When do you want to retire?
The first thing to think about when taking out a pension is when you want to retire. The longer you’ve got, the better off you’ll be in retirement. The difference even a few years makes can be quite startling. For example, a 25-year-old looking for a pension of €2,000 a month at today’s prices when they are 65 would have to put about €727 into their pension plan – €436 after tax relief at the 40 per cent rate. On the other hand, a 30-year-old would have to put in €835 a month (€501 after tax relief). In this case, it might make sense for the 30-year-old to put back their retirement target date to 70.
What is your target retirement income?
This is a vitally important consideration. It is very easy to underestimate or, indeed, overestimate what is required. The best way to work it out is to look at your current income and expenses and then project what they might look like on retirement.
There should be quite a few expenses which no longer apply at that stage – these will include school and college fees, mortgage repayments, and, of course, your pension contributions. Reduced grocery bills and holiday costs are another welcome bonus as you grow older.
On the other hand, you may have to factor in the cost of health insurance and running a car if these were looked after by your employer. It is usually best to talk through this issue with a financial adviser. Once you’ve established how much you need, they will be able to tell you how much it will cost.
How much can you afford to save for your retirement?
This isn’t as straightforward as it sounds. While you may have a certain amount of disposable income over and above normal expenses, it is not necessarily wise to put it all into a pension plan. For starters, you need a rainy-day fund just in case something goes wrong. Most experts advise putting aside between three and six months’ salary to cater for emergencies and other contingencies such as illness or redundancy.
Medium-term savings are also important – you might want to help your children with their college fees, weddings, deposits on houses and so on. A separate savings or investment account is best for this purpose. Once you’ve looked after those items, you can start thinking about how much you can afford to save for your retirement.
How much risk are you prepared to take?
Members of defined-benefit pension schemes don’t have to concern themselves very much with investment risk. Their pensions are based on the number of years they have been members. But the majority of private-sector employees will be members of defined-contribution schemes.
In this case, the pension is based on the value of each individual’s pension pot at retirement. That value is a function of the amount contributed and the investment returns achieved over the years. Unfortunately, not all schemes are created equally and will offer different investment options based on risk. The higher the risk, the greater the potential return – and loss. Everyone has to decide for themselves how comfortable they are with risk and, once again, the best advice is to take advice.
What kind of fees are involved?
This is one of those questions people rarely ask but should. A difference of even a fraction of a percentage in fees can mount up over time, particularly as they are deducted from your contributions over many years. Anyone considering investing in a personal pension plan should check out the fees and charges before the commit themselves.