Made simple, really? OK maybe I’m setting the bar too high but I want to tell you all you need to know about pensions.
I’m bored already. Wait, this is important. Just give me 2 minutes of your time.
OK, go on then, why do I need a pension? Because your income could drop to €12,000 a year if you only have the State Pension to rely on. That might pay for your annual cruise but not much else!
But I’ve got my work pension, right? If you’re in the public sector, yes. In the private sector only 6 out of 10 people have a work pension. Even then, most of us still won’t have enough, especially in the gap between retirement (55? 60?) and getting the State Pension (68?).
So I just need to put some money on deposit and watch it grow. Simple. Not so fast. Deposit rates are close to zero. You need to invest in a pension.
Why a pension? It’s too complicated. I know. Even the Bank of England chief economist says he can’t understand pensions. But he’s alright because he has a work pension that will pay him £80,000 a year. The rest of us mere mortals really need to invest for retirement in a pension – and the simple reason is tax relief.
Tax? Zzzzzzzzzzz. Stay with me. If you contribute €100 to a pension the tax man gives you up to €40 back. So a €100 investment costs as little as €60 and it grows tax free until you retire.
Free money? There’s got to be a catch. No catch. OK you can’t touch the money until you retire but that’s a small price to pay for free money.
Yeah but I’m taxed on the money when I take it out! Yes but not much. The combination of being allowed to take a large lump sum tax free and the retirement income tax exemption means that most people end up paying minimal tax on retirement income.
OK but aren’t there lots of complicated rules about how I can actually get my hands on the money? You’ve got me there – that is true. But those constraints are being relaxed all the time. Now you can control your money in retirement and it doesn’t die with you (like it used to).
What about fees and charges? I’m probably going to get ripped off? Not if your financial advisor is on the ball. True it’s easy to hide all sorts of charges in complicated financial products but pensions are getting cheaper and much more transparent.
But hasn’t investment performance been rubbish? Ok yes in the bad old days some Irish pension companies thought a diversified portfolio was a Bank of Ireland bond, some Dublin commercial property and a shareholding in Anglo Irish Bank (doh!). Now you, or your financial advisor, can pick and choose your own globally diversified portfolio.
OK sounds like a good idea but how do I ‘get’ a pension? The paperwork alone must be a nightmare. Believe me, with the right financial advisor (ahem) it’s as easy as opening a deposit account. And the sooner you start the better. Over to you…