Retirement can seem like a foreign land in your 30s. Money when you’re 66? You’ll worry about that later.
Maybe you’re paying rent, saving for a home or you have a mortgage or childcare bills making funds tight, but start a pension in this decade and you’ll be glad you did.
How much will I need?
How much income will you need in retirement? It can be hard to put a figure on that – but even guesstimating does provide a reality check.
By 2046, Irish men can expect to live to 85 and women to 89. So if you retire at the current State pension age of 66, you’ll have about 20 years of living post your last pay cheque.
Will you be paying rent or a mortgage after the age of 66? There is property tax, home insurance and utility bills to consider too. You’ll have your food shop even though this may be less if your household is smaller, or more if grandkids are on the scene. You’ll probably have a car. You’ll need clothes, shoes and haircuts. Then there’s health insurance – you may be tapping that more frequently and the excess can add up. You’ll be socialising, you may have hobbies. You’ll want to go on holiday, you may want to treat those you love or give to charity. Maybe you’ll have a pet.
It turns out the older “you” has pretty similar outgoings and the annual State pension, currently €1,200 a month, is unlikely to cover them.
“It’s useful to have a target retirement income in mind to determine the level of regular pension contributions you will need to reach that,” says Mark Reilly of Royal London Ireland.
If you start to save for retirement at age 30, on a salary of €40,000, you will need to set aside a minimum of 18 per cent of gross salary every year until age 66 to get an income of €2,000 a month in today’s money – and that’s including the State pension, according to Pensions Authority calculations. The regulator for Irish pensions, it has a calculator on its website that allows you figure out your pension target and what it will take to get there.
Interviews with 7,000 retired people in the UK by consumer website Which? give some sense of how much a “comfortable” retirement costs. This includes holidays, hobbies and the odd tipple, but nothing fancy like long-haul holidays, health club memberships, pricey meals out or a new car.
An individual will need the equivalent of €22,600 a year on top of the UK state pension of €13,680 to enjoy a “comfortable retirement”, it found. For a couple, that figure rose to €30,900.
For a single person in Ireland, that would mean a retirement income of about €37,000 a year including the State pension, or about €3,100 a month.
For single-person households, achieving this level of “comfortable” retirement on the basis of current annuity rates of about 5.5 per cent would mean a pot the equivalent of €411,000 in addition to the State pension.
Start early
Start early and put in what you can, says Kristen Foran, national sales director with Zurich Life. The key factor in how big your pension pot grows to be is not so much the money you put in but the time it spends invested. Contributing a small amount in your 20s, for example, can mean a bigger pension for you than for someone who starts putting in larger amounts in their 40s.
This is because of “compounding”. If you put money in a fund last year and it made a 6 per cent return, this year you will earn interest on your original investment plus interest on the 6 per cent return you made last year. When left for long enough, an investment can grow exponentially.
The maximum State pension is currently about €14,420 a year. Many people will need at least €10,000 a year more annual income when they retire.
“If I am 30 now and I want to get that when I retire, it’s going to cost me about €466 a month, even if I start when I’m 30,” says Kirsten Foran. “If I was 40, it would cost me €737 a month, which is a big difference.”
“The key really is early and often. Start with whatever you can afford as quickly as you can,” she says.
Free money
It’s not often the Government and, generally, your employer will give you free money. Pension is the exception. Those who do not contribute to a pension in their 30s are leaving up to 10 years of this free money on the table.
“When I’m 30, if I’m on the high rate of tax and I put €100 into pension, I’ll get 40 per cent back,” says Foran, citing the impact of tax relief on pension contributions, which is granted at a person’s marginal, or higher, income tax rate. “So if I put €100 a month into pension, it’s only costing me €60.
“Putting money into your pension is not costing you as much as you think,” she says. “People probably hear those monthly contributions of €466 and €737, but when you take the tax relief off the top, it’s usually quite a bit more manageable.”
And if your employer offers a pension scheme, sign up. ‘It’s free money,” she says.
An employer scheme may entail you contributing 6 per cent of your gross salary, for example, with them topping this up with 10 per cent of your salary out of their pocket. That gives you a 16 per cent contribution that’s only costing you 6 per cent, and less again with tax relief.
“You don’t notice it and you get tax relief at source, so you don’t have to go near the taxman; it’s all done for you,” says Foran.
There are limits to the amount of pension contributions you can get tax relief on in one year, says Mark Reilly, though few people are in any danger of hitting this in reality. In your 30s, you can get relief on up to 20 per cent of your earnings.
Part-time workers must get the same access to pension as their full time colleagues, says Reilly, unless you’re working fewer than a fifth of their hours. Pension contributions are paid at the same rate, based on the worker’s reduced pro-rata salary, he says.
If your employer doesn’t offer a pension, or if you are self-employed, a financial broker can advise you on a suitable pension and help you get tax relief. Quiz them on charges before signing up.
Those in their 20s or 30s should consider a fund that has at least 70 per cent invested in a diversified portfolio of global equities or shares. Being too cautious in your investment fund selection can ultimately reduce the value of your pension.
And for those not currently paying into an occupational pension scheme, auto-enrolment is a new pension savings scheme for employees that is scheduled to come on stream next year. Contribution rates will start at 1.5 per cent from the employer and 1.5 per cent from the employee, with the Government topping things up by 0.5 per cent.
“Rates are very low, so it doesn’t often compare favourably with what might be available right now in an employer pension scheme, which could be 8 per cent,” says Foran. And the incentive of State contributions is lower than what is available on current schemes in tax relief for higher-rate taxpayers.
What if I move jobs?
Job hopping in your 30s? Always opt into the pension scheme if there is one.
“When you get to retirement, you’ll have pots of money everywhere and that’s fine. They won’t disappear,” says Foran. Just keep your contact details updated with the pension provider.
If you’ve lost track of your pensions, contact your former employer or the Pensions Authority, says Mark Reilly of Royal London Ireland.
Can I stop and start?
Try to keep your pension going for all the reasons we have explained above. But if you must, it is possible to reduce, pause or stop contributions.
In general, if you are a member of a work pension scheme and your salary continues during maternity leave, pension contributions must continue as normal. With extended maternity leave or parental leave, an employer is not obliged to make contributions.
Pausing contributions will have an impact on your final pension pot, but if money is tight and it’s causing you stress, it may be the right thing to do.
Parents on parental leave can mitigate the loss to their final pension pot by continuing to contribute, if they can afford it, says Reilly. “The impact of stopping payments into a company pension scheme can be significant further down the line,” he says. Consider making even reduced contributions if you can.
Those returning to the workforce after a break should resume contributions and top things up through an Additional Voluntary Contribution (AVC) if they can afford to do so, he says.
When calculating your State pension, the Government looks at your PRSI contributions. To get the full State pension, you’ll need 40 years of these contributions – 2,080 weekly PRSI payments. You continue to accrue credits while on maternity leave, but if you take additional time off to care for a child, you have to ask for those credits to be reinstated for you, says Foran.
Time taken out of the workforce to look after children up to a maximum of 20 years is taken into account for the purposes of the State pension. However, you will need to apply for the Home Caring periods scheme, says Reilly.
Pension gap
Women need to be particularly proactive about pensions. Disparity in salary and time spent out of the workforce for caring responsibilities have detrimental impacts on their retirement income.
The age at which men and women start saving for their pension is the same, on average, according to research by Irish Life, and they contribute comparable percentages of their salary.
Despite this, there is a 36 per cent gap in the pension funds of working men and working women, according to Irish Life. Women would need to work eight years longer to achieve the same pension in retirement, according to the research.
Women live longer too, so they have more retirement years to cover.
Increasing employer contributions for women returning from maternity leave is one potential mitigant, says Irish Life. Paid parental leave for men and women would also balance things out. But until Government and employer policy addresses this inequality, women will have to do what they can to mind that gap.
