In June this year, a piece ran in the Irish Times with the headline “Pensions are boring, but they are still the best way to earn money tax free”. Susan O’Mara, Business Development Manager in CPAS examines if this is true.
Working in Pensions for nearly all of my adult life, I felt inclined to challenge that assumption. Are pensions really that boring?
I will agree that Pensions can seem needlessly complicated, and because they are a financial product, the regulatory framework around them, which is designed to protect consumers, is so prescribed and detailed that it can make pensions seem very off putting.
For example, the annual benefit statement, which is your annual pension update, can run to 14 pages of text, simply to outline how much you have contributed to your fund, how it has performed and what it is projected to be when you retire. As both a pension saver and a pension professional, I can see the logic of why so much of information is supplied, and also how off putting and potentially boring this can be.
But stick with me if you haven’t drifted off already…. Pensions are brilliant!
Pensions are the key to living a great life in retirement. The State does not provide enough for the fun stuff, and this is where pensions come to the rescue. A well-funded pension can ensure that you can afford to do the things that make you happy when you are no longer working.
Pensions are tax efficient – that may sound boring, but if you are paying tax at 40%, then every €100 invested into your pension costs you €60 – that, in ANY other scenario is exciting, €100 for €60… what a deal!
Pensions are long term savings accounts – that is where our friend compound interest comes in. Albert Einstein (yes, him) said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Compound interest is the interest earned on interest, or the gains made on gains. It’s how the rich are rich, how credit card companies make all their money, and it’s how the real magic happens in pensions.
The sums
If you contributed €100 per month for 30 years, your total investment would be €36,000 (pre-tax relief). Assuming a rate of 40% tax relief throughout those 30 years, your actual outlay would reduce to €21,600. After three decades, your value, assuming a conservative growth rate of 3%, would increase to €58,519. This remarkable outcome demonstrates the power of time, tax relief, and compound interest, turning €21,600 into an impressive €58,519. Surely, that isn’t boring!
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One of the most valued components of a benefits package is a pension scheme. Construction workers, like all employees, deserve financial security in their retirement years. By offering a pension plan, construction companies demonstrate their commitment to their employees’ long-term financial well-being. Contributions made to a pension scheme can be deducted from taxable income, providing a valuable tax advantage for workers. This benefit not only encourages saving for retirement, but also helps employees reduce their tax liability.
Construction work can be physically demanding and carries inherent risks. To address this, offering death in service benefits is a critical provision in a benefits package. Such benefits provide financial support to the dependents of employees in the unfortunate event of their death. By offering this protection, construction companies demonstrate their dedication to the well-being of their workers’ families, alleviating financial burdens during an already difficult time.
Sick pay and income protection benefits offer financial security to employees who may be unable to work due to injury or illness. By providing income replacement during periods of incapacity, construction companies not only support their employees but also help maintain their morale and reduce financial stress.
Mental and emotional well-being is an important aspect of any worker’s life, and construction employees are no exception. Wellbeing programs, such as stress management workshops, counselling services, and fitness initiatives, contribute to a positive work environment and foster a healthier work-life balance. By investing in these programs, construction companies promote the overall well-being of their workforce, leading to increased job satisfaction, lower turnover rates, and higher productivity levels.
It is particularly acute in the areas of skilled workers. Construction companies are in competition with one another to attract a limited pool of skilled staff. A competitive salary and career prospects play a part in staff attraction and retention, but it is not always the deciding factor. A broader benefits package can sway a prospective candidate. This might include health, life and sickness cover and pension provision. Many skilled individuals are looking towards their future and want to ensure they are covered for all eventualities. The desire for a pension contribution along with other benefits may appear during the interview process, in addition to the usual salary negotiations.
Along with salary, an occupational pension scheme can be provided as an option, into which an employer and employee contribute. Schemes can be designed to provide similar contributions for all staff, or to reward experienced staff. Schemes can be designed to suit the needs of the company and the individual. One scheme does not necessarily have to have the same rates for all employees. In addition (more often than not), there will be life insurance, also known as death benefit or death in service. This pays out a lump sum to the dependants of an employee on their death while an employee of the company. Once again, there are varying levels of cover and you can arrange different levels of cover, for different categories of staff.
Having a benefits package in place is a good starting point, but is it fit for purpose? Does it suit the demographic of your workforce? A single 25 year old might be less interested in life assurance than a 40 year old with a young family. However, the idea of an income protection policy might appeal to them. Simply put, income protection is a policy insuring a portion of the employees’ income, so they will be covered in the event of a loss of earnings due to illness or injury.
If you haven’t already started saving for retirement, it’s not too late. The current tax relief available within the pension framework was designed to allow older people save more money. As you can see from the table below, from age 50 the percentage of your salary, on which tax relief is available, increases from 30% up to 40% by age 60. This is capped at an earnings limit of €115,000.
More people than ever before are opting for the latter, but what are the differences? At a basic level, the annuity option is essentially taking the value of your retirement savings at your retirement date and giving them to a provider in return for a guaranteed income. The income that you will receive is dependent on your fund value, your age and health. In some instances, some additional bells and whistles can be added on.
As another year comes to an end, many of us reflect on the highs and lows of the last 12 months. Many articles online try to capture the year in a single snapshot – from what we searched for online, the types of content we consumed to the words we used. The summaries invariably uncover some deeper meaning and offer some lessons.
What about Investing?
For those employers who have not already done so, they will need to decide urgently what the best solution for their defined contribution scheme is. For those who wish to continue administering their own scheme in its current format, it is possible to do so long as they support the implementation of the IORP II requirements. They must also be mindful of the enhanced levels of governance and compliance along with the additional costs incurred as a sponsoring employer.
Issues have arisen with the initial low level of pension contributions but in addition, individuals will be unable to make Additional Voluntary Contributions (AVCs). Employers who wish to top up the minimum amount will not be able to contribute more than the stipulated maximum.
There has been less media coverage of IORP II, which could have a more significant impact on you, your business or your pension arrangement. A European directive, this was transposed into law in Ireland in 2021, under which many of the deadlines for changes have already passed or are looming.
Last Saturday, 
