Pensions – still your best retirement bet

N E A L K E L L Y

If the media is to be believed, pensions are under fire. Not only has the performance of many pension funds suffered on the back of the investment slump of 2008-2010, but with the Government looking to trim some of the tax incentives associated with pensions, it's easy to think that continuing to invest in a pension would be the wrong decision in today's economic climate. Which would be a big mistake. To discover why involves taking a look at the alternatives to pensions as ways of planning ahead for your retirement. For years, many Irish people considered residential property investment as a way of preparing for the years after they finish work and the dependable monthly income comes to an end. With a steady rise in capital values and an income stream from a ready supply of tenants, property seemed like a sure-fire bet. The property could be sold off and the released equity could be reinvested to supply a regular replacement income or a lump sum in retirement. But as we all know property hasn't quite worked out that way. Once the market ground to a halt in 2007, capital values soon began to fall and by 2011 capital values were half what they had been in the peak of late-2006. In fact they had fallen back to roughly where they had been in 2001. Which means that someone investing in residential property over the last 10 years has probably seen little if any appreciation in the value of their investment. Meanwhile, more cautious people will have played things very safe and placed their money on deposit in one or more of a variety of short, medium and long-term deposit savings schemes. In the modern era of low interest rates these schemes will have typically offered an annual interest return of between 2% and 5% over the last 10 years. Over that same period, inflation has more or less averaged out at between 2% and 5% per annum. Which means that any interest return on their money has most probably been cancelled out by the effects of inflation and the application of Deposit Interest Retention Tax to the interest earned. Investments have also suffered. Although the stock market falls of 2007/2008 have not been repeated, a lack of sustained investor confidence has suppressed the investment markets over recent years and, overall, any returns which have been achieved have been quite modest. All of which begins to make a pension look like the shrewdest move for those looking ahead to their retirement. The reasons for this are fairly obvious. Despite the lowering of

contribution ceilings, the Government continues to offer generous tax incentives for people making contributions to a personal or company pension scheme. You can usually still claim full tax relief at your marginal rate on the money you put into your pension plan. This means that after tax relief, every €1,000 you put in is only costing you €800 if you're a 20% tax payer, or as little as €590 if you pay income tax at the 41% rate. That's a substantial return on your money - almost straight away. In today's market there's no other investment or savings return that even comes close. Of course, the value of your pension can go up as well as down in response to market fluctuations. However, if security is your primary concern, then you can direct your money to be invested in the most conservative funds. Bear in mind that while this may protect you from some of the downs, it also limits your exposure to many of the ups upon which the growth in the value of your pension pot depends. However, there's always a pension to suit you no matter how cautious or adventurous you want to be, from low risk pension funds to medium or high risk pension funds and even self-directed funds that you control yourself. It's easy, given the prevailing economic climate, to look upon your pension as a lifestyle extra and to think that it's an expense you could do without. But remember that in years to come, after retirement, your pension might well provide your main source of income. So even if you can only afford to make a relatively small regular pension contribution at the moment, you can rest assured that it's all being sensibly invested in something which will one day provide you with a vitally important income. Your financial adviser can review your current pension provision and give you an indication of the levels of income you might enjoy in retirement based on the contributions you are currently making. They can also tell you the effect that ceasing, lowering or increasing contributions will have on the level of that income. What they will also tell you is that paying into a pension remains one of the most effective and tax efficient ways of saving for your retirement.