Negative about pensions?

I'm hoping this post doesn't come across overly-negative. I'm currently putting as much as I can into a pension fund, making sacrifices to put aside money that could otherwise be spent on providing for my family. Even so, online pension projections don't show me being particularly well-off in retirement. I see other people who aren't saving for retirement, and I can't help wondering if I'm setting myself up to be milked.

I've made a few assumptions:

- This state will never allow people to starve; those without an income will be assisted.

- The current worker/pensioner ratio of 5:1 is going to change to 2:1

- A pension fund of €0.3million would be needed to provide the equivalent of the state pension for an individual. €0.6million would be needed to provide the equivalent for a couple.

- When state spending is constrained, the trend is towards progressive actions, such as means testing.

I suppose the last point is the least certain. But if there aren't sufficient workers to pay for pensions, then the only choice is to reduce the overall sum being paid to pensioners. What's more likely - reducing the state benefit (e.g. by half so it's less than unemployment benefit), or ceasing to provide a state pension to "the wealthy" who have made provision for themselves?

Why would a citizen divert significant funds into a pension fund that can be raided by the state at any time, only to wind up losing the state pension through means testing, and end up little better off than if they didn't bother? It might be a different situation if that citizen was in a position to put aside a significantly greater fund than the figures mentioned above, but I don't think very many are.

A very good point which I have wondered about myself.

The state's commitment to pensions is absolutely unsustainable. They will have to restrict them to those who need them - i.e. those who have made no pension contributions over their working lives.

So, do you just spend now and rely on the state anyway?

Personally, I would not like to rely on an insolvent state for my pension. So the right thing to do is to make provision for your retirement.

animaal said:

I'm currently putting as much as I can into a pension fund, making sacrifices to put aside money that could otherwise be spent on providing for my family.

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It sounds as if you are putting in too much. Cutting out a second holiday and a new car every year would be justified. But scrimping and saving so that you can contribute to a pension would not be justified.

Brendan

I assume you own your own home? That should be the number one priority for when you've retired over pension.

Thanks for the responses.

I've probably over-stated things by using the word "sacrifices". I do have my own home with a mortgage, and I don't struggle to put the dinner on the table. I'm not particularly worried about my finances.

It's more the extras - my family hasn't been on a foreign holiday for many years. The car is over ten years old and I'm not sure about how I'll replace it. We very rarely go out.

They're the types of things that we could continue to do without in order to save for retirement. But I'm not sure a modest private pension will improve our standard of living; it will be used to facilitate public provision to those who aren't making the same decisions now. It feels more like a tax (although voluntary) than saving.

Brendan Burgess said:

Personally, I would not like to rely on an insolvent state for my pension. So the right thing to do is to make provision for your retirement.

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On balance this is probably the best decision, but how to address the concern that means testing will make your efforts counter-productive.

By the way, nice to see your status has been upgraded from "New Member"


The outlook for the state pension is not good, and as pointed out those who save for retirement are likely to be penalised by means testing.

There are some alternatives, or at least supplements to the traditional saving within a pension.

A home is not usually included for means testing purposes, so that a more valuable home could fund some form of equity release in old age. Investment property could also possibly fund equity release, though not omitted for means testing.

Invest in your children's education, if you have children.

Plan or train for possible part time work after retirement. While a 65 year old might not expect to be a gardener, there are many things that can be done as well by a healthy 70 year old as a 55 year old. Given the reduction in the size of the 20 to 65 age cohort, finding work should not be as difficult for an over 65 as it may be now.

I don't think the state pension will be means tested in the future, if a person pays into the PRSI fund all their life then they are entitled to the pension
I would think if a government decided to means test it or reduce it significantly there would be a public outcry like you have never seen before.
that been said no of us know what the future will bring and I wouldn't be relying on it alone to fund my retirement.

I was very reluctant to start my pension given all the stories I heard from other people with pensions and their performance but there was one person I met who gave me one nugget of golden advise " when you get to retirement age you will be glad you have a pension fund"

Is your employer matching (or going above) your level of pension contribution? It would be good if you could maintain the amount to get their matching contributions.
I don't think the level of private personal pension that will get you in retirement would put you above a means test threshold, should one be introduced.

If you are putting in additional AVCs, then you need to consider whether you can maintain that if you are making unsustainable sacrifices at present.
You will need a new car at some point, does it make sense to consider a car loan when you are paying in pension AVCs, I'm not sure. Just raising the question.
I know my old car has higher running costs than a younger one - yearly NCT, higher tax band due to old engine emissions, insurance loading for age. That said, most problems can be fixed on it much cheaper than on a new car, just every year it seems to need something done.

What you want to be at retirement is in a position where you are debt free, have you own roof over your head, have a rainy day fund for emergencies, and don't have any short-term significant purchases on the horizon (home repairs, new car etc etc). After that, private pension is a bonus and I would not disregard it.

From what I have read ,if things remain as is, State Pension will have to reduce by 30% in real terms.

I expect it would be wise to plan that state pension will reduce by 50% and plan accordingly.

For couple, you then need (in todays terms) to plan to have 200 xtra as a minimum in private pension on retirement to match todays State Pension.

Even if (your) fund might be means tested(in a worse case scenario,) you will still end up better off than someone relying on states beneficence.

Again, your post highlights the harm done by FG in raiding private pensions.

Things on pensions, appear black just now, but what does the future bring ?
It would be very very unwise for anyone to NOT contribute, if they can, to a Private pension.

The Pension Cliff seems to be coming in twenty years , the Pension Planning by State hasn,t started.

Cervelo said:

I don't think the state pension will be means tested in the future, if a person pays into the PRSI fund all their life then they are entitled to the pension

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I agree it is unlikely that they will mean test the contributory OAP but they might reduce and/or stop inflating it so that it loses value over time. Then there might be a mean-tested top-up to the equivalent of current level. e.g. allow it to reduce to 8K in today's value plus the possibility of a means-tested 4K top-up. The non-contributory would still need to be at the full 12K level if that's judged to be the subsistence amount.

This would be a major breakdown of the implicit PRSI contract but there may be few other choices for the government. If there are too many contributory pensioners to give full current value pensions to, what can they do? Reduce the COAP and the non-COAP below subsistence so that pensioners starve and freeze?

And don't forget that this increasing pension cost will be accompanied by increasing health care costs from the same aging population...

Cervelo said:

I was very reluctant to start my pension given all the stories I heard from other people with pensions and their performance

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This is a bug bear with me. It's not the pension that has performed poorly, it's the investment strategy. I transferred an old pension into a newer, cheaper plan last year. I got a benefit statement the other day and the value had fallen -13%. Is that the pensions fault? No. I am invested in a number of index funds, which have taken a hit in the last 6 months. Given I am 40 years of age and have another 25 years to retirement, I have no concerns that the value is down now. If you have a diversified investment portfolio and you keep investing into it, you will make money.

I doubt too that the old age pension would be means tested. They haven't means tested the children's allowance.

We are given the illusion that our PRSI contributions are paying for our OAP. Good luck to the government who turn around and tell people that the PRSI contributions that they have been paying into for 40 years is giving them no benefit. But they will continue to give a benefit worth €300,000 to those who haven't worked a day.

Given the high value of the OAP, if it was means tested, it will discourage people for saving for retirement. What's the point in saving a couple of hundred thousand if it means you miss out on a benefit worth €300k?

Pick a diversified portfolio, keep saving on a regular basis and don't look at the value too often.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Steve,

I think the horror stories around pensions are more to do with the lack of transparency around fees than investment performance.

Saying that pensions shouldn't be means tested, or that it would be unpopular to means test pensions or that it would discourage saving, or that it would be unfair to those who have saved in good faith, is all well and good and I am sure no one would disagree with you.

But and it is a very big BUT what about the prospective change in the dependancy ratio. If current worker/pensioner ratio of 5:1 is going to change to 2:1 then there will be major changes to pensions. And non of the arguments you have made will prevent that. A little head-in-the-sand methinks, from the financial planner.

Sorry Steven You are of course correct in that a pension is a vehicle and it needs to be managed to get the best return from it.

Cremeegg, I've been hearing that argument for nearly 3 decades just like we were told there is only 20 odd years of oil left, I would be quite confident that I'm going to pass on before either runs out.
I would say that if a government was to find its self in the position not been able to afford the OAP they will change it for new entrants into the system just like they did with the public service pensions.

Personally i agree with th OP ..building up to large a nest egg will come back to haunt you... you would be weiser to invest now in long term cost saving measures that cant be taxed in the future. Insulation / Solar Panels / Electric Car / etc ...all these will held you down the line and cant be taxed ...these are effectively invisable assets the government wont know you have.

Codogly said:

Personally i agree with th OP ..building up to large a nest egg will come back to haunt you... you would be weiser to invest now in long term cost saving measures that cant be taxed in the future. Insulation / Solar Panels / Electric Car / etc ...all these will held you down the line and cant be taxed ...these are effectively invisable assets the government wont know you have.

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Lots of high risk investments there that have a good chance of failing

Cervelo said:

Cremeegg, I've been hearing that argument for nearly 3 decades just like we were told there is only 20 odd years of oil left, I would be quite confident that I'm going to pass on before either runs out.

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The change to the dependency ratio is hardly a prediction.

The retired people of 50 years time have already been born.

One third of the workers of 50 years time have already been born.

There are not many unknowables involved.

Lots of high risk investments there that have a good chance of failing

I wasn't referring to making investments into these industries / shares ... i meant invest in lowering your future energy charges etc.

Example : if your future energy bill is 100.00 per month (energy efficient) and the average energy bill for your average joe who hasn't an energy efficent home/car is 300.00 then you are 200.00 better off ... but the government does not know this.

Cervelo said:

I would say that if a government was to find its self in the position not been able to afford the OAP they will change it for new entrants into the system just like they did with the public service pensions.

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That seems pretty inevitable at this stage. I personally think the impact of an increasing dependency ratio should be shared across generations (starting now) but there doesn't appear to be any appetite to do so.

Oh well, passing the buck to the next generation seems to be increasingly popular policy these days.

cremeegg said:

The change to the dependency ratio is hardly a prediction.

The retired people of 50 years time have already been born.

One third of the workers of 50 years time have already been born.

There are not many unknowables involved.

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This is where I would differ from you, it is a prediction, it's a mathematical formula that estimates the dependency ratio going forward.
They are expecting the ratio to fall in the future but at present and for the last 10 years is actually going the other way
They are expecting the 0/15 group to decline but is the birth rate not increasing year on year
They have the over 65 group as dependants and make no allowance for the fact that a growing majority will still be contributing to the workforce/tax take well into their 70s
The formula also does not take into account a migrating work force that come to avail of work and pay taxes