Pensions are such an important part of your finances yet many seem to avoid them until later in life. We are all for living for the now which is so important but ignoring your future can be detrimental to your finances.
A pension in its simplest form is saving to replace your income in your retirement. A good pension pot is up to 66% of your working salary. Pensions have many tax benefits. For every €100 you contribute to your pension, it really only costs you €60 from your wallet if you are on the higher rate of tax of 40%. Also, your pension savings grow tax free and when you reach retirement, you can take a tax free lump sum of up to 25% of your fund (capped at €200,000).
While many people are at different stages of life at different ages, we have given a general overview of where you (probably) should be at in each decade of your adult life. Remember, it is never too late or never too early to take control of your pension!
In Your 20s
In your 20s, time is on your side, but you should still start your pension to get ahead of the curve. This is the time that you can take the most risk when investing in your pension! If your employer has a pension scheme, that would be a great start. If they offer to match your contributions, that’s even better! If not, then consider saving into your own personal pension to get you started. Even a small regular payment can get you great results if you start early. That’s 40+ years of saving into your retirement fund which gives you the benefit of compounding. That means that investment returns made stay reinvested over time. The longer you leave your money in, the more returns it should generate, and the larger your pension pot could become.
In Your 30s
If you haven’t been paying into a pension in your 20s, then you better get started as soon as possible. Your 30s can be a strange time. You are probably making more than you were in your 20s but have a lot more expenses. For many, buying a house and maybe saving for your children’s education is the priority over a pension. While this is fair, neglecting your pension can have very negative impacts on your future.
Being uneducated about pensions in your 30s can be very frustrating when you do come around to understanding their importance. We have many clients come to us in their late 40s or 50s saying “I can’t believe I didn’t start this sooner”. Don’t put yourself in that situation as it could literally cost you thousands for every year you put it off. Also, if saving is a priority for you, just know that pensions are the most tax efficient way to save money. As mentioned, for every €60 you contribute from your wallet you can get up to €40 back off the tax man, and if your employer matches your contribution, that €60 can turn into €200!
In Your 40s
If you haven’t started already, now is the time to take action! But don’t worry, it’s not too late. You still have 20 or more years remaining until retirement. You have about the same amount of time in retirement as you have left in work, so you have plenty of time to build up an adequate pension pot.
If you have already started a pension, make sure you review your plan and are getting the most out of it. Make sure you are getting your entitled tax incentives. If you are still putting the same amount into your pension pot as when you started, it’s time to increase your contributions. If you are married, there are ways to ensure you and your partner are maximising income tax relief.
How much you contribute to your pension each month is up to you and depends on your circumstances. In your 40s, 25% of your income would be a good contribution. This may seem like a lot but considering income tax relief, it is a lot more doable than you might think.
In Your 50s
With retirement not so far away, this is the time to get really serious about your pension. You really need to act now! If you have not started a pension by your 50s, don’t panic. You are behind but the pension system is made to help you catch up. You should probably contribute between 30% and 40% of your income to your pension fund in your 50s depending on your circumstances.
If you have a pension already, make sure to review it so you can get the most out of it. If you have a decent pension pot now, maybe consider a more cautious investment strategy to secure your retirement income. Of course, this all depends on your goals. At this point, you should know what you want your retirement to look like.
Make sure you track down all of your pension savings from previous jobs. Every time you switch jobs, there is a chance you have left pension savings behind. If you like, you can fill out our quick questionnaire on my-pension.ie and we can see how we can help you put all the pieces of your retirement picture together.
In Your 60s and above
At this point in your life, you are approaching retirement and probably want a secure income for it. You should consider switching your investment strategy and invest in less risky funds. You can also boost your pension pot by making additional voluntary contributions (AVCs). By the time you are in your 60s, tax relief is available on up to 40% of your net relevant earnings (capped at €115,000 net relevant earnings). Again, make sure you track down all your pension entitlements throughout your working life.
Retirement goals are different for everyone. Some want to retire early, others would love to work until they are 70. If you want to retire early, you simply need enough in your pension pot to do so. If you want to know how much savings are required to hit your pension goal, try out our pension calculator. If you plan on relying on the state pension when you retire, just know that it is not guaranteed to be the current €12,900 per year. There’s not even a guarantee that the state pension will exist when you retire, especially if you are in your 20s or 30s. Also, the state pension retirement age may increase as the years go by. This is why paying into a pension is so important.
For more information, call 025-30588 or book a complimentary chat here. Also, feel free to subscribe to our monthly email newsletter below.