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  • AM Financial

My pension gone in a puff of smoke!

Updated: Jun 30, 2021


Well, no, not really. In spite of everything that we will write here, the boring truth is that your pension will remain the best investment decision you will make in your life. Taking money that the taxman would otherwise charge on your income, investing this in your own fund instead, earning tax-free returns on this money and having the right to a tax-free lump sum at retirement. Do it !

Ok, but gone ?

In fact, pensions are recognised as such a wise investment and because they reduce the burden on the state, there is a trend internationally for governments to automatically enroll people into pension plans. Ireland is looking at this too !

Ok, but GONE ?

And the idea behind the pension of course is that you save some of your salary - including the tax portion that the taxman would otherwise have taken. You save some every month. It gets invested according to your risk profile. Large portions are invested in the international equity markets. And my word, the markets have been soaring. A slight blip as Covid reared its head but soaring again now. And this is good for your pension fund. It's growing bigger and bigger and the gains are not taxed.

And then at your retirement, you have the right to a tax-free lump sum. You also have the option to use some of your fund to buy an income until the day you die. But this is the point at which things have moved against us a little.


The majority of us unfortunately live in a defined contribution pension world. In times past and most prevalently in public sector roles, defined pension benefit pensions told us we could retire earning a certain percentage of our final salary until our death. But for the most of us, we build our pension fund (and this part is going very well), but there remains uncertainty as to how much benefits we will get at retirement. In fact, nobody really knows exactly. And so that's why people (actuaries) need to make assumptions.

Every year you get your "SORP" (Statement of Reasonable Projection). This is a projection of how much your pension fund will bring you in retirement income. And of course projections require assumptions. And these assumptions have just changed against us and reduced the retirement incomes we might have expected.

Right, so where has the money gone?

Perhaps, for example, last year your SORP was telling you to expect something like €30,000 per annum after your retirement. But your most recent SORP has told you - despite a positive fund return over the year - to expect something like €25,000 per annum. But although it feels like you have been raided, this is not really the case. In fact, what has happened is that assumptions made in the past about how your savings translate into retirement income have been deemed overly optimistic.

Why have these assumptions changed now?

The world has changed - particularly since the financial crisis of 2007/2008. The aftermath of this brought in low interest rates to stimulate recovery. It was natural to assume these rates would rise once recovery was evident. However, nearly 15 years later and following the Covid pandemic, interest rates remain as low as ever.

Actuaries don't like to make knee-jerk changes but it is now impossible to ignore the low interest-rate world we live in. This has a knock-on effect to many assumptions made in our pension plans. It means the assumed return on bonds is reduced (from 2.5% to 1%) and the assumed return on cash is reduced (from 1% to zero). It also impacts on the income our fund can buy at our retirement date (annuity rates).

But that is not all ! The assumed equity return is lower. And so is the assumed rate of our earnings growth - we are projected to earn less in the future and hence contribute less to our pension funds and hence have lower outcomes. And so on...

This is not good?

Nobody likes seeing lower numbers for our pension in retirement. It can come as a shock. But the reality is that nobody can predict how much our pension fund will buy us in retirement. Although these changes seem sudden, they are merely aligning more with reality.

With some large spikes in inflation, our low interest world may be gone. Bond rates and annuity rates will rise again. Also, we do not have to buy an annuity at retirement. We can invest our money in an ARF and shelter for a while from the low interest rate environment.

But overall, the message is to stay the course. A family who have found the family home that they are happy to spend their lives in will be interested in how property prices are changing but not overly affected. A long-term investor in the financial markets will similarly be able to look beyond price swings and not make any knee-jerk decisions when things move against them. And with pensions, the overall set-up is so positive. We need to try to understand changes like this certainly but we need to stay the course !

Come and speak to AM Financial for advice on your pension arrangements - or if you want more detail on any of the pension assumption changes and how they may affect you.

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