Understanding your pension – do I really need one?

Most people’s eyes glaze over if the topic of pensions is raised! However, with Blue Monday this week many of us may have allowed our mind to drift to thoughts of early retirement and warm beaches!
Saving for retirement is extremely important. People are living longer and leading more active lives in retirement. As a result, it is more important than ever for you to think about where your income will come from when you retire. Pension saving is one of the few areas where you can still get tax relief. Unfortunately, only about half of the people working in Ireland are members of pension arrangements.

What is a defined benefit (DB) pension scheme?
A DB pension, or sometimes known as final salary pension, is a special type of workplace pension. Instead of building up a pension pot over time, it provides you with a guaranteed annual income for life, based on your final or average salary (hence the name).
DB pensions are most often provided by the public sector (health, education etc) and government employers. Some private sector employers do still offer them, however. Historically they have been seen as a very attractive kind of pension.

How does a DB pension work?
When you are a member of a DB / final salary pension scheme, your employer pays into a central fund on your behalf (unless your scheme is directly funded by the taxpayer). The scheme will assign you a ‘normal retirement age’, and your pension will be paid from this date. The amount you’re paid will depend on a number of factors. 

What are the advantages of a defined benefit pension?
DB pensions are often seen as more generous, because it would take an above-average defined contribution (DC) pot to be able to buy an annuity that pays you the same amount as a DB scheme.
What’s more, the payouts from a DB pension are guaranteed for the rest of your life. So long as the pension scheme itself remains funded, your pension income will be paid no matter how long you live.

What are the drawbacks of a defined benefit pension?
Despite the attractions of a DB pension, in some ways it is not as flexible as a DC pension pot. You can’t vary the income you take from it, nor draw out larger lump sums (apart from the tax-free lump sum offered by some final salary schemes). Also, this kind of pension cannot be inherited by your beneficiaries. If you die prematurely, there may be a widow’s pension for your spouse, but most of the benefits will be lost, and nothing passes to your children.
If you have a defined benefit (DB) pension, you may be offered the option to transfer it into the more common type of pension (defined contribution).
This is a big decision and an irreversible one, so it’s important to understand exactly what this means, and what the pros and cons for you might be.

What is a Defined Contribution (DC) Pension scheme
In a defined contribution scheme your employee contribution and the contribution paid by your employer are usually fixed as a percentage of salary. The contributions will be invested in a fund in order to provide your retirement benefits. DC schemes do not provide any guarantees, your benefits at retirement will depend on a number of different factors including contribution levels, fund performance, plan charges and the annuity rates available when you retire.
The most important point from this article is make sure you have a pension! It is never too late to start, and any small amount starting you off is better than not starting a pension.
Check out the Pension Authority website for more details. www.pensionsauthority.ie
On a related topic… How to trace a lost or forgotten pension
You could be losing out on tens of thousands – perhaps hundreds of thousands – of euro by forgetting about or failing to track down a pension taken out in your youth. Many Irish people are losing out on pensions taken out in their early career – particularly if they have worked overseas or have moved jobs a number of times. It is well worth chasing up any pension pots from previous jobs.
Some workers are having difficulty finding their retirement plans because they have changed jobs quite frequently or their former employers have changed locations, been bought out by other companies, or have changed their names.
Indeed, like dormant savings accounts, some experts reckon there is a lot of unclaimed money in the pensions system that is simply lost, forgotten about or even that the workers were unaware they had in the first place.
Some employees may need to go as far back as 40 years to trace lost funds.
If you moved between jobs over the years, you may have secured some pension benefits with more than one employer. Currently in Ireland, it is estimated there is approximately €500 million of unclaimed Pension benefits. Is part of this money yours?
For example, let us say you’re a 35-year-old who is changing job and you have built up a pension fund worth €10,000 with the employer you are leaving. This fund could be worth about €29,000 by the time you retire – assuming you retire at 65,.
This could add €90 a month to your pension income in retirement – assuming you buy an annuity. Now you are interested!

How to track down a lost pension 
This all sounds very complicated. Workers switch jobs 11 times on average over their career, according to Government figures. With the advent of auto-enrolment, this means that many of us can expect to end up with 11 pensions by the time we retire.
With the demise of defined benefit schemes – where the size of the pension is based on a person’s salary and length of service – the chances are that this collection will be made up of defined contribution schemes.
It can be particularly hard to trace a pension if you have moved abroad since taking one out, if the employer who provided that pension is no longer around or has gone bust, or if the pension provider itself has changed its name.
Should you hit a brick wall when tracing a pension, contact the Pensions Authority as it keeps a register of company pension schemes.
Another useful way to track a pension is to ask previous colleagues who also worked with the employer. Financial brokers can also help you.
Here is a quick checklist to confirm if you are likely to have a ‘lost’ pension:
• Were you a member of a previous employers Pensions Scheme?
• Did you ever make contributions (through salary deduction) to any of your previous employers’ schemes?
• Do you have any supporting documentation (payslips, pension benefit statements, booklets etc) in relation to the schemes?
• Have you moved address since ceasing to work for that employer?
• Has either your employer or Pension merged with another Company, ceased trading or been liquidated?
Remember, the money in a pension is held in trust. In other words, it is still your money and still there – so don’t give up on it. It could make all the difference between a cash-strapped retirement and a comfortable one.
We have covered this topic in our articles before and are delighted to say we have gotten contacted by readers telling us about their successful ‘windfall’ of finding their own forgotten pension pot.
We hope this article will trigger a few more successes for our Clare Champion readers.
As always, we strongly discourage savers from making the decision alone.
The best thing to do is to get financial advice, as the financial adviser will be able to make sure the pension saver achieves the right outcome.

Carey Corbett Financial Services are experts on personal and commercial insurance, pensions, investments, mortgages, protection and financial planning.
Call Tommy or Donal on 065-689 3540 or email: info@careycorbett.com