It’s rarely too late to start a pension – but you’ll get the full tax benefits and be free to drive off into the sunset the earlier you start, says Independent.ie Personal Finance Editor Charlie Weston
Just how long will you be in work before you get to retire? The answer is that it could be a very long time.
Many people are attracted to the idea of dispensing with the need to have to get up early every working day, commuting to work on cramped public transport or congested roads, and meeting never-ending deadlines.
Having a clear date to hang up your hat is the dream that gets them to the end of each week.
The key issue is being financially stable enough to leave the world of work behind.
Having a decent pension plan in place is the main determinant of when you can retire.
The State retirement age – when you receive the State contributory pension – has risen to 68.
And many people will end up working into their 70s if they do not put a private pension plan in place.
Sure, the State pension will be enough to allow you to live on in retirement, you might tell yourself. But it is designed only to be sufficient to keep you out of poverty. Could you live on €248.30 a week now?
Even without a mortgage and other debt that you may hope to have cleared by the time you retire, €248.30 will not get you very far.
And it is likely that more and more people will be renting at retirement age.
Many people avoid thinking about pensions for much of their working lives.
Others have been banking on an inheritance from their parents.
But the large numbers of elderly people who need residential care means that the likes of the Fair Deal scheme is eroding that inheritance.
Recent research, commissioned by Irish Life, has found that 90pc of workers are off track with their pension savings.
And that only applies to those who have a private or an occupational pension.
The earlier you start the better as compound interest will ensure you get more bang for your buck.
Most people leave it too late. The average person in this country starts saving for retirement from the age of 37. That is just too late, according to pension advisers.
As a rule of thumb, advisers say people should aim to target a pension equivalent to a third of their salary when they retire.
The old rule was to aim for half of final salary, but low interest rates and the fact people are living longer are among the reasons this target has become difficult to attain.
The other issue is that the later you leave it to start saving into a pension, the more expensive it becomes. Every ten years you delay starting a pension leads to a doubling in the cost of building up a retirement pot.
So when is a good time to start a pension, and what should you be doing about your pension at various ages?
Pension planning in your 20s
Starting a pension is probably the last thing on your mind. Getting a job, or settling into one just landed, the damage we are doing to the planet and worrying if you will ever be able to afford your own home, are all higher priorities. Of course, it is sensible that other priorities take precedence, like paying down any debts from your student days, and trying to save for a deposit to buy a property.
Just meeting rental payments can leave little or no leeway for saving for the likes of a pension.
Founder of the Askaboutmoney.com website Brendan Burgess says that if you are in your 20s or 30s, it might be better to postpone making pension contributions and save for the deposit on a house or reduce your mortgage.
He points out that those in their 20s cannot access their money until they retire. He adds that they might need the money sooner to get on the housing ladder or to cut their debt.
“If you are paying tax at 20pc, then you will get only 20pc tax relief on your pension contributions. You might be better off waiting until you are earning enough to get tax relief at 40pc.”
Pension adviser David Boylan, a pension technical specialist at Davy, agrees that when people are in their 20s they are just out of college and are on small salaries.
“They mainly want to live in the city for the social scene and thus face high rents. Socialising will take up much of their disposable cash.”
The exception is if there is a company pension scheme that your employer is contributing to, Burgess adds.
An employer will pay money into a retirement plan on your behalf. So if you contribute 5pc, the company will pay in 5pc of your salary to the scheme.
This is free money and it would be foolish to miss out on it.
Some in their 20s will be banking on the State’s planned auto-enrolment scheme to provide for them in retirement.
Under the plan, all employees over certain income limits will be automatically enrolled into a pension scheme.
They will receive contributions from employees, as well as both employers and the Government. However, its introduction in the Republic has been subject to delays, with fears that the latest target launch date of 2022 will be missed.
Pension planning in your 30s
People in their 30s find themselves squeezed financially. They are likely to be getting married, starting a family and buying, or renting, a family home.
The cost of accommodation, the extortionate cost of childcare, and even the cost of a wedding will leave little for pension provision.
David Boylan of Davy says: “As people get older they look at potentially buying a house and require a hefty deposit to do so and this means their main focus here is to tighten their belts and save any extra cash after they pay their rent.”
But the good news is that you still have plenty of time to grow a significant pension pot through your employer’s pension, should they offer one, or to set up your own.
And if you can find the money to fund a pension in your 20s or 30s you will get incredible bang for your buck. This is due to something called compound interest.
Albert Einstein allegedly described compound interest as the greatest invention of all time.
Basically, the longer you invest money for, and if the gains are reinvested, then the larger your pension pot will be when you retire.
Boylan gives a basic example. If you contribute €100 per month from age 25 to 65, and assuming you receive a 5pc return per annum, then at 65 you will have a fund of around €153,000.
However, if you wait until you are 35, it will cost you €183 every month to accumulate the same-sized fund.
Time and compound interest mean the earlier you start paying into a pension, even if it is a small monthly amount, the more money you accumulate. Sinead McEvoy, who is pensions technical manager at Standard Life, advises people in their 30s to use what she calls the “pay trick”.
This is simply increasing your pension contribution commensurately with each pay rise.
“Most people will be unable to contribute enough at the beginning, so start with whatever you can and increase it proportionately,” she says.
One thing to note is that you need a financial buffer for emergencies in your 30s.
Pension planning in your 40s
People in their 40s will probably have raided the bank of Mum and Dad to get themselves on the housing ladder. Their careers are settling down, with children in school. There will still be lots of calls on their cash.
But inertia may be an enemy when it comes to taking the pensions challenge.
Boylan cautions against letting pension savings slip down the agenda.
“People are living longer with life expectancy now into the 80s. This means that people will need more money in their retirement,” the Davy expert says.
He says people are working longer. This is reflected in the fact that the State pension age, or the age when you get the State contributory pension, is rising. In 2014, it was 66. People retiring from 2021 will have to be 67 to get it, and it rises to 68 from 2028 on.
The State is coming under more pressure paying for State pensions as our population demographic gets older, he says, and private pensions will be the key for our retirement.
The money we put away into our pension will have to do us for longer, he adds.
Pension planning in your 50s
This is the age when saving for retirement gets serious. If you are working and paying income tax, and if your employer is contributing to the pension scheme, it is generally a no-brainer to contribute what you can to the scheme. For example, if you’re 55, you have 13 years until your State pension starts. You could even keep working and contribute up to age 75 if you’re still paying income tax.
Most people don’t realise that, as you get older, Revenue allows you to pension-save a higher proportion of your salary.
This can make a big difference to the final value of your pension pot.
If you are aged 50 to 54, you can save up to 30pc of your salary tax efficiently within Revenue rules, up to 40pc when you are aged 60 and over.
Pension contributions grow tax-free, Boylan of Davy points out. Unlike personal investment, any gains your pension investments make are not subject to tax, which again increases their growth value significantly.
Pension planning in your 60s
These days few people are lucky enough to get to retire in their early 60s.
This means most of us will continue working, in some capacity, well into our late 60s.
There was a time when well-funded defined benefit (final salary) schemes meant people had the option to retire early.
That is becoming increasingly hard to do.
But not everyone has given up on the dream of leaving work early.
The Fire (Financial Independence, Retire Early) doctrine encourages people towards a mixture of extreme saving, frugal living and smart investment that will allow them to stop working and put their feet up decades before their peers.
The aim is to retire well before your late 60s.
And advocates of Fire claim you do not need a six-figure salary to get there.
However, many will find the Fire dream unobtainable, especially if you have reached your 60s and have yet to contribute much, or even anything, to your pension.
John O’Hara of Davy says engaging with a tax or financial planning expert can help identify the potential benefits of making additional pension contributions in advance of retirement.
“It is often in the years close to retirement that people have most scope for making significant pension contributions, which can be a time when employees have more discretionary income if they are no longer repaying mortgage debt or covering children’s education costs.”
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