Brianna Parkins: Are you delaying funding your pension? Here's why that is likely to be a bad idea
So, despite the uncomfortable financial environment many of us find ourselves in, now is actually the best time to start thinking about the future and what kind of retirement we want to have.Pensions may not be as much fun to save for as a holiday but, as Daragh Cassidy from comparison site“At the start people get very confused about taxation and pensions. It absolutely bores people to death,” he says.
“But if you put €140 in your pension, you will actually still be left with that €2,900. The extra €40 that you were able to put in the pension comes from tax relief.” This works in two ways when it comes to pensions. The first is compound interest. Any growth your invested pension fund generates is rolled over year into year, snowballing into a larger amount.As Ciaran Hughes, a financial planner and ethical pension specialist at Ethico, explains: “Compound interest and time can supercharge your savings. One thousand euros invested the day before you retire will just be €1,000 on retirement.
As a benchmark for under-30s, Hughes sets a contribution level of about 8 per cent if you start your pension at 25. For a career in which earnings average €50,000 and you are looking for a pension of €30,000 a year including the State pension with 6 per cent investment returns and a 1 per cent charge, the number increases dramatically with age according to his calculations.
As a general rule when figuring out how much money you might need to live off when you retire, you should aim for two-thirds of your final income, according to Cassidy. That can go down to half in some circumstances. Subtract the State pension currently at €13,172 and that’s what you’ll have to generate every year from your pension to live off.
Unlike other countries, employers in Ireland are not legally bound to contribute to your pension though that is set to change with a new mandatory enrolment scheme scheduled to be rolled out in 2024. Auto-enrolment will see anyone earning more than €20,000 a year and aged 23-60 who isn’t already in a pension enrolled in one. Employers will have to match employee contributions up to a certain cap with the State kicking in a bit on top in lieu of tax relief.
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