The State pension in the Republic of Ireland is just over €12,000 p.a. and is paid from age 66, increasing to 67 in 2021 and 68 in 2028. There is no commitment to link the State pension to inflation. In fact, the State pension was frozen for a number of years and was only increased for the first time in seven years this year. Ireland’s population is projected to age significantly over the coming decades but such projections are prone to error because migration patterns can change considerably over time. The projection of a more aged society leads to a concern about the long-term sustainability of the State pension with some predicting that an element of means testing will need to be introduced.
About half of Irish employees are accruing pensions separate to the State retirement pension. The forms of accrual include public sector employee pensions, defined benefit schemes, defined contribution schemes and contract-based pensions akin to UK stakeholder pensions.
Traditionally, public sector pensions worked on a final salary basis with a lump sum of 1½ times salary and a pension of half salary after a full career. New public sector employees are provided with a career average pension, with each year’s accrual being adjusted for inflation between the year of accrual and retirement.
Unlike the United Kingdom, members of private sector defined benefit schemes are not protected by law and many pension schemes have been wound up or amended with members receiving benefits significantly less than promised. The level of member protection depends on the wording of the scheme rules. Strongly worded rules can adequately protect members while weakly worded rules will not.
Even strongly worded rules can provide challenging situations as the enforceability of the promise depends on the resources available in the company. Multinationals, that can reduce the resources of the local company, can put pressure on trustees to accept a compromise below the full value of scheme benefits.
The number of defined benefit schemes is in steady decline and the benefits of those that remain have in many cases been amended (reduced).
The vast majority of defined contribution members are contributing at levels that will not allow them to retire comfortably at an age of their choice. Some will be able to increase funding later in their careers but many will need to work longer than they would like. For those able to contribute higher amounts, there are limits on annual contributions and an overall fund limit of €2m (the Standard Fund Threshold), above which tax is applied at 41% on any excess.
Those retiring from defined contribution schemes do not now have to purchase an annuity. After taking a tax-free lump sum, they can re-invest the balance of their funds and draw down an income within specified bands.
Ireland will most likely adopt an auto-enrolment system in the coming years, with contributions increasing over time. The timing of such a move is uncertain and is considered politically difficult. Despite the difficulties, increased individual retirement funding and an increase in the number of contributors does make sense for the State in the long-term as it will reduce reliance on the State pension, which as noted above may not be sustainable in its present form.
The above is a summary only. Detailed rules apply in practice. Action should not be taken on the basis of this summary and specific advice should always be sought. John O’Connell is a Director of Trident Consulting, which represents the GAPS international network of pension experts in Ireland. Quantum Advisory represents the GAPS network in the UK. Queries regarding pensions in Ireland can be directed through your normal Quantum Advisory contact or to John directly at +353 1 485 3887 / firstname.lastname@example.org