A Beginner’s Guide to Pensions
Hello and welcome to this special
episode of bonkers.ie TV Where we’re here to talk about pensions. I’m delighted to be joined by Colm Power who is Director of Pensions at HMP
Insurance & Pension Advisors. – Colm, thanks a million for being here.
– Thanks, Mark. So, pensions are notoriously confusing for lot of people but also one of the most important financial decisions a lot of people are ever going to make. So, tell us a little bit, at the beginning, how do pensions really work? – Pensions are ultimately a long-term savings plan, okay? So, like any savings plan, the more you
can put in the more you will get back out at the end. The beauty about pensions is that there’s tax relief available and your pension will grow tax-free as well. – Tax reliefs; you hear a lot about that when it comes to pensions. Tell us about some more of the specifics around tax reliefs involved in pension savings… – So, for every pension contribution that you make as an individual, you will get tax relief at your marginal rate So, a quick example will be if you are paying tax at a 20% margin rate and you’re paying €100 into your pension you’ll get €20 tax relief on that, okay?
– Okay. – So the full hundred euro goes into your
pension and but it’ll actually only cost €80… because of the tax relief. That €100 then grows tax-free within the pension vehicle, so it’s a win-win for everyone. – Great, so, you’re only losing €80 out of
your paycheck but €100 is actually being invested and that hopefully that accumulates handsomely over time… – Correct, and then obviously if you’re
paying tax at the higher rate, at 40% it obviously works out at much greater tax relief as well. So, there are a lot of different types of workers out there; there’s employees, there’s employers… …there’s company directors, there’s self-employed people. What are the different pension options out there for people? There’s so many different pension options out there and sometimes it can be quite confusing, okay? But ultimately they all try and do the same thing, which is provide an income for you when you retire. So, there is a company pension arrangement, there is a personal pension arrangement… …there’s a personal retirement savings account. So you can see, with all the lingo, it can be quite confusing. – So, the pension – there, you mention – is there to really help people in retirement but the state pension also has a part to play. So, roughly, what is the state pension at the moment? – Approximately, it’s about €12,000 per annum for all those people that qualify for it. So, when you look at the average wage being about €30-€32,000 per annum When you stop working, there’s quite a big drop off from your income and down to the actual state pension So, our job, really, as advisors is to promote active pension funding to make sure tha there’s a big bridge on that shortfall, okay?
– We hear about the so-called ‘pensions time bomb’ in Ireland, are there any changes being made, legislation-wise, for how people do pensions in Ireland? – I suppose government have realised that it’s completely unsustainable to carry on with the current arrangement So, there’s talk of introducing auto-enrollment, there’s talk of pushing out retirement ages so that there is more flexibility and transparency around retirement and pension planning. – And when someone opens a pension, in many cases, do they get a risk assessment, so their advisor will then be able to decide how best to deploy their savings? – The main focus should be on starting the pension, okay? Investment is hugely, hugely important but the sooner you can start paying into your pension the more beneficial it will be in the long run. – Okay, that leads me nicely onto my next question; when is the right time for somebody… …because, you know, a lot of people on the back of, you know, the recession and the crash here in Ireland may have been more reluctant to be parting over that money or not in a position to do that or… …what would your advice be to people like that? – Look, absolutely agree with all that
and my advice on it is the sooner you can start the better, okay? Because you know it’s going to take you quite a long time to build a sufficient fund that will sustain you in in retirement, plus the fact that you have investment growth, compound interest and it grows tax-free within the pension vehicle. So, the sooner you can start, the better. – Finally, Colm, if someone was watching and was looking to start a pension for the first time what would you advise they do? What are the
first steps they should take? – The first steps that they should do is talk to a qualified financial advisor. I would look at Brokers Ireland’s website,
where they have qualified advisors in each regional area and that, I think, is your first port of call. – Okay, excellent. Colm, thank you so much for being here. Thank you very much for watching If you have any questions at all about how to start a
pension yourself or any questions about the coming legislation, just leave them below and we will be happy to get right back to you Thank you for watching!