Over the course of a career the average person can expect to accumulate several pensions. Even if you never actually had anyone review your pensions, if you have always been a member of a pension scheme, you could be forgiven for thinking that your Retirement Planning is on track. It’s not necessarily the case however, as a client of ours recently found out.
This client who is aged 50 has been working for various large companies since he was 24. He recently approached us to review his pensions. Although he has been in the same industry for 26 years and always worked for very large companies who all enrolled him in their pension scheme’s, his situation is less than ideal.
As a result of his various employments he has five pension entitlements.
The first is a Defined Benefit type arrangement – in the past this would have been described as a gold plated pension however this is no longer the case. His scheme was restructured a few years ago so while it will provide some income for him during his retirement, this is frozen at the current level. It will not increase over the fifteen years which are left until his retirement and it will therefore devalue due to inflation between now and when he retires and also right through his retirement assuming that inflation is positive, which is likely.
The second entitlement he has is also Defined Benefit in nature. It will provide him an even smaller amount of income from his retirement age. This figure is subject to revaluation each year linked to inflation, up until retirement however increases in retirement are discretionary which is a concern given that the scheme is in deficit.
The third is a Defined Contribution pension scheme which contains a modest amount of funds which he can invest and grow to help provide an income in retirement.
As part of his current employment he is a member of a yet another scheme and this is where most of the smoke and mirrors takes place. People who are members of Defined Benefit schemes often feel very secure in their retirement planning, often without justification. His current employer has two schemes. Up to a certain level of his income he is a member of a Defined Benefit scheme. This is not a particularly good Defined Benefit scheme as;
1) it only applies to income up to a certain level
2) it funds for a pension of 50% of final salary (rather than the Revenue max permitted of 66%) and
3) it is integrated with the State Pension
Without getting into technicalities, all of these provisions serve to reduce what it will provide versus what it could provide.
His fifth and (if he remains in the employment) last pension is the Defined Contribution scheme offered by his current employer for income above the level at which their DB scheme is capped at. This is a matching scheme. For every 7% of income he contributes to this his employer will match his contribution. Free money it would seem but here comes the rub. His employer only matches contributions above the cap on the DB scheme. The 7% which they will contribute is therefore a tiny figure – a paltry amount in the context of funding for a pension.
Based on his current funding if he stays in his current employment until retirement age he is likely to have income at his retirement date of less than €20,000 p.a. I say “income at his retirement date” rather than “income during his retirement” because of course around 35% of his pension is frozen at it’s current value and increases during retirement on another of his schemes are discretionary and in doubt due to it’s funding level.
To add to the uncertainty, as two of his schemes are Defined Benefit in nature there is no guarantee that they will remain intact until he retires.
As a result of his current underfunding and the uncertainty regarding his Defined Benefit schemes he needs to make additional provision for his retirement. Based on the calculations we carried out we have recommended that this client commence making Additional Voluntary Contributions of €1,133 per month. After tax relief this will cost him €680 per month. This is not a small amount for him and he is a bit disappointed that it is necessary but happier all the same that he caught it in time and can now feel somewhat confident that he will have sufficient income in retirement.
Even if you have always been a member of a pension scheme, you may benefit from a review of your retirement provision. If you would like to check your position, please give us a call on 01 546 1100 or book a 15 minute video call with us here.
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