The notion of retirement might seem abstract and distant when you’re in your 30s. The concept of financial stability in your late 60s might feel like a problem for future you. However, beginning to plan and save for your pension during this decade of your life is a decision that you’ll appreciate in time.
A common question is, how much will someone require during retirement? Answering this query isn’t always straightforward, but any estimated figure encourages a dose of realism.
By 2046, it’s projected that the lifespan of Irish men will be 85, and for women, it will increase to 89. Consequently, if you opt for retirement at the given State retirement age of 66, you’ll spend about two decades without any income from employment.
Several financial obligations might still be present in your life post-age 66. Housing expenditures such as property taxes, rent or mortgage payments, or household insurance payments are probable. Utility expenses will still be a factor, as well as the cost of food. The latter might fluctuate depending on the size of your household or if grandchildren regularly visit. Moreover, personal expenses like clothes, shoes, and grooming might also be persistent. There could also be a car for transportation. Considering health conditions are more likely to occur at this stage, health insurance premiums might become more frequent and costly. Social activities, hobbies, vacations, charity donations or the upkeep of a pet could also be part of your spending. Therefore, it appears that your monetary outflow during retirement might be comparable to the current times, though the €1,200 State pension per month might be insufficient to cover those.
Mark Reilly from Royal London Ireland suggests that it’s beneficial to have an anticipated retirement income to decide the regular pension contributions required to reach that goal.
As per the calculations by the Pensions Authority, if you start saving for retirement at the age of 30 with an annual income of €40,000, you should contribute a minimum of 18% of your gross salary to your pension fund every year until the age of 66. This will enable you to have a monthly income of €2,000 (current value), along with the State pension. Users can calculate their retirement goals using the Pensions Authority’s online calculator.
A recent report by consumer site Which? confirmed that to enjoy a “comfortable” lifestyle in retirement, including holidays, hobbies, and occasional treats but excluding luxury purchases like long-haul trips, health club subscriptions, lavish meals or a new vehicle, UK retirees require an equivalent to €22,600 per annum, in addition to the UK state pension of €13,680. This estimate jumps to €30,900 for couples.
For single retirees in Ireland, this equates to a yearly retirement income of approximately €37,000, inclusive of the state pension, or roughly €3,100 monthly. Achieving this level of comfort, with current annuity rates at around 5.5%, demands a savings pool to the tune of €411,000, a sum in addition to the State pension.
Kristen Foran, the national sales director at Zurich Life, advises starting the savings process early. Emphasising the role of time over the investment amount, she suggests that even modest contributions in one’s 20s could yield a larger pension amount, as opposed to those who begin hefty investments in their 40s.
The principle of “compounding” illustrates this point. If money is invested in a fund that delivers a 6% return, next year interest will be earned on the original investment sum as well as the 6% return. Over time, investments can escalate rapidly due to this effect.
The current state pension maximum is approximately €14,420 annually. However, many anticipate needing an additional €10,000 per annum upon retirement. For a 30-year-old aspirant, this would require monthly savings of around €466. If this investment only started at an age of 40, the necessary monthly contribution would escalate to €737. Start early and save frequently, Foran advises.
Free money from the government and employers is rare, however, a pension scheme is the exception. If individuals in their 30s don’t contribute to a pension scheme, they risk missing out on up to a decade’s worth of free money.
As Foran explained, for those in the higher tax bracket, a €100 contribution to their pension plan, incorporating the tax relief, will only cost €60. The perception is that pension contributions can be expensive, often quoted as €466 and €737 monthly. Still, with the tax relief included, these amounts become more affordable.
Furthermore, if the option to join a pension scheme presents itself through an employer, seize it. It is, after all, free money. A workplace pension may require staff to contribute 6% of their gross income which the employer would then complement by adding 10% from their pocket. This system results in a 16% pension contribution, costing the employee only 6%, or even less when considering tax relief.
The beauty of such schemes, Foran highlights, is that it is mostly stress-free; tax relief is received directly and there’s no need to engage with tax authorities as it is handled automatically. There are annual limits for pension contributions that qualify for tax relief yet, according to Mark Reilly, few individuals reach this ceiling. In your 30s, for instance, relief can be sought on up to 20% of your income.
For part-time staff, access to pensions should match that of their full-time counterparts, unless working less than 20% of their hours, asserts Reilly. Pension contributions are similar but are proportionate to the part-time employee’s income.
And for those who are self-employed or have employers that do not provide a pension scheme, a financial broker could provide advice on an appropriate pension scheme and tax relief acquisition, albeit with a prior discussion on fees.
Those in their late twenties or early thirties ought to consider investing a minimum of 70% into a diverse array of international stocks or equities within their investment funds. Being overly conservative in choosing your invest fund could diminish your pension value in the end.
Additionally, for those not presently contributing to a workplace pension plan, there is a new pension saving system termed automatic enrolment, designed for workers, which is set to roll out next year. Initiation rates will begin at 1.5 per cent from both the employer and the employee, with the government contributing an extra 0.5 per cent.
“Given the exceedingly low rates, they don’t usually compare favourably with existing bosses’ pension schemes, which could offer 8 per cent,” Foran remarks. Plus, the lure of government contributions is less enticing than the current schemes offering tax relief for top-rate tax payers.
Considering a job switch in your thirties? Always join the pension scheme if it’s available.
“If you reach retirement age and have multiple pots of money scattered about – that’s acceptable. They won’t vanish,” says Foran. Simply keep your pension provider updated with your recent contact details.
If you have lost track of your pensions, reach out to your past employer or the Pensions authority, suggests Mark Reilly, of Royal London Ireland.
Can I halt contributions and pick them up later?
For the aforementioned reasons, it is generally advisable to maintain your pension, but if need be, contributions can be diminished, halted or withdrawn completely.
In most cases, if you participate in an work pension scheme and your wage continues throughout maternal leave, the pension contributions should carry on as usual. With extended maternity or parental leave, an employer is not required to make contributions.
Temporarily stopping contributions will have an effect on your eventual pension pot. However, if funds are low and it’s generating stress, it could be a viable option.
Parents on parental leave can manage the drop in their impending pension pot by continuing to contribute, should they can afford it, recommends Reilly. “The repercussion of ceasing contributions into a business pension plan can be meaningful later on,” he states. Even a lower value contribution should be contemplated if feasible.
People re-entering the workforce after a pause are advised to resume and intensify their contributions through the Additional Voluntary Contribution (AVC) option if their financial position allows, suggests an expert. To meet the requirements for a full State pension, one must have completed 40 years of PRSI contributions, equivalent to 2,080 weekly PRSI payments, as per Government calculations. Credits continue to build during maternity leave, but if extended time off is taken for child care, it’s necessary to request reinstatement of these credits, Foran mentions.
A break of up to 20 years from the workforce to take care of children is considered in State pension calculations, however one must apply to the Home Caring periods scheme, Reilly advises.
Pension Deficit
Women must be particularly active regarding their pension planning. Pay differences and time away from employment due to care duties have negative effects on their retirement savings.
Irish Life studies revealed that the commencement age for pension savings and the proportion of salary contribution is approximately equal for both genders. However, a noticeable 36% gap exists between the pension funds of working male and female individuals, as per Irish Life. To attain an equivalent retirement pension, women would need to work an additional eight years, the research revealed.
Women also have longer life spans, which means they have more retirement years to finance.
One possible solution suggested by Irish Life is enhancing employer contributions for women resuming work after maternity leave. Equal provision of paid parental leave could also establish parity. However, until policies from the Government and employers tackle this unfairness, women must make every effort to bridge this gap.