PENSIONS are boring, right? Well, that depends. If you think free money is boring, then stop reading now. Because the beauty of a pension, particularly one you have as part of your job, is that there can be three people contributing to it – you, your employer and the taxman. What other financial product can you think of where three people contribute, and one person benefits? No wonder some people have characterised pensions as the best deal in town, bar none. Still think pensions are boring? I thought not.
It works like this; let’s assume you are a higher rate taxpayer (41%) and decide to put €100 into your pension.It will cost you just €51. The very generous taxman will put in the other €49. This is because an employee gets relief on their tax (41%), relief on the health levy (4%) and the relief on Pay Related Social Insurance, or PRSI (4%) when they put money into a pension. Many people lucky enough to be still in a job will also benefit from an employer contribution to their pension.
But it does not end there. Along with tax reliefs on pension contributions, there is no tax on the growth of the pension fund, and the lump sum you can take at retirement is tax free up to certain limits. For the self-employed, pensions make huge sense as a way to lessen the amount of tax you have to pay when it comes to filing your annual tax return each autumn.
Despite the incentives, people are reluctant to put money into pensions. Around half of the workforce has no pension. A recent survey found that stock market collapses have turned people off investing in pensions. Just a quarter of people think it is a good idea to put money aside for retirement, the research found. And who could blame people for being wary of pensions?
Private pension funds have endured their worst-ever period, with losses of a staggering €30bn last year. The vast majority of pension funds, whether they are old-style company funds or the increasingly popular defined contribution schemes, have mammoth deficits. The hope is that over the 30 or 40 years that you will be contributing to a pension that these losses can be recouped.
But what is the alternative to providing for your retirement? Research conducted by the Pensions Board has found that eight out of 10 people do not consider the State pension adequate for their retirement. The State contributory pension is €230 a week for those who have made sufficient PRSI contributions. If you decide you can’t live on this then you need to do something to provide yourself with additional income in retirement.
Right now stock markets are at wealth-wrecking lows, and this has had severe impact on returns for almost all pensions, as most pension funds are largely invested in equities. But the fact that stock markets are at such low levels also means it could be a good time to start building up investment units in a pension. Because markets are on the floor, every euro you save into your pension is buying more fund units than when the markets are performing better.
Personal finance expert Brendan Burgess believes it makes sense to put money into a pension,“on balance it is a good idea to put money into a pension, especially for those paying tax at the higher rate.” This is particularly the case for those with a secure job and spare cash.
There were no changes in pensions law in the December Budget. However, Minister for Finance Brian Lenihan did warn that the generous tax reliefs for higher earners were likely to be reduced to a new 33pc tax relief for all. He did not say when this would happen.
Tags: Charlie Weston, finance tips
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