EXPLAINER: Pensions and the price on your future

Time to start looking after your own golden years, because most Irish workers will find out they're barely gilded...

The late, great Joe Strummer was probably right when he romantically proclaimed "the future is unwritten" but if he'd stuck around to look at the state of Ireland's pension pot in 2016, he'd probably have been saying the future is unpaid to boot.

Perhaps the starkest warning that Ireland's pensions crisis isn't just looming, it's here, arrived today, as Aviva Insurance put proper figures on how our pipe dreams of a comfortable retirement are not being followed up with anything resembling adequate planning in practice.

Aviva's Mind The Gap report showed a veritable gulf between the income we'll need post-retirement and what's actually what's in store.

That gap is now the second largest, behind the UK, in the eight European countries Aviva surveyed, and is widening all the time. The cost of bridging it right now for the generation who want to jack in the day job between 2017 and 2057 stands intimidatingly at over €1,000 per month in additional savings.

Looking at the country as a whole, the retirement income we require is close to €28 billion per year. The ultimate cost to cover state liability for public servant pensions and the Social Insurance Fun shortfall? Some €440bn. Big gulp.

Where did it all go wrong?

The Government has most certainly failed to prepare thus far, but the individual can shoulder a bit of the blame for sleepwalking into this situation assuming that the State would take care of things  – less than 50% of employees contribute to their own private pension.

Quite simply, age is catching up with the nation, as it does with most mature democracies.

After hitting a peak in the early 1980s, the birth rate dropped and only began to recover slightly after the millennium.

It hasn't hit those '80s heights again, meaning there's less young people knocking about. Plus, we're all living longer, with 20% of people currently in their thirties expected to live to 100.

According to the Department of Social Protection, the number of people over 65 years of age in Ireland will climb from 570,000 to 855,000 in a decade. It's all making for an ageing population.

Right now, we have five workers for every pensioner and the PRSI being paid is already struggling to cover that one. By 2055, there will be a mere two workers for every pensioner.

This is where the current pay-as-you-go model, where today's employees are looking after today's retirees, falls down.

What can be done?

Aviva wasn't all doom and gloom – it did offer one possible solution. The company recommended the introduction of auto enrolment, where employers have pension contributions directly deducted from their salaries. It's been a tempered success in the UK already, narrowing their gap by some 4%.

Speaking to Newstalk, Aviva Ireland's Gary Marshall also agreed that fees need to be simplified and made more competitive:

"There are all kinds of charges in these products nowadays, we're taking a serious look at simplifying that so people can understand it better and understand what they are facing."

As for those in power, while a Universal Retirement Savings Group is currently working on a review of the crisis, the issue has largely been absent from political discussions. A problem for another day and all that. 

Meanwhile, a National Pensions Reserve Fund had previously stored away the not-inconsiderable sum of €22bn, only to be emptied when the economy collapsed.

The spotlight will be intensified from next year, when the Government is obliged under new EU rules to calculate the total amount they must pay current and future pensioners. 

An unpopular option might be to simply cut the State pension. A 2014 report from the Department of Public Expenditure and Reform found that a €1 reduction in the weekly contributory and non-contributory rates could generate savings of €19.7 million. The department also suggested doing away with the €10 top-up the over-80s get. The political resistance to such moves would be fierce.

Far more likely we'll end up working longer. The qualifying age for the pension climbed to 66 two years ago. That will hit 67 by 2021 and then 68 by 2028, if current plans come to fruition. Will it stop there? The case could be made that if people are living longer on average...

As things stand with the State pension, the top rate is €230.30 a week. To be entitled to this, you will need at least 520 paid contribution weeks, doubling the 260 contributions needed before 2012.

You can assess how you're doing so far by requesting a record of your contributions from the Department of Social Protection here

What you really want to do, if possible, is take your future in your own hands and start saving as soon as possible. Opening a specific pension account brings a number of tax breaks: tax relief on the contribution at your marginal rate of tax, the availability of a tax-free lump sum of up to 25% of the fund to a maximum of €200,000 at retirement age, and tax-free growth in the fund.

If you're starting early (or right on time) in your twenties, you should save 15% of your income. A decade on, that increases to 20%. Those between 40 and 49 should put away 25%.

In your fifties, you should save 30%, rising to 35% in the second half of that decade. Those over 60 need to be contributing 40% of their income, is possible.