 0.6% of your private pension value, chances are your occupational pension fund value will be down is down at least 8% in real value this year. (This doesn’t include charges and fees.) Five year funds returns are at -1.5%. Over the past decade the typical pension fund has produced a mere 1.1% return.
The government is now expected to reduce pension contribution tax relief to the standard income rate of 20% only. If you pay income tax at the higher 41% rate - and thousands more who only paid 20% tax will be on the higher rate after the December’s budget – you will end up paying 61% on your pension income at retirement (assuming you are still a higher rate taxpayer.)
Between this loss of tax relief, the confiscation of pension savings by the government (for only four years, they say) and poor returns from so many typical managed funds, the very idea of conventional pension funding has to be questioned. And yet ‘retirement’ has to be funded. (Go to the Pensions Board calculator at www.pensions.ie for funding cost examples.)
This problem is not going away. If the return on your fund has been poor, at the very least you need to find out why. You should seek help from an independent financial advisor to help you understand the investment assets and value of your part of the company scheme. The irony is that there are many well performing assets and funds available from all the Irish pension fund providers but the level of knowledge about is, clearly, not well enough known.
Chances are you also need this kind of help/review if you are self-employed, a company director, or the holder of a PRSA (a personal pension).
However, even with this review – and the eurozone debt crisis means it needs to be done as soon as possible so that the risk of countries defaulting, the end of the euro, can also be addressed. No matter how the eurozone crisis ends, you are still going to reach an age when you cannot work. Younger workers should certainly check out new strategies.
According to some Irish pension fund data that I’ve seen, the average occupational fund value of a worker under age 35 is currently about €7,000. Workers between age 35-45 have pension funds worth about €17,300. Typical 45-55 year olds have funds worth under €31,000 and over 55’s, only €47,000.
For illustration purposes, a worker who retires at age 65 with a fund worth even €100,000 can expect an income of only €5,000 a year and half that for his widow.
Could you live on €5,000 a year? Or even €17,000 once you start collecting your old age pension? Assuming, of course that there still is an old age state pension worth €12,000 a year when you reach retirement age?
This moves us onto the second and third pension pillars: public service and old age pensions, both of which are entirely unfunded, that is, they are paid for through general taxation, not as a result of contributions invested in real stocks, property, cash, bonds or commodities.
Now that the state is effectively bankrupt, the state’s promises to its own employees of half final salary pension, based on years service, or the promise to all private sector workers who paid sufficient social insurance ‘stamps’ of a flat €12,000 annual pension, are clearly unsustainable.
The teacher with 40 years service record and a €60,000 final income is expecting a €30,000 pension. He or she has no other retirement savings. But there is no invested fund, the state is officially “in receivership” says the Minister for Education and such a pension in the private sector would need an invested fund worth at least €600,000. The only reason state pensions are being paid right now, is because we are on a semi-permanent drip of billions of euro of cash from the European Central Bank.
The debt crisis in the eurozone is now playing out as some of us expected: the debt must be paid off (but it is too large) or it will be written off. And it will be and this will have a profound effect on all our retirement plans …and how we lead our lives until then
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