Benjamin Franklin is credited with the assertion that death and taxes are life’s only two certainties, but for many people there’s a third: retirement.
For historical reasons, 65 ended up as the widely accepted retirement age, but for a large part of human history, there was no such thing as formal retirement. People simply worked until they became incapable of doing so.
We have Bismarck to thank for introducing the concept of a modern state pension in the 19th century, with the retirement age set at 70 – at a time when few enough people lived to see that age. It was also 70 when the Old Age Pensions Act came into force in Ireland in 1908.
The qualifying age was subsequently adjusted downwards to where we are today, although a report produced in May of this year for the Financial Planning Standards Board suggests that while it’s nominally 65, many Irish people now expect to work until the age of 70 to maintain their standard of living.
Almost 80 per cent of those surveyed also felt financially unprepared for retirement, with a critical knowledge gap between what they were putting into their pension fund and how much income they thought that fund would provide when the time came.
Money, or having enough of it, pretty much tops the lists of concerns voiced by those facing retirement. This is closely followed by anxiety about filling the time previously taken up by work.
“Money is terribly important and, in an ideal world, you would start thinking about it long before you retire, maybe seven to 10 years before the planned date, because the sanest and most tax-effective way to save for retirement is by contributing to a pension scheme,” says Paul Kenny, a veteran of the pensions industry and Ireland’s first pensions ombudsman, who now leads courses for the Retirement Planning Council designed to get people retirement fit.
“Things happen that can radically change when people retire, such as illness, redundancy or an accident,” Kenny says. “Then there are those who put things on the long finger and suddenly they’re facing retirement with no financial plan.
“But all is not lost. Last-minute additional voluntary contributions (AVCs) are an option. How much you can put in is limited by your income in the final year and how much you can claim against tax, but they’re worth considering,” Kenny says.
AVCs are supplementary payments into your pension fund. If you’re in your late fifties, you can get tax relief on as much as 35 per cent of your salary if you put it into your pension fund. Above 60, that percentage jumps to 40 per cent.
So if you have just turned 60 and are earning €90,000, with normal pension contributions of 6 per cent, or €5,400, you can put up to a further €30,600 into your pension, assuming you have it. For many, it is a way of beefing up retirement income in a tax-efficient manner if they come into a windfall, such as an inheritance.
“When you’re looking at your overall money picture, an awful lot also depends on what kind of pension scheme you’re in because, in some cases, if you’re already getting the maximum from a scheme, AVCs are not going to do you any good. So, you need to know what you’re in and the benefits,” Kenny says.
“Annuities and approved retirement funds (ARFs) may also come up when discussing retirement financial planning,” Kenny adds. Both are products related to after-retirement income, not saving for retirement.
“An annuity, which will guarantee a payment for your lifetime, will be bought from an insurance company with the money in your pension fund and will very much tie you to what are currently low interest rates. Annuities are based on life expectancy and bond yields, and if interest rates are low, bond yields are low, so you’re locking yourself into a low interest rate for life.
“With ARFs, rather than lock your money into an annuity at a point in time, it remains invested after your retirement, with the retiree drawing down a certain portion of the fund each year.
“It’s crucial how you invest the money because that’s what will determine the capacity to draw down over the rest of your life. So, it’s really important to get good advice.
“ARFs are generally run by insurance companies, and they’re investing in massive numbers of different assets all over the world, something you could never do on your own, and this spreads the risk. They pay you the monies you are drawing down and take care of things like PAYE. An ARF gives you flexibility; if you really need money, you can make a drawdown and pay the necessary tax.”
Kenny says that the one thing to watch with ARF investments is the charges.
“If you’re being offered ‘hello money’ in the form of a bonus allocation, be careful. There’s only one person paying for that. So, the message is to go for the lowest charges. Anything over 1 per cent should be viewed with suspicion.”
Assuming the money side of things is under control, the next burning question for many prospective retirees is what to do with their time.
The psychosocial infrastructure is the term used to describe what a community, such as a workplace, provides to the individual. For better or for worse, this means having colleagues, work to do, and company events to attend. Losing this infrastructure can be a difficult adjustment, especially for those who have been defined by their job (often those in senior positions and the professions) or in whose life work was the dominant feature.
Kenny suggests reframing “all the time I have on my hands” to see it as a bonus, not a negative. “You’re getting back 50+ hours a week and why would you sit there and twiddle your thumbs when there is so much you could do?” he says.
“First of all, some people still want to work, so explore the options. Can you continue to work with reduced hours or part-time at your existing company with less pressure?
“Often people don’t want to keep doing what they’ve done for years, but that shouldn’t be a deterrent to doing something else. It’s really a question of looking for what’s available. If someone is prepared to work voluntarily rather than needing paid employment, then that opens another avenue.
“Sharing your talents, life and work skills with others can be invaluable and it feels good to give back. There are many charitable organisations which would bite your hand off if you had the skills to revamp an outdated system or update a website, for example.”
Retirees often get asked to join a board and, for many, it’s a good way of staying in touch. However, Kenny raises a warning flag. “Check the number of subcommittees because what looks like a once-a-month commitment can suddenly become twice a week,” he says.
Kenny adds age-appropriate exercise into the retiree timetable and also something to keep the brain agile. Both learning a new language and taking up a musical instrument for the first time are seen as particularly good ways to challenge the grey matter.
“The education and training boards offer a huge variety of hobby and other courses, with many of them heavily subsidised and run during the day. Then there are the more formal courses at Third Level for those who want to go the academic route,” Kenny says.
“Then come the hobbies which split into things you do alone and things you do with other people. I know of a gentleman who retired at 76 having known nothing but farming all his life. His son convinced him to go on a retirement planning course, and since then he has taken up horticulture, baking bread, general cookery, hill walking, yoga and line dancing.
“The wonderful thing about any of these activities is that they bring you into contact with new people who have no idea about who you are based on what you used to do,” Kenny adds. “In a sense, you get your personal identity back, and maybe that’s still a 25-year-old trying to break loose.”
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.