Dissapointed by pension

Hi guys,


Posting this query for my spouse.


They have recently started a new job and are 30 years old earning €75k.


They and their employer are making pension contributions totalling 20% (€15k per anum).


If they keep this up for the next 38 years according to the pensions authority pension calculator (can't post link due to post count) they will only receive a pension of circa €24k (ignoring the state pension which they will also be entitled to under current rules).


I don't know what my query is, just that it doesn't seem that much I guess. Would that calculation include some sort of cash lump sum on retirement? Putting away €1250 per month in a pension from 30 seems like it would be on the upper end of contributions. I honestly don't know what is going to happen to the hundreds of thousands paying a few % of incomes like €35k per anum etc.

Hi Bill,

I haven't checked just now but I remember looking at this before.

Basically, for DC money the pensions authority prescribes assumptions for projection purposes that are conservative.

The self-same authority, for DB plans (say, in the calculation of the statutory transfer value), prescribes assumptions for calculation purposes which are aggressive.

I am not aware of the authority ever even attempting to explain the difference? If I've got this last bit wrong, can someone let me know please? Maybe later, if time permits, I'll illustrate this numerically.


Anyways, to answer your question, long-term conservative assumptions will show, well, long-term uninspiring outcomes!

Put the numbers into some of the online pension calculators and read the assumptions on it.

He\she can also do AVC's. And the fund you invest into probably should be high in equities at that young age.

There will likely be a good pension pot in 30-35 years with putting in 15k p.a. which will probably go up as earnings go up.

Also, read about options at retirement, taking an annuity is just one option.

In some of the pension calculators the pension is shown in “real” terms (after projected inflation) to give you an idea of what it looks like in today’s prices. This needs to be factored into your expectations.

Pension Authority said:

Pension Calculator
Assumptions

1. All values shown are in present day money terms, i.e. the calculations aim to take account of inflation between now and your retirement date.
2. You are assumed to be eligible to receive the State Pension from your state pension age. The current state social welfare pension is €12,695 per year (or €243.30 per week).
3. The calculator assumes that your retirement fund pays an annual management charge of 1% per annum. In addition, a 5% contribution charge is assumed to be paid on each regular contribution (based on Standard PRSA fees and charges maximum limits). You should contact your pension provider to confirm what charges you are actually paying as these can have a significant impact on your retirement fund which determines your retirement income. Please refer to the fees and charges section of our website for further detail.
4. Regular monthly contributions are assumed to continue to your retirement age and are assumed to increase by 2.5% per annum over the term to your retirement date.
5. Investment return is assumed to be 4% per annum after expenses until 10 years before your retirement date. The investment return is then assumed to reduce annually to the post-retirement interest rate over the 10 year period prior to retirement. This is intended to reflect a common investment strategy of defined contribution pension scheme members and allows for a reduction in risk during the 10 year period leading up to retirement. The investment return earned on your fund is estimated to be 3.7% per annum after expenses from now until your retirement date.
6. The annuity rate used to calculate your pension at retirement uses a post-retirement interest rate of 2% per annum after expenses. Your pension is assumed to increase at 1.5% per annum in retirement and is assumed to be guaranteed to be paid for a minimum of 5 years.
7. The annuity rate used in the calculations is a long term average rate. The actual annuity rate at retirement may differ from the annuity rate used in your illustration
8. Mortality post-retirement is assumed to be in line with 42% of the ILT15 table for males and 50% of the ILT15 table for females with allowance for future improvements in mortality. Under this mortality table the average life expectancy at age 65 for a male and female is approximately 26.4 and 27.6 years respectively in 2038. This is in line with current guidelines recommended by actuarial guidance in Ireland.
9. The calculations assume a 50% spouse’s pension on death in retirement. You and your spouse are assumed to be the same age.
10. Your existing pension arrangement (if any) permits benefits in line with those selected.
11. If your earnings are less than €34,550, your marginal tax rate is assumed to be 20%. Alternatively, if you are earning more than €34,550 your marginal tax relief is assumed to be 40%.

Click to expand...

These are conservative assumptions. In particular, it assumes you earn 2% p.a. in retirement and your pension increases by 1.5% p.a., that is a real return of 0.5% p.a. Admittedly this is the basis of commercial annuity rates but a more aggressive investment strategy on an ARF might do better than that. A real net investment return of 1.5% p.a. (4% - 2.5%) pre retirement also seems conservative.

Thanks for the advice guys, so I guess the general feedback is that the pensions authority err on the side of caution which is understandable.

The fund is I believe 100% in equities given the long time to drawdown.

Retirement is expensive to fund and feels very remote, I suppose our own parents' approaching retirement has focused our mind on the issue to some degree.

Thanks for the feedback,
Bill

I am trying to focus on retirement too, and aside from funding the pension plan, I believe it's also important to understand what your cost of living will be in retirement, rather than just having a number in mind. Items I am considering are age of children when I retire, ie are they earning an income themselves, increased cost of health insurance as I will upgrade plan as I get older, maintenance cost of house and car replacement. You might be surprised about your income level required if you compare it against your current income/expense. Certainly paying a mortgage and childcare takes a large % of our disposable income right now. Looking at my parents, they are enjoying a much higher disposable income in retirement.

To the OP I think that your spouse is in a very good place pension wise, right age profile and a very decent contribution. Is it indexed at all?