Belfast Region Committee South Region Committee presents "Mind Your Own Business" an evening with Bryan Johnson Welcome
Retirement Planning CPD 17 Bryan Johnston
This evening Challenges facing Irish Pensions The OECD view How the State has changed the State Pension How much should you be putting into your pension How easing back is the new retirement 1.5 hour CPD
Bryan Johnston QFA FLIA Progressive Life. Sales / marketing Management. Training. Irish Permanent. Business Champions Ltd QFA Public Lectures Webinars In house Personal coaching Consultancy Financial DNA Sales CPD events
Anyone fancy a glass of wine?
Happy Retirement! One bottle of wine per day between you and your partner (both aged 40 and wishing to retire at 65) Relatively modest tastes say 12.99 per bottle OK bottle of New Zealand Sauvignon Blanc How much would you need to save to pay for it?
Assumptions Inflation at 2% Investment Return of 5% (gross) Management Charge 1% Current Annuity Rates prevail Current Tax and PRSI Rates remain constant Retirement income will be liable to tax at top rate (40%)
Required Fund at 65 12.99 bottle will then cost 21.33 A bottle a day will cost 7786 per annum Pre tax income required 12976 Fund required to buy a pension of that amount will be 432,555 If you opt for a level annual amount ( not increasing) the required saving will be 850 Annuity 3%
We are facing a Retirement Income Crisis! We are living longer We are healthier for longer We are likely to be ill for longer Annuity rates are at historically low levels We will have less children to support us Having children later means that we won't have enough disposable income to save We can no longer rely on the State for any help
Pensions coverage in the Irish workforce
Changing Demographics
Issues Defined benefit schemes underfunded Pension contribution slow down People living longer State Pension age Annuities low Charges and pension plans Investing your money
The Pensions Authority in 2016 published proposals to change the private pensions system which, if implemented, will have a significant impact on the pensions market, particularly individual pensions. The target date for implementation is September 2018.
Pensions developments Proposed.. no new RACs or Buy Out Bonds and The PRSA would be the single DC accumulation contract available for: 1. The self employed 2. AVCs outside a scheme 3. Accepting transfers from other arrangements, such as occupational pension schemes, RACs, and Buy Out Bonds
Transfers RACs will be allowed to transfer to an occupational pension scheme, as well as to a PRSA; BOBs will be allowed to transfer to a PRSA as well as to an occupational pension scheme; The current max 15 years service limit on transfers from an occupational pension scheme to a PRSA will be lifted.
One member DC schemes Enhanced authorisation and regulations More difficult and harder to set up including 1. Scheme structure and formation; 2. Governance and management; 3. Investment 4. Business Plan Also includes SSAPS
Trustees Cannot be employer and financial advisors The scheme trustees will have to be: At least two individuals, one with a mandatory trustee qualification (NFQ Level 7 upwards) and another with appropriate trustee experience (at least 2 years), OR A corporate trustee acting as sole trustee with at least two directors, one with a mandatory trustee qualification and another with appropriate trustee experience
Trustees 1. Will have to undergo fitness and probity verification by the Pensions Authority. 2. ALL scheme trustees will have to meet an ongoing CPD requirement. 3. Mandatory codes of practice for trustees; 4. The Pensions Authority will have enhanced supervisory powers to intervene in the operation of schemes. 5. Will also apply to all existing large DC schemes after May 18
Master Trusts The Pensions Authority wants to encourage the development of master trusts, i.e. one large multi-employer scheme and trust. The hope is that the scale of such larger schemes will lead to better outcomes for members 1. Lower charges, 2. Better governance and 3. Better advice provided to members
Proprietary directors choices 1. PRSA; May be subject to the current age related tax relief limits (combined employer and member) with no facility for funding back service, etc. The scope for contributions may be far lower than at present under a one member DC scheme; 2. One member DC scheme; More expensive and difficult to set up and operate than at present, 3. Master trust scheme. Investment options in such a scheme are likely to be more limited than available currently to one member DC schemes. No self directed funds
Think about If you have deferred benefits in a DB scheme transfer to a BOB or PRSA Will allow ARF and traditional options Proprietary directors If not started start new and have much bigger potential contributions Some may have reached contribution levels and could put fund into BOB and future funding could be done through cheaper PRSA route
OECD Ireland faces challenges on the financial sustainability of its pension system as the population ages;. The economic situation of pensioners in Ireland is comparatively good, both with respect to other age groups in the population and internationally. Ireland and New Zealand are the only OECD countries that do not have a mandatory earning-related pillar to complement the State pension at basic level, Private pension coverage, both in occupational and personal pensions, is uneven and needs to be increased urgently.
OECD Pension charges are expensive for small occupational schemes and personal pension schemes. The existing tax deferral structure in Ireland provides greater incentives for those with high incomes to save for retirement. The Irish legislation regarding the protection of defined-benefit (DB) plan members is weak. There is unequal treatment of public and private sector workers due to the prevalence of DB plans in the public sector and DC plans in the private sector. The State pension system lacks transparency, both with respect to the calculation of benefit entitlements and to the interplay of the contributory and non-contributory pensions. The link between contributions and benefits in the Irish State pension scheme is very weak.
Their recommendations
Change the parameters of the State pension system in order to improve financial sustainability 1. The long-term retirement age, which at 68 is relatively high in international comparison, could be linked to life expectancy after 2028. 2. To provide incentives for workers to remain in the labour market longer and on the other hand provide more flexibility in deciding when to retire, increments and decrements of the State pension could be introduced for late and early retirement. 3. More flexibility could also be provided in allowing retirees to combine work income and pension receipt; this could also ensure more adequate retirement income. 4. The adjustment of pensions which have been frozen in recent years also needs to be considered; various options of combining indexation to wage growth and price inflation could be considered.
Structural reform of the State pension system to eliminate inequities Current inequities in the treatment of workers contributions to the system should be removed The best two options for a structural reform of the State pension scheme are 1. a universal basic pension 2. or a means-tested basic pension..
Reform of the public service pension scheme At a minimum, a faster phase-in of the new rules of the occupational scheme for public servants should be considered; this would entail including existing public servants in the new scheme based either on a certain cut-off age or on length of service. Any new private pension scheme for private sector workers should also be extended to public servants, at a minimum for new entrants but ideally also for some of the existing public servants.
Expand private pensions coverage and retirement savings Compulsion is the less costly and most effective approach to increase coverage of private pensions. Automatic enrolment is a second-best option. Its success depends on how it is designed and on its interaction with incentives in the system. Existing private schemes need to be subject to the same rules as the new schemes under auto-enrolment or compulsion.
Enhancing benefit security in DB schemes Strengthen the Irish legislation regarding the protection of DB plan members Introduce more flexible DB plans that allow for accrued benefits to be cut in case of underfunding and for risks to be shared Establish a clear framework to facilitate domestic investment in infrastructure projects Revise the new funding standards,
Trends Defined benefit schemes being wound up Enhanced benefits being offered in some cases Retirement for State pension effectively 68 How do you bridge that gap
Retirement Landing Choices 1. Tax free cash 2. Annuity 3. ARF 4. Mixture of these
DC Scheme Members Choice Options Standard benefit options OR Alternative benefit options Tax Free Lump Sum related to service and final remuneration, max 150% x final remuneration Tax Free Lump Sum of 25% x accumulated fund AND Balance of fund must buy Pension AND Balance of fund: Buy annuity ARF Taxable lump sum
Retirement options Take 25% as a tax free lump sum (Max 200,000) Balance Buy annuity with life company, Invest in ARF, OR * Take as taxable cash sum* Restriction * 63,500 must be invested in annuity or AMRF Unless Guaranteed Income of 12,700 +
Effect of charges
Income in retirement Three ways of providing your income in retirement 1. State Pension 2. Private Pension provision 3. Accumulated Wealth and Savings State Pension? May depend on PRSI contributions Qualifying age increasing (68 if born after 1961) Home Reversions and Lifetime loans set to make a comeback
State Pension Contributory How to? PRSI contribution record (A and S ) At 66, if born before 1954, no retirement necessary If born between 55 60 now age 67 If born after 61 now 68 Level of benefit? Personal rate 233.30 Personal rate + adult dependant 442.30 Maximum 428.60pw Taxation? Liable to PAYE but not directly taken However if individual has other income Other income / pensions reduced to collect tax due on Above How long? Life
Contributions
Income in retirement There are 2 considerations 1. Drop in income in retirement 2. Increase in life expectancy
Drop in income at retirement solely relying on current state pension 40,000 60,000 80,000 Income -71% -45% -81% -64% -85% -72% Drop in income if single Drop in income if dependant spouse
From Increase in Life Expectancy - people are living longer! Age 70 12 15 Age 65 15 19 Female Male Age 60 19 23 0 5 10 15 20 25 Years
Life Expectancy Living longer Most people under estimate their life expectancy Men at 65 by at least 5 years Women at 65 by 6 years Life expectancy at birth often thought to be a given age less expectancy at birth E.g. in 2000 men at birth could expect to live to 75 however when they reach 65 on average will live to 80 Irish men aged 65 today..83 and women 86 Born in 1980 at 65 men 86 and women 89
How much do you need in retirement Basic living costs annually 12400
What else would you like
How do you want retirement to be? 35000 Cost That s after tax 20% Tax = 43750 40% tax = 58333
Age 35 and 10% salary going into pension
How much extra per month needed Need to increase to 25.3% salary Fund only Expected fund 180000 if left at 10% of salary Fund in todays terms Contributions increase by 2..5% Investment return 4%
Extra 35% needed Fund only Expected fund 265000 if left at 10% of salary Fund in todays terms Contributions increase by 2..5% Investment return 4%
45 and 50000 in pension already
45 and 50000 in pension already Extra 30% needed Fund only Fund in todays terms Contributions increase by 2..5% Investment return 4%
55 and 100,000
55 and fund of 100,000 now Need to increase to about 57% salary Fund only Expected fund 168,000 if left at 10% of salary
An ideal world Ideally 50000 pa State Pension 12000 38000 pa Lets look at some funds Irish men aged 65 today..83 and women 86 Born in 1980 at 65 men 86 and women 89
Age 65 getting 38000 pa ARF Fund @2% 38000 pa needed pre tax Age Last year residue Annuity 500000 15 years 80 3000 19517 400000 11 years 76 26000 15605 300000 8 years 73 9000 11695 200000 5 years 70 19000 5716 100000 2 years 67 25000 3989
Shop around for annuity rates 50000
Enhanced annuities Standard annuity Regular payment for life Enhanced Takes account of your health status and lifestyle health risks (e.g. smoking) in determining the level of regular income payable to you. With an enhanced annuity you may be entitled to a higher regular income than you would under a standard annuity.
Start now - cost of delay
Tax Relief in Practice Example - assume 40% Income Tax Rate Salary 50,000 Monthly Pension Contribution (10%) 416.67 Less tax relief: Income Tax @ 40% 166.67 Net cost to you 250.00 Amount invested in pension 416.67
Maximum contribution levels Age Attained in Year Under 30 15% 30-39 20% 40-49 25% 50-54 30% 55-59 35% 60 Plus 40% % Of Salary (to a max salary of 115,000)
Start now - cost of delay Example Contribution 1,000 p.m. Retiring at age 60 Level contributions Assume 6% growth Age Fund at age 60 30 871,000 35 623,000 40 431,000 45 281,000 50 165,000
Major Survey
Retirement is changing along with the pensions landscape The nature of retirement is changing along with the pensions landscape in Ireland. As a result, people s attitudes towards retirement are shifting. The concept of gradual retirement is becoming more prevalent as people slowly reduce the amount of time they spend working, a fact that is evidenced by the 37% of respondents in our survey who indicated that they plan to continue working during retirement. This reflects the widespread move away from Defined Benefit to Defined Contribution pension plans.
In a Nutshell More than half of people surveyed (52%) did not feel completely ready to retire and just two-fifths believed that 65 was the right age to retire. Over 61% felt they had more to contribute to the workforce, but most would not choose to remain on with their current employer if given the option. People were overwhelmingly looking forward to the free time they would gain, the time they could spend with family and the chance to travel when they retired.
In a Nutshell 34% of respondents had not put any kind of healthy living plan in place for when they retire. A strong majority of those surveyed had social networks in place outside of work Almost two-thirds of those surveyed already held membership of clubs and organisations that they intended to continue into retirement Nearly 60% of survey participants intended to engage in volunteer work
Finances While most of those surveyed (67%) had been preparing financially for retirement through saving, 55% of those surveyed had not prepared any kind of personal budget to address the future change in their financial circumstance
Is 65 the right age 65 + 52% Before 60 16%
Ready for retirement Stay with current employer if they could No 54% Yes 24% 61% More to give
Most Looking forward to Relaxing more Taking up new things Being stress free Farming Having freedom
Financial Planning for Retirement 50% have a plan for retirement 66% saving 13% have an annual budget 50% no budget at all 66% happy they will be ok financially 80% plan to ski!
Steps for a Successful Retirement 1. Begin planning early 2. Consult with your family and your spouse or partner 3. Consult with your employer & signal well in advance 4. Plan to hand over your responsibilities your succession plan. 5. Take time to understand your financial situation and options available to you 6. Take a pro-active approach to minding your health. 7. Don t let your financial future be your only consideration 8. Think about ways in which you can re-apply your skills. 9. Make sure you have a strong social network outside the workplace 10. Give yourself some structure and routine. 11. Take care of your psychological well-being. 12. Enjoy your time in retirement.
Finally The day will come If you retire at 65 what happens until state pension kicks in Look at charges Start saving early Ease back Happy retirement Thank you The tragedy of growing old is not that one is old but that one is young. Oscar Wilde
Questions 77