This working life: Time out of work means money out of your pension
Job sharing, unpaid parental leave and reduced hours may be attractive ways to improve work-life balance, but they must be considered when planning for retirement.
“You can’t get the time back.”
This is what I say to my clients, and indeed my friends, when they are considering reducing their hours of work when they have children. Since the start of the pandemic, we have seen our clients prioritise what’s important to them in terms of work-life balance. They want the option of working from home and not sitting in traffic feeling stressed.
Employers are offering more and more flexibility to their employees in the form of job-share, reduced working week, unpaid parental leave and indeed, term-time. If you can financially afford to do this, it can be a benefit well worth taking advantage of.
However, there is a catch if you don’t allow for this when planning for retirement. Any time you take off while working impacts your service. For example, if you are working a four-day week for five years, you will lose one year of service. Work half-time for ten years? That ten years’ service is now reduced to five, and that will reduce your pension unless you take action.
According to the National Women’s Council, even though over 50 per cent of women are now active in the labour force, they are far less likely to have pensions than men – and the pensions they do have are likely to be lower in value.
A trend our financial planners have noticed lately is more and more fathers availing of flexible working conditions, which is very encouraging. But what should working parents/potential job-sharers do if they have a feeling their reduced working hours are going to have an impact on their pension? Here are some tips.
Plan before you have a family – The earlier you take action around your pension, the better. For every four years you delay paying into a pension, it will double the cost of building up your target fund.
When I meet young professional clients in their 20s I often advise them to start building up an extra pension in advance of buying a house, getting a mortgage and indeed having their family.
You can really break the back of what you will need to bridge any future gaps when you have relatively few commitments and outgoings. When you have lots of financial commitments in your 30s like mortgages and childcare, paying extra money for a pension might not always be an option.
Clients are often amazed that they have managed to build up an extra €30,000 in a relatively pain-free fashion during their 20s. This can give them plenty of flexibility and options when it comes to reducing hours in the future.
Make an additional voluntary contribution (AVC) – To compensate for years missed towards your pension, you can opt to pay more into an AVC scheme at any stage in your career, provided you already have an occupational pension scheme with your employer.
The great thing is that the government helps pay for it. If you are in the high rate of tax, putting €100 into your pension will cost you only €60 and the tax man picks up the rest of the bill. AVCs are flexible, so you can pay as much or as little as you want within limits, and you can take breaks if you need to.
The devil is in the detail – Be sure your financial planner does a risk questionnaire with you and puts you in a pension fund that suits your appetite for risk.
All pensions vehicles have charges. Insist that your planner explain them to you in a clear and transparent fashion, and that you are comfortable with them.
While the tax relief is very favourable at present, it may not always be the case. So make hay while the sun shines and don’t lose out on your year-on-year entitlements.
Pensions don’t die with you. And while we always hope you enjoy a long and healthy retirement, if – god forbid – you don’t make it, your pot is transferred to your estate.
Review your plan – We love to see our clients thinking about their goals for the future, and putting plans in place to achieve these. However, you need to review these plans, as things can and will change. We recommend a review every 12 to 18 months for those under 50.
Once you are on the home stretch towards retirement, review at least every 12 months. As you get older and your salary increases, you can pay more in as per Revenue rules. You will also need to see where your money is invested, as most clients like their plan to de-risk as they approach retirement age.
They key message is to sit down with a financial planner with all the above in mind and see firstly if you need to do anything for your retirement – and if so, what your options are.
Claire Hanrahan is CEO of Irish Pensions & Finance, ipf.ie
Featured in the Sunday Business Post 27/11/2022