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My pension road trip…

Auto-enrolment makes sense, but there are critical issues beyond pension coverage that need to be considered.

BY GILLIAN RYAN

I went to visit my daughter in the Gaeltacht on Sunday so we had a five-hour round trip, much of which was spent reading articles in the Sunday papers and on LinkedIn about pensions – much to my husband’s delight. Genuinely. I know that’s probably most people’s idea of hell but given the fact that I have worked in the pensions industry for longer than I care to remember, I find such articles really interesting and, if I’m honest, a little frightening.

My job and career to date is based on people’s need to invest in pensions. I work with advisers to support them so they can help their clients build better financial futures. On that basis, you might say I have a vested interest but as well as working in the business, I’m a wife, a mum and a friend, so my vested interest is less about my job and more about the futures of the people I care about. That said, my professional experience gives me greater insight than most on this topic.

The road trip involved me reading articles about the potential reduction of tax relief on pensions contributions, the ability to bring pension funds back to Ireland from different jurisdictions, the alleged complexity of different pension structures, the fact that public sector workers don’t really need to worry too much about their pensions, and that the private sector does not appear to worry enough. I shared some insights with my husband as we drove down the dreary M6. I don’t imagine my comments and observations made the trip any more exciting for him.

It did, however, open up a discussion about our future though and the potential cost of financing it. Damian is a golf club member and I’m a gym member. We both like driving nice cars. We’re not big travellers but like to have a sun holiday once a year and enjoy socialising. I could go on, but the point I’m making is we like to enjoy life and this costs money. We both work hard and believe that life is for living, but we have two children and we know it’s important to provide for them as we want them to have everything they need.

What struck me as really scary was that, although I have worked in financial services for over half of my life, this was probably the first time we had a forensically in-depth discussion about such things. Maybe it is a sign that we need to get out more, but it is more likely because we have reached the stage in life where we know we are half-way there and we want to live in the comfort that we have grown accustomed to in
retirement – but we don’t want to work forever.

We are both members of occupational pension schemes, to which we and our respective employers contribute. As we near retirement, the need for – and the benefit of – being a member of these arrangements is becoming ever more relevant. There is a push to increase pension coverage in the private sector in Ireland and I agree that this is something that should be done. I have some concerns about the direction of change, however.

Coverage

If I think back to when I was 20 and retirement was two more lifetimes away, pension funding was the furthest thing from my mind. Had I not worked in a company with a pension scheme, I am quite confident that I would have elected to spend my money elsewhere. On that basis, I genuinely believe that 20-something year olds need a push to make provision and to that end, the introduction of an auto-enrolment (AE) system that would automatically include this cohort of private sector employees makes a lot of sense. They will be grateful someday that this was “forced” upon them.

Adequacy

I believe an AE scheme is appropriate for those who don’t make the decision to fund but at a certain stage in life, one needs to start taking responsibility for one’s own financial future. The issue of having set levels of pension contributions in place is that members of such schemes believe that just ticking the box is enough. They believe they have a pension, which they do, but that brings me to my next concern: is the pension that you contribute to adequate to support your needs and desires in retirement? This is where the requirement for financial advice kicks in. Individuals need to be asked the following:

  • Are you maximising the tax reliefs available to you at this stage in your life?
  • Are you taking enough risk to generate the returns you need on your investment?
  • How does your pension fund fit in with the other assets you own?
  • When you retire, what should you do with your pension to provide for the future you want?
  • We are all living longer, so how do you save enough to ensure that you can afford to retire comfortably?

There is a cost for getting this advice, and rightly so. But in the world we live in, surely we understand that you get what you pay for – particularly if you are savvy enough to plan ahead.

Tax relief

I mentioned tax relief in the last section and in the weekend papers, there was much discussion about tax relief and the possibility that the Government may seek to reduce the tax relief available to higher rate tax payers. The papers referred to the “standardisation of tax relief on pensions” and I struggle with this one for many reasons.

Higher rate taxpayers earn more and therefore pay more tax on their income. To that end, they should be entitled to tax relief at the same rate as they pay on income earned. If it was about creating a more simple structure and encouraging more private sector workers to fund pensions, then why not standardise at the higher rate?

If our Government wants to increase coverage, they should surely aim to make pensions more attractive to the lower earners rather than penalise the higher earners. Reducing higher rate tax relief will not encourage those subject to tax at the lower rate to fund pensions. It will make no difference to them and will more than likely reduce the amount of pension contributions made by the higher rate cohort, so this contradicts the Government’s stated ambition to increase private sector coverage.

Tax standardisation only relates to reliefs, which is one part of the equation. There has been no reference to standardising the tax paid on the income from retirement benefits. As a higher rate taxpayer, why would I make contributions to my pension and get relief at the lower level when at retirement, the same Government that reduced the relief available to me in the accumulation stage (pension funding) want to tax the income paid to me in the decumulation stage (retirement) at the higher level? That isn’t a balanced approach.

The cost to fund auto-enrolment

Private sector versus public sector pensions – this is the most emotive debate of them all and, as you can imagine, the public sector don’t want their pension benefits to be touched. To be fair, I completely understand that. While it is a significant cost to the economy, there are a huge number of men and women who work hard to earn this benefit and I am sure that if I was eligible, I’d be fighting to retain it too.

Many academics and industry representatives have tried to come up with solutions that would create a level pensions playing field between the private and public sector. To date, no-one has been successful. My main concern, and the one that the Government tends to brush over, is that the majority of pension costs incurred by the State relate to public sector pensions – not private sector pensions.

Conclusion

AE in some form makes sense and addresses the coverage issue. It doesn’t address the adequacy issue, however, and there should therefore be a middle ground where individuals can seek advice and fund private contracts where necessary.

The means by which the State funds the introduction of AE, which is a system to maximise coverage in the private sector, should not be funded by a reduction in tax relief. This move would be totally counter-productive in a world where private sector pension funding needs to be increased.

Anyway, if you have made it to the end of this story, you will be glad to hear that my daughter is having a great time at the Gaeltacht and my husband is delighted that she will be home next week, so there’s no need for anymore (pension) road trips.

Gillian Ryan is Strategic Business Manager at Standard Life.