Universal retirement plans risk becoming a recipe for disaster

Auto-enrolment does not take the place of careful retirement planning, according to a leading pensions expert. Adrian Godwin, Senior Financial Consultant and Managing Director, OakTree Financial Services, which is based in Fermoy, Cork, says that there are a number of things that employees need to take on board when it comes to auto-enrolment.

“The auto-enrolment scheme is really only suitable if you are a lower rate tax payer,” Godwin commented. “As a higher rate tax payer, the tax relief option is more beneficial. In addition, some predefined risk portfolios will be provided, but no advice will be offered; advice is crucial for any pension as there are a number of personal factors that need to be taken into account. Ultimately auto-enrolment is a quantity over quality product simply designed for lower earners to put in place a pension.

“While auto-enrolment will be put in place for you automatically by your employer, you should push your employer for an advice-based product outside of auto-enrolment. Any existing company scheme means that you already have access to a product where you can avail of advice from the scheme providers. This is of huge benefit as it helps with your financial plan for your retirement.”

Advice is crucial for any pension as there are a number of personal factors that need to be taken into account

In addition, the tax relief offered by pension contributions continues to be a useful financial tool for those in a position to take advantage of them. “The simple advice with pension planning is to start early as you can and with as much as you can,” said Godwin. “In the last few years we have seen a number of younger clients starting their pensions early and maximising the amount they contribute based on Revenue thresholds. By preparing well in advance you can fund your retirement income and avail of tax relief at the same time meaning that more is going into your pension than is coming out of your wallet. However, the ability to maximise these contributions is a very personal matter and requires thinking and planning.”

Advice is especially important if you are planning on early retirement. “One of the main things to remember with auto-enrolment is that the option of early retirement is not available to you. If you are considering early retirement then you need to do your sums and work out what you need to have in your pension pot before making the decision. With the proper advice you can retire early quite comfortably before drawing down the state pension.”

Advice is also essential given the likelihood of more changes down the road, including an increase in the retirement age. “It is quite likely that the retirement age will increase in the future,” commented Tracy Sumstad, Senior Financial Consultant and Director. “I think given the fact that the government has introduced the ability to continue working to 70 certainly points to this. However, if you plan your retirement income properly you should be able to deal with that eventuality if and when it arises. Like everything that materialises changes may need to be made to your plan throughout its lifetime and so the earlier you can start that planning the better.”

Another potential change is the removal of the retirement bond. “This has been for many a method of moving their company pension to their own name so they are in control of their pension fund,” said Sumstad. “The removal of the retirement bond will potentially limit people having control over older pension pots from previous employers and having access to their funds from age 50. If you have an older pension with a previous employer, then I would seek advice now to ensure that you avail of the retirement bond option while it exists.”

There are also a number of changes both Godwin and Sumstad would like to see coming into play. “The maximum earnings cap of €115,000 up to which you can avail of tax relief should be increased in line with the increase in wages over the last number of years,” he said. “In addition, the overall pension fund threshold of €2 million should be reviewed and increased in line with the contributions and fund performance over the last number of years; the maximum tax-free lump sum of €200,000 should be increased as well as increasing the trivial payment amount from a pension; and transfer rules from occupational pension schemes to other products should be made easier and give members more options.”