WHENEVER THE DISCUSSION about pensions starts, you soon discover that not everyone has one – in fact very few have.
There are several excuses given: “Sure, I’m way too young for that kind of thing”, “I’ve thought about it but don’t really understand all the options or jargon” or “I’ve invested in property for my retirement so I don’t need one”.
The Pensions Authority reports on a regular basis that about one million private sector workers, or 70% of the private workforce, have no personal pension plans. In fact, in 2016, the authority dealt with only 10,000 pension queries in total.
A recent survey carried out by Davy’s investment division, iCubed, has shown that 60% of respondents held investments primarily to ‘fund their retirement’ and that investment in property is still seen as a ‘safe’ and ‘steady’ investment despite inheritance tax and high mortgage rates.
So, specifically, how are people planning to provide for their retirement and why is there so little uptake for the products on offer?
The survey showed that the main reasons for not having private pensions ranged from not understanding them or believing that they are too costly and unaffordable, to respondents being too young to consider retirement, which they believe is ‘hundreds of years away’.
Of those who are without a pension, 20% had never even considered investing in one.
The pension age has been, and may continue to be, extended. It is 66 at present but will be 68 and there has been some talk recently that people will to be working until they are 70.
The average life expectancy in Ireland is 81, which means that retirees will be on a pension for maybe 10 years. However, on the basic state pension there will be a shocking drop in income – to €230 per week, or in the region of €12,000 per year.
The current buzz phrase appears to be ‘auto-enrolment’. People are often not the best judges of what will serve their interests. Institutions, including government, can help us do better for ourselves with small changes – nudges – in the structure of the choices we face.
There’s plenty of evidence that these so-called ‘nudges’, like the proposed auto-enrolment, have beneficial effects without little downside.
Take the topic of organ donation, for example. Surveys show that 90% of us support the principle of donation – yet only a small percentage of us bother to register as organ donors.
Austria and Germany are countries that we usually think of as rather similar in terms of culture, yet their levels of organ donations are very different.
Austria adopts an opt-out principle – you must check a box if you don’t want to participate in the organ donation programme - whereas Germany adopts an opt-in system.
As a result, organ donation rates in Austria are close to 100%, while they are only 12% in Germany.
I’m in favour of efforts to steer people in the right direction, but I’d have more of a libertarian approach to this, which would allow people the option to resist the nudge if they choose to do so.
Auto-enrolment is a good idea, but there should definitely be an opt-out option so that people can be influenced, but not required, to move towards funding for their retirement.
There are very few decisions we make which don’t have implications for others. If you neglect your health, others bear a burden. If you fail to save for retirement, others bear a burden.
Therefore the argument for some sort of intervention, such as auto-enrolment, is on far firmer ground than one where the implications of decision-making only affect the individual.
There are those who oppose auto-enrolment, claiming that it is a ‘nanny state’ idea, with the state controlling what we do with our own money and how we decide to provide for our retirement.
But the introduction of an opt-out option should quell this opposition. I’m all for letting people make mistakes, and learning from them, but the evidence from the pensions industry would suggest that we are either very slow learners, or we aren’t learning anything at all.
Where mistakes have potentially serious consequences, as arguably they do in this case, I believe intervention is a positive move.
If auto-enrolment is explained thoroughly, in an easy-to-understand way, it could remove the heartache and worry about your pension. Make sure to consult your financial adviser but, whatever you do, don’t leave it too late.
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