Foresight might be there in abundance, but financial pressures at different life stages can make diligent pension contributions seem more like a luxury than a necessity. Whether you started your pension later in life or dialled back payments to focus on other, more pressing considerations, the good news is that experts say there are practical steps someone can take to boost their pension at every age.
“There’s little value in focusing on when you wish you’d started.” That’s according to Sinead McEvoy, head of retirement solutions with Standard Life, who says the pension provider’s research shows that two in five people are concerned they won’t be able to retire.
“Life rarely follows the ideal financial planning timeline, and that can leave people worried about whether they’ve enough time to catch up,” she says. “Income can rise and fall, careers change direction, people may take time out of work, start a business, care for family members or face periods when what needs paying for today simply must come before future planning.”
But if financial circumstances have changed for the better and pensions once again become a priority, there are a number of ways to start making up for lost time.
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“The aim isn’t to make up for every missed contribution overnight, but to take it step by step, put a plan in place and make the most of the time you have from here,” McEvoy says. The first step, she says, is simply to start rather than wait until someone feels they can afford the “right” amount. “The “right” amount is so varied and dependent on the person’s circumstances, and what they want from their second life,” she says.
“Obviously, the earlier you start the better, as you have a longer time frame over which to invest, but you can still make up for lost time if you start later,” says Kristen Foran, national sales director with Zurich Life Assurance. This can be done with careful planning – she suggests speaking to a financial adviser to assess the best route forward.
“Higher contributions will be needed, but the levels of tax relief available increases with age, so achieving a good pension can still be very achievable.”
When it comes to pensions, it’s better late than never, says Evelyn Ryder, director, corporate pensions with New Ireland. “Starting earlier clearly provides more time to save, but starting later is considerably better than deciding it is simply too late to do anything.”
This still provides an opportunity to build meaningful retirement savings, she says. “The tax benefit associated with investing in a pension, particularly given the larger limits at older ages, means starting late can be very beneficial.”
Awareness is crucial; for example, Foran warns that people often believe when they are in a company pension plan that they have their pension needs sorted “so they don’t need to do anything more”.
An issue can arise here, she says, as most company plans now are “defined contribution” in nature, known as DC arrangements. “This means that the benefit provided is dependent on the contribution rate, which is usually set at a fixed amount for all employees,” she says. “This might be sufficient for those with a long time to horizon until retirement but may not be for those who may have joined the employer or pension arrangement at a later time.”
Additional voluntary contributions (AVCs) may be part of the answer if someone is in a company-sponsored pension arrangement, Foran says.
“AVCs are a way of bridging the gap – these are amounts paid in addition to your normal contributions to boost your pension pot.” They can usually be done through the main pension scheme or set up as a separate PRSA AVC plan.
However, AVCs are only part of the answer, McEvoy says. “The most important step is understanding your retirement goals, identifying any shortfall and putting a realistic plan in place to address it. An adviser can help you work through how much you may need to save, make the most of tax relief and consider how other assets might fit into your retirement plan.”
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Ryder agrees. “Before making AVCs, an employee should consider whether they are already contributing enough to receive the maximum employer contribution available under their pension arrangement,” she says. There may be an option to contribute more, and the employer may match employee contributions. “From there, AVCs can provide a flexible way of increasing retirement savings, subject to the relevant revenue tax and contribution limits.”
Anyone in a group scheme should check whether they are getting the maximum employer contribution available under their pension arrangement. “If not, consider whether you can afford to increase your own contributions and/or pay AVCs within the applicable limits.”
Ryder says people should consider all their options when it comes to closing the gap between the pension they have and the income they think they will need in retirement. “This could be to contribute more, work longer, delay retirement or take more investment risk if risk appetite and time allows, or a combination of these options,” she says.
She warns, however, that somebody trying to improve their projected retirement outcome shouldn’t assume that taking more investment risk is the only solution. “Increasing contributions, working for longer or delaying drawing down pension rather than taking inappropriate additional investment risk may provide a more suitable way of improving the potential retirement outcome.”
