Don’t be late to the pension party
Colm Power of NFP Ireland tells Siobhán Maguire why there is no time like the present to start a pension
There’s been a lot of soul-searching in recent months as 2020 plays out as one of the strangest years on record. And while health and wellbeing top many people’s lists as they try to maintain some level of normality against the backdrop of a global pandemic, financial security and retirement planning have also emerged as key priorities for many.
Colm Power, director of employee benefits at NFP Ireland, has received a steady flow of queries from clients on pensions. These range from how to start one, add more contributions to an existing one or even purchase a property funded by one.
“There’s a strong appetite out there for pensions. We have seen a huge number of employees engage with us on pensions, and I would say it’s because of having the extra time now to carefully review their finances,” he said.
“People are reassessing where they stand on their finances, and what their retirement might look like, and when it might be achievable to actually retire on the income they want.”
Power said a tale of two situations had emerged since the pandemic. One is of the employee working in a badly-hit sector such as hospitality and having to err on the side of caution where personal finance is concerned. The flipside is the employee who has job security and is at liberty to look at boosting an existing pension pot.
“What we say is that investing in your pension is essentially delayed spending,” he said. “You don’t spend the money today so that you can spend in 15 or 20 years down the line. Some of our younger clients can have the attitude that they could be dead tomorrow, so why worry about something that is so far in the future, but the odds are they will live to a ripe old age.
“The World Health Organisation (WHO) reports that the average life expectancy in Ireland is now 82.35 years. We are strong advocates for financial independence and dignity in retirement, people are now working longer as they simply cannot afford to retire. The over-reliance on the state pension is something that is very emotive. People think it is guaranteed, but already we have seen changes to the state pension age in an effort to deal with this.
“As our country’s demographics change the reality is the state pension may not be sustainable into the future at its current rate, so a retirement income of your own has never been more vital. People are slowly waking up to that fact that we are living longer. They value their health and personal fitness goals, and if you want to have a quality of life when you stop working, you will need a plan and a sufficient pension is central to that plan.”
Power admits that saving to buy a house can often be the reason why people put off starting pensions, but this can mean delaying a pension with an employer for years.
“That’s years of free cash from an employer and years of tax relief and growth they’re missing out on,” he said. “We always say start at a figure you know you can afford and then build it up from there, aiming to increases each year. We actively engage with all our corporate clients to ensure that their employees are aware of the benefits in signing up to the company pension plan.”
NFP Ireland has a way to help employers encourage employees to join a pension scheme – with their own auto-enrolment scheme
“This is where we get everyone in the company enrolled into the company pension plan from the very beginning, people can obviously opt out, if they so wish,” said Power. “But because of human nature, the path of least resistance means that 99 per cent of people will stay in the plan as the pension contribution is automatically taken from salary.
“We always tell our clients to ‘pay yourself first’ and by paying into their company pension plan they are funding their future unbeknownst to themselves. When we are back presenting to the members on the first anniversary of them joining the plan, they are amazed at how much they have saved, and this gives them great impetus to continue saving.”
Tax relief is just one of the reasons why pensions are such a good way to save, according to Power.
“In Ireland we benefit from government incentives to save for our own retirement. For anyone who is self-employed, this is particularly important,” he said.
“Whether self-employed, a PAYE worker or a director of your own company, many people are unsure about how pensions work, that’s why working with a qualified advisor is so important as they will provide you with honest and unbiased financial advice that you can trust.”
Power has another valuable piece of advice: to recognise the importance of compound interest over the long-term. He said the sooner you can start saving and getting a return on your investment, the better the outcome will be.
“Compounding is known as the eighth wonder of the world,” he said. “Compounding is the concept of interest earned or in a pension context investment return or growth.
Specifically, the investment return and additional pension contributions being reinvested, on top of what is already in the pot, continues increasing over and over until retirement. It’s the investment growth on top of the investment growth that really helps build your pension fund in a tax-efficient way.
“We always take a long-term approach to pension planning and believe it’s about time in the markets instead of trying to time the markets” Power said. “If we have a client who is trying to achieve a large return over a short period or wants us to pick the best performing stocks or investment funds we tell them that we can’t predict the future, nor can anyone else for that matter.
“People can lose sight of the plan, but it’s our job to keep them on track and help them understand it is a long-term strategy.”