How Safe is My Pension?

In the past, people would have said that the answer to this question is “Pensions are as safe as houses”.

However, think back to what happened in the 2008 financial crisis. The housing crisis.

Some people lost everything and many realised their pensions weren’t as safe as they thought. The narrative changed and the distrust in pensions grew.

That doesn’t mean you should be afraid or anxious about investing wisely in a pension.

Various things contributed to the pension disasters in 2008, including poor planning and advice.

So today I will discuss why you can trust your pension and why they are a safe and tax efficient option for saving.

The first thing we need to look at are the different pension options available in Ireland. From there, we’ll discuss how secure and safe they actually are.

Additionally, I’ll go through strategies to help you make wise investments decisions for your retirement fund.

Types of Pensions

In Ireland, there are various types of retirement planning structures available. These include occupational pensions, Personal Retirement Savings Accounts (PRSAs), Personal Retirement Bonds (aka Buy Out Bonds) and Personal Pensions.

There are various pension providers in Ireland offering these different types of pensions.

Each type of pension structure comes with its own set of features, rules, investment options and pricing arrangements.

How Does a Pension Work?

The rules relating to each of the above structures generally govern the mechanisms by which funds are paid into the pension and how you receive your benefits once you come to retire it.

The pension structure and provider that your financial advisor recommends will depend on your individual circumstances. These include your age, type of employment, income, frequency and size of contributions, and future retirement plans.

Once your funds are paid, or are regularly paying, into the pension, it becomes an investment vehicle. Contributions from multiple individuals are pooled and invested in various assets such as equities, bonds, and property.

The Benefits of Having a Pension

Pensions remain the first choice for saving and investing in Ireland. Contributions to pension schemes are tax-deductible, meaning you can reduce your taxable income by contributing to your pension. If you fund your savings and investments from your net income, you’re automatically reducing the pot by 40%.

Investment growth within a pension fund is also tax-free, allowing your savings to grow more efficiently over time. Cash savings are liable to exit tax or CGT.

Many employers offer pension schemes or contributions as part of their employee benefits package. Therefore, effectively providing free money towards your retirement savings. Remember, if you’re not a member of your employer’s pension scheme then you’re opting for a pay reduction!

Pensions encourage long-term savings by keeping funds ring fenced until retirement. This ensures that the money is available when needed once you stop working. Pension also allow for tax free compounding returns, maximising the growth potential of your savings.

What Protection Does the Government Offer?

Under the Deposit Guarantee Scheme  deposit accounts in Ireland are protected should your bank go bust. This is limited to €100,000 per person, per institution. This protection is guaranteed by the Irish Government for personal investors.

Above this amount savers should seriously consider holding more than one bank account with multiple institutions. They should also make full use of State Savings products.

When it comes to regulated pension and investment products, investors are covered by the Investor Compensation Scheme, established under the Investor Compensation Act 1998.

However, the maximum amount payable to you is €20,000 and claims made under the scheme can be slow and laborious for claimants.

Unfortunately, the compensation scheme certainly isn’t going to provide much comfort if things go wrong.

What happens if my employer goes bust?

The impact of your employer going bust on your pension depends on the type of pension scheme you’re enrolled in. In a defined contribution pension scheme, your pension is held with a regulated financial institution which is separate to your employer. Therefore, your employer’s financial situation typically doesn’t have an impact on your pension savings.

Are Pension Providers Regulated?

Pension providers, including insurance companies, investment firms, and financial institutions offering pension products, are regulated by the Central Bank of Ireland. The Central Bank of Ireland is responsible for regulating and supervising financial services firms to ensure the stability and integrity of the financial system and protect consumers. Pension providers must obtain authorisation from the Central Bank and comply with regulatory requirements to operate in the Irish market.

Pension funds in Ireland are regulated by the Pensions Authority, an independent statutory body established under the Pensions Act 1990. The Pensions Authority oversees the operation of pension schemes, including the management of pension funds, to ensure compliance with legal requirements and protect the interests of pension scheme members. Pension funds must adhere to strict regulatory standards regarding investment practices, reporting, and governance.

Are Pensions Risky?

Pensions can carry some level of risk, but they are generally considered a relatively stable and secure way to save for retirement.

As with all investments, pension funds are exposed to market fluctuations, economic cycles, and geopolitical events.

Regulatory changes and reforms in pension legislation can impact the operation, governance, and taxation of pension schemes. Changes in regulations may affect contribution limits, retirement age, tax incentives, and pension benefits, potentially altering the risk and return profile of pensions.

Inflation erodes the purchasing power of money over time, potentially reducing the real value of pension savings and retirement income. Pensions should aim to generate returns that outpace inflation to preserve the purchasing power of retirement savings.

Pensions may be exposed to counterparty risk when dealing with financial institutions, investment managers, and other service providers. Counterparty risk arises from the possibility of default or insolvency of a counterparty, leading to financial losses or disruptions in pension operations.

Longevity risk refers to the risk of outliving your retirement savings due to increasing life expectancy. With people now living longer in retirement, there’s a greater need to ensure that pension savings last throughout retirement. Pensions must account for longevity risk by planning for sustainable income streams that support retirees for throughout their retirement years.

Ensuring the security of your pension involves mitigating risks associated with market volatility, risk management strategies, and adherence to regulatory standards.

How Much Risk Should I Take with my Pension?

When you enter into a new pension contract your financial advisor will ask you to complete a Financial Risk Questionnaire. This is a regulatory requirement and is used to understand your appetite for taking risk with your pension savings and investments.

Your advisor should also consider your capacity for risk and your long-term retirement plan.

As a very broad example, let’s look at a 25-year-old, paying into their first pension. While their Financial Risk Questionnaire may indicate a low risk tolerance, they will have an investment horizon of decades stretching ahead of them. In this case, the majority of their pension fund should be invested in equities. While equities are considered ‘higher risk’, the risk is mitigated by the length of time that the funds will be invested.

Conversely, an individual with a higher risk tolerance should consider lowering their pension investment risk the closer they move into retirement. There are many other factors to consider when approaching retirement but generally speaking the closer you come to needing access to the funds, the more safeguarding they will require.

How Can I Reduce Pension Risk?

Pension funds can be invested in equities, fixed income (cash and bonds), property, commodities, alternative investments or generally a mix of these.

Pension investments are typically diversified across a range of different asset classes, currencies, geographic locations, industries, sizes of companies and investment terms to spread risk.

Market fluctuations can affect the value of pension investments and may result in periods of positive or negative returns. Diversification can help to mitigate the impact of market fluctuations on your pension savings.

It’s important to review your investment strategy and performance of your pension fund regularly to ensure it remains aligned with your retirement goals, risk tolerance and capacity.

We outsource to a Discretionary Investment Manager who provide discretionary portfolio management for many of our pension clients.

A Discretionary Investment Manager improves portfolio efficiency. They act in the best interests of the investor at all times, exercising their discretion in order to meet the pre-defined investment strategy of the investor.

Pension Fees & Charges

Depending on the size and structure of a pension, our preference for retirement planning is an ‘unbundled’ platform-based pension structure. This gives greater fee transparency and wider investment choices, as distinct from a retail life assurance company contract.

Conclusion

Consultation with a financial planner is essential to assess your risk tolerance and also your capacity for risk, develop a suitable investment strategy, and ensure that your pension plan aligns with your retirement goals and objectives.