Irish Financial Review

Pension planning more important than ever

Planning for retirement continues to be a focal point of Governments all over the EU and here in Ireland we are not immune from the discussion.

When the concept of a state pension was first introduced in Germany under Otto vonBismark, they were done on the basis that few were likely to qualify for them and as a means of neutralising radical socialist movements at the time. That was the late 1880’s.

Accessing vonBismark’s state funded pension was heavily conditioned on age, vonBismark craftily set the age well beyond the majority of citizens under his rule. While groundbreaking in his social responsibility, Bismarck was also no fool. He clearly understood the link between the health of the state finances and the consequences if too many citizens suddenly had access to his new pension plan.

Since the time of vonBismark, societies all over Europe have continued to support the concept of a public pension. However, the original philiosphy that state funded pensions be made available to just a select has been overwhelmingly reversed.

We all live longer now than our forefathers did in the late 1880’s. This is as a result of changes in lifestyles, medical advances, the type of work we do and so forth. Additionally, in all societies, retirements ages are set below the general life expectancy of many citizens.

 

But across the EU, there have also been significant societal shifts that now severely undermine how pensions work…and will work in the future. Some refer to the challenge as the ‘pensions timebomb’. It is a pretty apt description and one that everybody in Ireland needs to begin to pay a lot more attention to in the years ahead. The problem of course is the ratio of people that are in the workforce versus those in retirement.

Pensions work on a very simple premise: that there will be enough people working to pay for those in retirement. But with falling birth rates across EU as well as here in Ireland, the number of people working compared to those in retirement has been falling…and it has been falling fast!

Whether or not states will actually have sufficient financial means to continue funding pensions in the future is unknown. However, if the more modest case scenarios put forward by economists actually comes to pass, states will be forced to take radical steps. We have seen first-hand how Governments can mobilise when they are backed into difficult financial corners. An exploding time-bomb is likely to result in much more severe response.

The golden years of state and employer pensions, especially those that provide generous levels of income guarantee are truly over. Governments and companies are fast abandoning premium plans in favour of ones that require more contributions and more attention from employees.

But many Irish citizens fail to make any alternative pension arrangements other than what they contribute to the state by way of their taxes. For some, this can be as a result of personal financial situations where they may not have the financial means to do so. For others, it can be a matter of putting things on the long finger and for some; it is nothing more than a matter of neglect.

What sometimes becomes evident from only the briefest conversation is that the topic of pension planning can be confusing for many. Pensions and the topic of pension planning are too often dealt with as a stick, by those in authority and even by those in the pension industry itself.

Last year, the decision of this Government to raid the private pension accounts of many did not help matters. It was a raid on the private pension accounts of private citizens and at a time that we need more people participating.

Pension planning at its simplest is very simple indeed. However, too often, the language used to describe them can often lead to confusion and even reluctance to engage.

At its simplest, pension planning should be done on a few basic rules:

  1. Start early. The sooner one begins with even a small pension plan, the better off they will be in retirement.
  2. Match your age to the risk. The younger you are, the more risk you can afford to take with your choice of pension arrangements. This works in the opposite was as one gets older. In fact, when nearing retirement, looks for as many secure options as possible. Having investment in cash is perhaps one of the most secure but not the best if inflation is high and yields on deposits are low.
  3. Diversify. In other words, do not put all your investments in one investment category or industry. In the 1990’s, a lot of people invested a majority (or all) their money in Xircom only to lose it when the stock tanked.

These are three of the basic rules of long term retirements planning.

There are lots of ways and means of how you invest your money and plan for retirement. One of the most popular is getting specialists to do a lot of the work for you. Pension brokers are a good example and typically, they work on the basis of advising on a range of options that cover issues such as the tax benefits of various pension options, qualifying rules (company directors can avail of more options than PAYE workers) as well as expected long-term returns from various investment classes. Brokers charge fees so check what those are and whether or not you are liable.

Pension brokers work with investment firms where your money is then placed according to your long-term retirement needs. This is the tricky part and one which you need to pay close attention to. Matching your retirement goals with the investment strategy under the direction of the broker, investment firm is what will largely determine how successful your retirement plan will be. Also, it is key that you understand what fees and charges will apply to your pension pot. It is not uncommon for fees and charges to exceed the actual returns generated from the investment strategy taken. This is not for a moment suggesting anything untoward, stock markets and other investments can go up and down, this is a feature in investment risk. But is important that you understand this and the level of fees your investment pot will be subject to before you part with your money.

That said, there are lots of great sites that provide a lot of invaluable pension information. The Citizens Information website, www.citizensinformation.ie is one of the best. It covers much of what you will need to know on the high level pension information, including types and benefits.

It is also advisable to seek the qualified advice of a pensions broker that is well-established in the market place. When it comes to your pension and retirement planning needs, you are better off paying for good advice. In fact, you better off paying a good pension broker for their advice…whether or not you choose to let them manage your money afterwards is up to you.

Mortgage approval a must for would-be first time buyers…but keep it a secret!

First time buyers must ensure they have up to date mortgage approval before they bid on a property. This is especially important for those who may have been granted so-called Approval in Principle but which may have expired and is no longer valid.

First time buyers that may have been granted an AIP by a bank some 6 or 9 months ago may not be aware this has expired and may no longer be valid” said Mr. Frank Conway of the Irish Financial Review.

With the price of property continuing to fall and more reasonably priced properties entering the market through public auctions, deposits placed on property by would-be first time buyers can be put at risk if they are unable to secure finance to complete their purchase. The same applies for private sales.

Attending public auctions can result in some good value being achieved by prospective first time buyers. However, they need to ensure they have not just their own deposit saved but also that they can secure financing from a mortgage lender if this is the route they go down to purchase” said Mr. Conway.

While mortgage lenders may extend expired AIP’s, they may do so for amounts far less than originally, which could result in a significant shortfall.

In one recent case, a couple that had been granted mortgage approval in principle at the end of 2011 for €250,000 found they were now being approved for far less due to recent birth in the family. In this case, the new mortgage amount was for far less than €190,000” said Mr. Conway

It is important that would-be first time buyers get an up-to-date confirmation on their approval in principle from their lender prior to placing a deposit on the property or bidding at an auction.

First time buyers are also advised to keep the mortgage amount they have been approved for secret.

5 Reasons to Get Approval in Principle

  • It confirms precisely what a prospective first time buyer can afford.
  • Helps identify homes within their price range.
  • Prevents loss of deposit if they are unable to secure a mortgage
  • Ensures they can attend property auctions in comfort.
  • Makes buyers more attractive to sellers as mortgage uncertainty removes question mark over whether or not they can afford the property.

 “Having mortgage approval is extremely important but so too is keeping that amount secret.  Preventing the amount one has been approved for from becoming public knowledge is important if one hopes to secure the best price” said Mr. Conway.

 

Property tax must be for all, with no exceptions

Property tax will only work if all pay…with no exceptions.

While there is lots of media speculation on the final solution on how property tax will be collected and how much the tax will cost, there is no Government agreement on either the general or the fine details.

With four months to go to the 2013 deadline on the introduction of a property tax, this Government has not yet bothered to agree on what the level of tax will be, how it be calculated, who pays and what exemptions will apply. Were this a private business undertaking, Project Property Tax would be in serious difficulty.

Property tax at its fairest must be paid by all citizens with no exceptions!

For those of limited financial means, perhaps some element of a reduced tax amount could be facilitated. However, calls by some social concern groups for broad exemptions completely miss the point on how democracies work. Democracy costs money. The right to vote can only be guaranteed by a duty to pay tax. How could our society protect the values of democracy if more and more citizens are granted the right to opt out of paying their fair share of tax? PAYE employment is not the only means of earning income, even though it may be the easiest by which Government collects taxes.

Property tax must be paid by all citizens. This must include senior citizens, retirees, the unemployed as well as those in self-employment.

Of course, PAYE workers WILL pay, they always do.

Rather than drawing up a long and complicated list of rules and ways of implementing measures to ensure compliance, Government can create a much more simple system of payment.

  • For the elderly (over 70), a reduction of 75% off standard property tax rate.
  • For those receiving unemployment assistance, a limited period of reduced tax for a 12 month period at 50% of their liable amount. This should be a once-in-a-lifetime benefit.
  • For self-employed, no exemptions.
  • For owner occupiers in general, there should be a 25% homestead deduction whereas
  • A full rate of tax would apply to rental / investment properties or where any form of rental income is earned on a property.

To ensure compliance, a property tax compliance certificate should be introduced, which would be linked to the right to vote, the right to drive as well as the right to receive socially funded payments.

Property tax must equate representation in our society. A notion that some pay while others opt-out will make for an unfair, unequal and unjust society.

This Government promised a fairer society, it must now deliver on that promise.

If it unable to put a fair and equal property tax system in place from January 1, then it must refrain from doing so until it is ready.

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