Ten ways to boost your personal pension
pot Tue, Mar 20, 2012
Maximising your retirement income is an important business so no opportunity should be
ignored, writes CAROLINE MADDEN
1 BUMP UP YOUR CONTRIBUTIONS – BUT ONLY IF YOU CAN AFFORD IT
The single biggest factor in determining how much you’ll have to live on in retirement is the
amount you contribute to your pension pot. And due to the power of compounding – which is
essentially growth on growth – the earlier you start paying into a pension, the better.
However, before you commit every last cent to your pension, it’s important to step back and
make sure it’s the right choice. Munro O’Dwyer, pensions director at
PricewaterhouseCooper, points out that it makes little sense to maximise your pension
contributions if doing so means you’re not paying off your 15 per cent APR credit card bill,
or it puts you at risk of missing loan repayments which can damage your credit record and
create a financial cost in the future. So it’s important to achieve a level of balance between
providing for the future and surviving in the present.
2 PUT THOUGHT INTO THE ASSET-SPLIT
Gary Connolly of iCubed investment consultancy says one of the key decisions that will
determine the performance of your pension portfolio is the asset allocation, ie how your
pension assets are split between equities, bonds, cash and various other asset classes.
When an employee join an occupational pension scheme they’re generally given a choice
between low, medium and high-risk funds, and what you choose on that first day could have
a significant effect years down the line. If you don’t tick any box, you’ll most likely be put
into a default fund, which may not reflect your preferences or attitudes to risk, so it’s worth
making an effort to understand the different investment choices available to you.
So how to decide? Connolly says the rule of thumb is that the longer you have to retirement,
the more risk you can take. “If you’re 25 with 35 years to retirement... you can afford to take
as much risk as there is available to you, as it’s such a long time period and there’s very little
in your fund. However, somebody in their late 40s or early 50s with a large amount in their
pension relative to what they’re putting in, then that’s a different situation and they need to
take cognisance of what their expectations are for their income in retirement.”
3 QUIZ YOUR FINANCIAL ADVISER
According to Pensions Ombudsman Paul Kenny, charges can vary considerably from one
pension contract to another, so the first thing people need to be aware of is what they are
paying their financial adviser and how that is paid.
Essentially, if your financial adviser is being paid a large commission from the insurance
company, then the charges built into your pension contract are likely to be greater.
“And that could come out in a hidden sort of way,” says Mr Kenny. For example in some old
contracts, only a percentage (in some cases as low as 45 per cent) of the individual’s money
was invested into their pension in the first few years.
The alternative to the commission basis is to pay an upfront fee to your adviser, which is
more transparent in many cases.
4 MAKE SURE YOUR LIFE ASSURANCE ISN’T HURTING YOUR PENSION
Many people set up pensions with life assurance living alongside it. However, what the
insurance company may not tell you is that the cost of this life cover is going to increase as
you get older, so that less of your monthly contribution will be going towards your pension
savings, and more will be going to support the life cover.
If you buy an ordinary stand-alone life policy, you’ll be sold a level annual premium product,
which means you pay the same premium throughout the term of your policy. However, life
cover connected with pension schemes is often written on a recurring single premium basis,
which means it varies according to age.
“You come to the point where the cost of life cover could exceed your premium and start
eating into your fund,” says Mr Kenny. There are steps you can take to soften this effect, but
if you separate the two products you may well be better off.
5 MAKE SURE TO CLAIM ANY FOREIGN SERVICE ENTITLEMENTS
Ireland has bilateral treaties with many countries (for example all European countries, the
US, Canada, New Zealand and Australia), which means that if you made social insurancetype contributions in those countries, they may be counted for eligibility for the State pension
here. Indeed those foreign contributions may make the difference between being eligible for
an Irish pension and not being eligible. The Department of Social Protection will liaise with
other countries on your behalf to sort out your entitlements.
6 BUY BACK NOTIONAL YEARS
If you wish to bump up your pension pot, then one way of doing so is through additional
voluntary contributions. However women who work in the public service, and who had an
interrupted career (perhaps leaving the workforce to bring up a family), also have the option
of buying back years of service missed so as to receive a full service pension upon reaching
retirement age.
While this strategy of buying back notional years can be a valuable one, Mr Kenny says one
of the problems with it is that people are not always told they will be liable for spouse and
children contributions as well as their basic contributions, so they can arrive at retirement
with a “big chunk taken out of their lump sum”, so it’s important to check that.
7 PAY BACK MARRIAGE BAR GRATUITY
Women who were forced to leave civil or public service employment upon marriage very
often received a marriage gratuity. Essentially this payment represented compensation for lost
pension entitlements.
If a woman subsequently returned to her job she had the right to repay the gratuity, with
interest, and in return she would be given back her pension entitlements. For those women
who haven’t paid back their gratuity, it’s important to consider it because even with the hefty
interest that would be due, it could be very much worth their while.
8 ANNUITIES V ARFS
Munro O’Dwyer says that when weighing up annuities against Approved Retirement Funds,
start from the premise that neither one offers more value than the other. “With the annuity
option you get the certainty of that cheque in the post for as long as you so shall live,” he
says. With an ARF you get to keep managing your pool of pension assets, with the potential
to continue making investment returns.
Annuities guarantee a set income for life, but at the moment they’re expensive because of the
low interest rate environment. Also, the annuity contract ceases when you die, which means
nothing will be left to your spouse. By contrast, the balance of an ARF would be passed on to
your estate on death.
“Depending on how long you live and the investment return your ARF achieves, one will
look better than the other, but you can’t know in advance,” says O’Dwyer.
9 SHOP AROUND ON ANNUITIES
If you’re buying an annuity, don’t forget that you’re not stuck with your own pension
provider. There are a number of providers on the market, and it’s worth shopping around as
some will be more competitive than others, particularly for women.
Also remember to check what policy charge the annuity provider is going to apply – it’s
generally a small flat fee to cover administration costs, but it can vary between insurance
companies so you may be able to save money by comparing charges.
10 PUBLIC SECTOR WORKERS SHOULD PAY FOR GOOD ADVICE
Mr Kenny advises public sector workers approaching retirement to pay for decent advice on
their pension entitlements from a financial adviser who knows the ropes, and is familiar with
all the quirks, gaps and perils in the system. “We’ve got into this mode of thinking that all
public sector workers have got great pensions. A lot of them have, there’s no question about
it, but the detail in the schemes contains a lot of funny stuff, and if you don’t know it’s there
and how to deal with it, it can be awkward.”
He says that unless you’ve been in the same public sector job for your whole career, with no
transferred service, then it’s worthwhile getting an experienced adviser to check out your
pension entitlements.
“Most people really don’t have the expertise,” he concluded.
© 2012 The Irish Times