In Cyprus, the dependence of pensioners on the state pension is particularly high. It is estimated that 40%-50% of Cyprus' workforce is likely to rely solely on state pension. But, is the state pension enough to ensure a comfortable retirement?
The welfare state is the institutional framework through which the state protects and promotes the economic and social well-being of its citizens. Pensioners around the world rely heavily on this, as they depend on the state to provide them with retirement income through the state pension.
Is the state pension enough?
The state pension is designed to secure a minimum income to cover the most basic needs during retirement; it is not designed to provide pensioners with enough income to maintain their pre-retirement standard of living. Recent studies have estimated that in order to ensure a comfortable standard of living during retirement, a pension income of 70%-80% of last salary is needed. In Cyprus, the state pension income is expected to reach 45%-55% of the last salary for low-paid workers, whereas for high-paid workers this drops significantly to less than 20% of the last salary.
The three pillars of retirement planning
In order to ensure financial security in retirement, state pension income should be supplemented with income from contributions to occupational pension schemes and personal retirement savings. This is known as the Three-Pillar Approach to retirement planning.
Pillar 1 - State Pension
Τhe state pension is considered as the basic pillar, as it can only provide with enough income to cover the most basic needs during retirement.
Pillar 2 - Occupational Pension Scheme
The second pillar refers to registered pension plans offered by companies to their employees. An occupational pension scheme is a great cost-efficient tool to supplement the retirement income, even if the employer is not contributing, as the contributions paid in such schemes enjoy considerable tax relief. Unfortunately, less than 50% of employees in Cyprus participate in such schemes.
Pillar 3 - Private Retirement Savings
The third pillar relates to voluntary privately-funded savings that individuals set up and contribute towards on their own, for their retirement. This pillar aims to close the pension gap between desired and actual income in retirement as despite the optimal use of the first and second pillars, the income from them alone may not account for the target of 70%-80% of the last salary. This pillar is, therefore, even more important for people who don’t have access to any occupational pension schemes or people whose employer is not contributing at all, or is contributing very little to such schemes.
Saving for retirement is one of the biggest concerns of our working years, but it often gets postponed due to other financial commitments we face earlier in life. However, the sooner you start planning for retirement and the better use you make of the Three Pillars, the higher are the chances of achieving the income you will need for a comfortable retirement.