When it comes to financial tasks that we put off dealing with, pensions tend to top the list. It’s easy to prioritise day-to-day spending when juggling multiple commitments and much harder to put money aside for the distant future. But inaction now could have a serious impact on future quality of life, writes Gráinne McGuinness.
If you aspire to enjoy your retirement you need to make a financial plan for that future. An aging population and increasing life expectancy means that the state pension is expected to come under growing pressure. The current maximum state pension is €233.30; payable to those over 66 — but many expect to see the amount fall in real terms in the coming decades while the qualifying age rises.
Minister for Social Protection, Leo Varadkar admitted as much recently when calling for pension reform: “The current situation where a majority of our citizens will rely solely on the State pension in retirement is unsustainable.”
So whatever plans you have for your golden years, accept that you will have to save for them yourself.
Work-related expenses will disappear when you retire and hopefully mortgage and other major debts will be repaid. But other areas, such as healthcare, will cost more. Pension planners say to aim for between half and two thirds of your final salary in retirement. The state pension of €233.30 works out at a little over €12,000pa, so that gives you an idea of the gap you need to fill with your own retirement savings.
When it comes to pensions, starting early reaps enormous benefits. All money saved is not equal for the simple reason that money you add to your pension in your 20s and 30s has decades longer to accumulate interest than funds you add to the pot later in your working life. Every year that you delay means more needed later, with costs roughly doubling every 10 years that you don’t have a pension. The Pensions Authority has a calculator to help estimate the contributions you should be paying to provide your desired pension, based on your current age and salary level, at www.pensionsauthority.ie.
Pension advisers recommend starting a pension early in your working life. Most employers provide pension plans; if they do join it. Many will pay a percentage of your income into the fund for you, while expecting you to match the contribution from your pay. This way, the money is deducted before it ever reaches your bank account. If you do not have access to a company plan you can set up your own once you are working. Go to a broker to discuss your options or your bank will can also give you advice.
The Government are keen for people to save for their own retirement through tax breaks. These are higher later in life, but even in your 20s and 30s you should ensure you are saving up to the tax-free limit if at all possible.
As you enter your peak earning years need to keep a close eye on your pension. If you are still contributing the same amount into your pension as you did when you started, it may be time for a review. Your pension should be checked and adjustments made on a regular basis to ensure you are taking full advantages of the pension tax breaks available. Between 40 and 49, you are entitled to tax relief up to 25% of gross pay.
Increasing your payments in line with your salary also ensures the gap between your current lifestyle and that in old age doesn’t widen.
The tax relief available for pension contributions rise to 30% when aged between 50 and 54, and 35% from aged 55 to 59. In addition to the financial input, you should also review the security of your plan. When you are younger it makes sense to make slightly riskier investments, to maximise growth. But closer to your retirement sit down with your adviser and ensure your money is being placed in more secure funds.
The value may increase at a lower rate as a result but it avoids a serious shock, such as the recent Brexit vote and the resulting market instability, seriously impacting your pension pot.
DEAL OF THE WEEK
Comparison site Bonkers.ie has launched an insurance comparison service to make it easy to compare and switch mortgage protection insurance.
Largely because of fear of the hassle of switching, 48% of households have never shopped for this product.
“All 740,000 mortgage holders in Ireland need mortgage protection insurance, but most buy it directly from their lender without shopping around, putting them at risk of overpaying,” Bonkers.ie managing director David Kerr said.
He estimates the average non-smoking household can save €190 annually by switching, with savings up to €379 for households with smokers.
There may be extra savings for men too. Under new EU rules, insurers can no longer quote based on gender, meaning men with older policies could make additional savings.
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