We talked last week with a financial controller of a company that employs over 500 people and whilst every employee has been given the opportunity of saving money into a PRSA (personal retirement savings account) less than 30 people are actually making contributions into their retirement funding account.

I asked myself what are the rest of those employees going to live on, when they have to, or want to stop working.

Do they think that the state pension will be sufficient to sustain them if they live for another 20 or 30 years after retirement? Will there even be a be a state pension at that time now that Ireland’s pension reserve fund has been raided to fund our bail out. Already the age for the state pension has gone from 65 to 68.

Ireland’s successive governments have totally failed to come up with a solution to one of the basic of public issues, that of people living longer than before. Michael Noonan our current Minister for Finance not only did nothing to encourage people to have a retirement fund, instead he imposed a levy of .75% pa on the value of the pension funds of those prudent people who had started to put some money away for their old age. As I said on a previous blog. Bizarre. Thankfully he has promised an end to that awful levy.

The last 5 years have been the most difficult financial years that most people can ever remember and for many the battle has just been to survive financially rather than save for the future.

However now that Ireland is slowly but surely getting off its knees it is time for a united effort to get people to start putting what they can away every month for their future financial wellbeing. Just so that they will have some kind of a fund of money to give them a monthly income when they reach retiring age.

Many things can be done and for a start let’s make a suggestion to the Minister for Finance to do something positive this time around. It is difficult to get young people to start saving for later on. Retiring age is so far away. Most young people will in all probability never start a pension savings plan unless it is done for them.

Suggestion no 1

For everyone in employment it should be made compulsory for both employers and employees to start saving into a minimum retirement savings plan. I would suggest that this should start perhaps September 2015. To kick this plan off so that it should not be too onerous on either the employer or the employee so I would suggest that both contribute 1% of the employee’s gross salary each month so that the initial contribution would be a total of 2% pa of the gross wage of each employee.

It can be agreed that over the next 5 years as hopefully the economy picks up, that the levels of contribution should increase gradually to perhaps 5% from the employer and 5% from each employee so that a worthwhile contribution is eventually being made. Naturally if the employees or indeed the employer wish to contribute higher levels then this should be allowed and indeed encouraged. This might certainly be of interest to the older employees.

As there are almost two million people employed in Ireland and if we assume that 50% of them have retirement plans in place we have in one fell swoop helped to create retirement plans for all of the others. Not a bad day’s work!

Suggestion no 2

Some people have been known to say that the reason they will not start a retirement plan is that there are too many costs and charges. In the past they would have been right but not any more I think.

My suggestion here is that we do something a little radical and we have a very simple charging structure let’s say a total annual management charge of 1.2% p.a. which would be split 50/50 between the fund manager who manages the money and the financial advisor who takes the responsibility for giving the investment advice and sets up the retirement fund in line with the employees individual attitude to risk.

The retirement funds will be in the names and under the ownership of the employee and the normal rules about not being able to access those funds until retirement age should still apply unless the employee has health issues in the meantime.

Eamon has said on his recent City Life blog that people should almost start their retirement funding before they graduate from college. “They will feel foolish at the time but like a genius when they come to retirement age!”

I started a retirement plan recently for an 18 year old professional sportsman. As a professional sportsman he is allowed take his benefits at age 50 that’s 32 years’ time. He started his pension saving at just €100 pm and if he does nothing more and it grows by just over 5% pa he will have a retirement fund of almost €100,000 when he reaches 50.  If he delayed starting until he was 40 rather than now, he would have to invest over €600 per month for the 10 years to have the same end result. The magic of compound interest and long term planning!

If you are in the business of giving financial advice then how about a New Year’s resolution. Talk to as many people as you can about starting a retirement savings plan in 2015. They mightn’t thank you in 2015 but they will be very grateful to you when they retire.

Ted Dwyer Family Business

December 2014

Ted Dwyer is the Founding Director of City Life Wealth Advisors a family business in Cork