PERSONAL FINANCE:The figures look daunting when you count up what you need for a comfortable retirement but it is possible as long as you plan ahead and are willing to embrace a new mindset

INVARIABLY THE biggest worry for people approaching retirement is money. Even for those fortunate enough to have a well-funded pension pot, the prospect of a drop in income is an unsettling one. However it is entirely possible to maintain a decent standard of living in retirement, as long as you plan ahead properly and are willing to embrace a new mindset.

John Higgins, chief executive of the Retirement Planning Council of Ireland (RPC) – a registered charity that runs retirement courses – advises people to use a projected cashflow statement as a key money management tool. The process of setting out your expected income and expenditure in black and white not only allows you to plan your lifestyle, but can also help to alleviate unnecessary fears about the impact of retirement.

According to Ian Mitchell, managing director of Deloitte Pensions & Investments, people are now starting to look at their retirement years in tranches. For instance, they may intend to maintain an active lifestyle from 65 to 70 or even 75, and then ease back as they get older. Achieving this requires even more careful financial planning: although the person’s fixed cost will remain constant throughout their retirement, their lifestyle cost are going to be higher at the beginning of retirement than at the end.

In order to fund this type of segmented retirement plan, it may be necessary to free up cash by tapping into non-pension assets, such as savings or a nest-egg investment. However “breaking open the piggy bank” can require a change of mindset which “an awful lot of people find very hard”, says Higgins. “You’re trained to save for a rainy day.” After relying on a salary and filling the ‘piggy bank’ for their entire working life, people have to make a difficult psychological shift to reverse the process and begin running down their savings and investments.

Mitchell has found that people’s spending habits in retirement are generally dictated by their background.

“If they’ve always been comfortable, well then they spend. If people have struggled in their working life, even if they have surplus pension they probably won’t spend it. When you learn habits over 40 years, they’re hard to get rid of.” In order to overcome this mental barrier, the RPC helps people to understand that although their gross income will drop in retirement, so too will taxes and levies. If you are 65 or over, you still have to pay income tax but much higher exemption limits apply. For instance a married couple (where one spouse is over 65) will be entitled to an old age tax credit of €650 and will not have to pay tax if their annual income is less than €40,000. Furthermore, they will no longer be making pension contributions. “On average a person might be taking home 58 per cent of their gross pay, but in retirement very often this goes up to 80 per cent,” Higgins says.

One issue that sometimes causes confusion is the transitional State pension. Unlike the contributory pension which kicks in at 66 regardless of whether or not you are still working, the transitional payment can be claimed at age 65 (as long as you have made sufficient social insurance contributions) but only if you have retired. However, you can still qualify if you are only employed part-time and earn less than €38 a week, or earn less than €3,174 a year if you are self-employed.

Anyone thinking of continuing to work after 65, perhaps on a consultancy basis, needs to consider whether this will disqualify them from receiving the transitional pension (which lasts one year and then switches to the contributory pension), and plan accordingly.

Another decision to be made is what to do with your matured pension fund once you retire. As the regulations currently stand, individuals in defined contribution (DC) occupational pension schemes have little choice but to buy an annuity, which provides a guaranteed level of income for the person’s lifetime. The main downside of this is that annuities have become increasingly expensive over the past decade as interest rates have fallen and life expectancy has improved.

In the National Pensions Framework, the Government indicated that it will extend access to more flexible options to DC members, but for the moment they are restricted to annuities. The options are greater for the self-employed, proprietary company directors and individuals with PRSAs and Additional Voluntary Contributions (AVCs) as they can purchase an Approved Retirement Fund (ARF) – a personal retirement fund in which you can invest the proceeds of a retirement fund – instead of buying an annuity.

So should you even consider buying an annuity? “If someone has got income coming from non-pensionable assets or indeed a post-retirement occupation then they wouldn’t normally look at purchasing certainty through an annuity. An annuity in pure financial terms doesn’t look like great value,” says Mitchell.

For a “super-cautious” person with no other income, who wants absolute certainty, then an annuity may make sense. “[But] should you spend all your money on an annuity? I would think probably not.” For some individuals the best approach may be to work out their fixed overheads and consider covering that element of their expenditure with an annuity. He notes that in general people are taking quite a cautious approach with their post-retirement income, even if they decide to buy an ARF.

“Providers offering good deposit rates in ARFs are seeing a big take-up,” he says. “Not that many people are plunging back into the markets yet.” Another mental block that the RPC courses help people to overcome is “spending the kids’ inheritance”, Higgins says. There are positive signs that people who have spent decades raising a family are starting to prioritise their own needs once they head into retirement.

“People are looking at life as a great adventure and that requires money. A few people want to leave it for the kids but not as many as you’d think,” Mitchell says.

PENSIONS BY NUMBERS

The Government plans to introduce fundamental pension reform to make costs more sustainable, but according to a survey published last week by Bank of Ireland Life, people don’t understand what may lie ahead.

The survey reported that 71 per cent of employees were unaware of the proposals and just one in five of those with a pension had sought advice since its launch earlier this year.

77per cent of workers were unaware of the proposal to reduce the tax relief on pension savings to a standard rate of 33 per cent

29per cent knew of the proposal to increase the State pension age

75per cent of employees questioned said they could not survive on the State pension alone which currently amounts to €230 per week

51per cent of people worry about their retirement

83per cent expressed concern that they wouldn't have sufficient savings or income to live on

32per cent said they might be bored due to lack of hobbies or interests

21per cent said that they would like to retire on or before 55 years of age, while a further 43 per cent chose an ideal retirement age of between 56 and 60

90per cent of workers said they wanted to retire before the age of 68