Just as it’s never too early to start your pension – it is never too late to start. In an ideal world, people would begin their plans for a financially secure retirement as soon as they start to work.

The new retirement saving scheme – Auto Enrolment – which is set to be introduced in Ireland in 2024 is set to help younger people achieve financial security but what if you are currently 40 or 50 years old, have you left it too late?

As it stands, the current minimum wage in Ireland is €11.30 per hour.  An individual who works a 40-hour week will gross €23,504 annually. The current state pension for an individual aged 66 is €13,795 per annum, which automatically results in a 42% drop in income on the day you retire, at current rates. For those working in roles where their income is above the minimum wage then the reduction is even greater. For example, an individual with a gross income of €50,000 the movement to a state pension means a reduction of 73% in income.

Where to start?

If you are someone that is starting to save later in life, you should consider maximising your pension contributions. There are a number of ways that this can be done. If you have recently received a pay rise or bonus you could consider applying some or all to your Pension, subject to certain limits. Another way to begin increasing contributions to your pension would be to look at your spending and identify if there are any areas that you can cut back on. By spending less overall you allow yourself to be more flexible when it comes to making payments into your pension fund.

There are no reliable rules that state how much you should be paying into your pension. Maximum pension contributions are based on both age and income. One rule of thumb set aside about half your age as a percentage of your income. For someone who is 40 years of age, that would mean placing 20% of their salary into a pension.

Tax Advantages

There are three distinct tax advantages of saving into a pension. Firstly, you are entitled to a tax relief on what you pay in. If you pay tax at 20%, by putting €100 towards your pension it will only cost you €80. For those that pay tax at 40%, putting €100 into your pension fund will only cost you €60.

The second benefit is that you can benefit from tax-free growth. Unlike other savings, your accumulated pension fund is permitted to grow without any tax deductions.  When you factor in compound interest, it is an additional benefit to the tax break.

For example, if you were to pay €10,000 into your pension as a taxpayer that pays 20% tax, it would only end up costing you €8,000.

If that €10,000 was to earn 2% interest the fund would perform as follows:

Year One:  €10,200 year one

Year Two: €10,404

Year Three: €10,612

In this example €8,000 spent in year one returns €10,612 over the course of three years, that equates to a 32.5% increase on the initial investment.

An additional tax benefit is that you are entitled to get a portion of your accumulated pension savings as a tax-free lump sum. 25% of your pension savings can be taken out as a tax-free lump sum which might give you the opportunity to clear residual debt, retire without any financial liabilities or take a holiday of a lifetime to enjoy the years of hard work that you have been put in.

The earlier that you start your pension, the easier it will be for you to fund the lifestyle that you want to have in retirement. The main thing to remember is that it is better to begin something such as starting a pension at any age, rather than not doing it at all. In essence, making informed decisions is the first step. Seek advice.

At Insight Private Clients, we can help you start your pension and advise you on that journey. Contact Senior Consultant Mary Murray to find out more.