Starting a pension at 30 versus attempting to live off of a €35 a day State pension.

It is probably not a question we ask ourselves as many put retirement on the long-finger. However, it is important you understand the potential ramifications of not having a private pension plan in place.

So, you are 30 or approaching it and you have heard the word pension banged around for many years and always said you would get around to it.

Well, if you have found this, that time has come. Although you probably still thinking you’ve plenty of time and retirement is 38 years away.

However, when you are no longer earning your regular salary, you will need to fill any potential shortfalls. You may retire but unfortunately, your bills and overheads may not.

As a result, it is important you get your finances in order.

So, let us focus on how you can go about starting a pension and what it will mean for your future. Think of it as present you looking out for future you.

Below we break down starting a pension at various salaries and how that affects your overall pot at retirement. With the State pension at €35 a day, it is certainly a good idea to organise a private pension.

Starting a pension at 30 and giving getting time on your side is an even better idea.

Starting a pension at 30

With the current State pension age increasing to 68, over three and half decades probably seems like an eternity away. As a result, it can be difficult to take the plunge and begin squirreling some money away.

But think of it as an opportunity to take advantage of tax relief on contributions, tax-free growth, and compound interest over the next 38 years.

If the thought of trying to survive on €35 a day alone was not enough to motivate you surely the combination of the above is.

Also, you will be able to withdraw a percentage of your fund tax-free at retirement.

Fairly good deal, right? The government does not want everyone to be dependant on €35 a day particularly as we have an aging population. Therefore, there are many incentives in place to encourage us to start a pension.

Furthermore, let us breakdown starting a pension at age 30 on different salaries and what that would mean at retirement. With the average Irish wage currently at approximately €43,938 www.cso.ie as of Q4 in 2020, we will use this figure as well as approximately €10,000 on either side to use as examples.

Starting a pension at 30 - Ciara (€33,000 Salary)

Ciara would like to have 50% of her salary (€16,500) a year in retirement. This will be including the €12,912 State pension giving her a total yearly income of approximately €16,500.

Calculation Example:

Age30
Salary (gross)€33,000
Retirement age67
Target pension as a percentage of current salary50% (€16,500)
State Pension€12,912 p.a.
  Tax relief – 20%Actual cost
Investment required€3,588 p.a.€717.60€2870.40
Income in retirement€16,500 (approx)

Ciara would like to have 50% of her salary (€16,500) a year in retirement. This will be including the €12,912 State pension giving her a total yearly income of approximately €16,500.

In the above example, we can see how the benefits of tax-relief can have a major impact on contribution levels. It is worth noting that Ciara falls into the lower tax bracket and will receive relief at 20%.

A total annual pension contribution of €3,588 after tax relief cost Ciara €2,870.40.

The magic of pensions. In addition to this, we added the State pension to achieve 50% of her current salary.

Although surviving on 50% might seem a little daunting, it is better than on 38% as would be the case if Ciara in the above decided to rely solely on the State pension.

However, committing to contributing just €3,588 annually will give Ciara approximately €132,756 extra into her overall pension pot.

It is worth noting we are ignoring investment returns as well as potential fees/charges to keep things simple.

Starting a pension at 30 - Peter (€43,000 Salary)

Secondly, we look at Peter. He is in a similar position but has a salary of €43,000 per annum.

Much like Ciara, Peter does not fancy the idea of trying to live on €35 a day and would like to supplement his income via a pension.

To keep things in unison, Peter would also like to have 50% of his current salary at retirement. With €43,000 that would be mean €21,500 annually including the State pension.

Calculation Example:

Age30
Salary (gross)€43,000
Retirement age67
Target pension as a percentage of salary50% (€21,500)
State Pension€12,912 p.a.
Tax relief – 40%The actual cost of contributions
Projected shortfall€8,588 p.a.3435.205152.80
Income in retirement€21,500

Much like we have seen with Ciara, Peter will receive tax-relief on his contributions. Although Peter pays income tax at the higher rate and therefore receives tax relief on contributions at 40%.

We know, pensions are the gift that keeps on giving.

If Peter contributes €8,588 per annum over the next 37 years, it will give him an additional €317,756 lump sum in retirement. This annually along with the €12,912 State pension will allow him to hit his target of €21,500 per year.

Again, it is worth noting we are ignoring investment returns as well as potential fees/charges to keep things simple. These figures should not be taken as advice or an exact forecast but rather to be used as a guide.

Starting a pension at 30 - Alan (€53,000 Salary)

Lastly, we took Alan’s situation. He has got a slightly larger salary of €53,000 per annum.

Yet, much like our examples above, the thought of living on €248 per week is not appealing.

Therefore, it is important to have a plan in place.

Due to the fact we would like to keep things simple, Alan would also like to have 50% of his salary in retirement.

His salary is €53,000 meaning his target including the State pension is €26,500.

Calculation Example:

Age30
Salary (gross)€53,000
Retirement age67
Target pension as a percentage of salary50% (€26,500)
State Pension€12,912 per year
Tax relief – 40%The actual cost of contributions
Projected shortfall€13,588 p.a.€5,435.2€8,152.8
Income in retirement€26,500 p.a.

Due to his salary, Alan falls into the bracket of 40% tax relief. As we have seen above, a pension has many benefits with tax relief being a major factor for many.

The ability to contribute €100 but only be charged €40 is a golden opportunity.

Like we said at the beginning, it is never too late (or early) to start a pension

How do I start a pension?

If you are an employee, you could potentially join your company’s occupational pension scheme. If this is the case, there is also a possibility your employer may also make contributions in addition to your own.

Perhaps contact the HR department and see if there is one in place you could join.

If your employer does not offer a pension scheme, they must provide you with access to a Personal Retirement Savings Account (PRSA). They must also provide the ability for contributions to be taken directly at source through payroll.

Maybe you are self-employed which also brings other options into play. Either way, deciding on the correct plan for your situation is important. If there is anything we can do, we are always here to help.

What are the benefits of starting a pension?

Firstly, let us look at the tax relief on contributions. The government does not want the entire population over 68 trying to survive on €248 a week. Therefore, they provide incentives to those who save for retirement.

If you contribute to a pension you will receive tax relief on those contributions. The level you receive will depend on what income tax bracket you fall into.

For example, if you pay the higher rate of 40%, you will receive this rate on contributions.

Simply put, if you contribute €100 it will only actually cost you €60.

Secondly, look at tax-free growth. As your pension pot accumulates, any growth your investment may experience will be free of tax.

We spend our lives giving out about taxes. Here we have an investment that will grow tax-free.

Thirdly, we look at the benefit of receiving a tax-free lump sum at retirement. Many of us will be eligible to withdraw 25% of our pension tax-free (up to a maximum of €200,000).

A combination of the above illustrates the benefits of starting a pension and some of the incentives on offer.

Let us look at it realistically, living off of €35 a day will be extremely difficult. Many would struggle to live any sort of lifestyle being restricted to such a modest amount.

The State Pension has also come under scrutiny as of late. A study in February 2021 by the Central Statistics Office outlined the rising liabilities of our State pension system.

With liabilities rising at 10% per year, the State has liabilities between the State pensions system and public-sector of €607.9 billion.

Ireland also has an aging population which will add to these issues over the next 20 years.

Therefore, relying solely on the State pension probably isn’t the best idea.

Use the above incentives to your advantage and begin to plan for your retirement.

It may seem like a lifetime away, but we all know how quickly the years go by.

You will thank yourself for it in the future.

How long does it take to start a pension?

Less time than ever before. As a result of Covid-19 and progression in technology, you can do everything over Zoom or Microsoft Teams.

Depending on how quickly you meet and complete paperwork, you could set your pension up within a week. Although it is better to allow a timeline of 2-4 weeks. Plus, it is not something to be rushed.

A consultation with a Qualified Financial Advisor is the first step. Ensure a holistic view is taken of your situation and decide the best course of action.

The pension world is full of acronyms and jargon so ensure you speak to someone who can break everything down.

When it comes to pensions there is no one-size-fits-all approach. Each of us has a different set of needs and circumstances.

How much should I pay into my pension at 30?

The PSL survey concluded that participants would like approximately €433,333 at retirement. If you start a pension at 30 and assume you retire at 68, that is a contribution of €11,403.50 annually or 25% of your salary.

It is worth noting, we have not taken inflation/fund performance and other potential taxes into account which may have a direct impact. We have also assumed an annual salary of €45,000.

Conclusion

To conclude, it is never too late (or too early) to start a pension. If you are 30 or approaching 30 and looking to start a pension you have made a smart decision.

Take advantage of the tax incentives and use compound interest to your benefit over the next three-plus decades.

We hope this piece helped to break down some of the jargon that is often thrown around.

It is worth noting, the case studies or figures above should not be regarded as financial advice. We used the calculator from the Pensions Authority website to generate the figures.

They can be used as a guide but you still must seek advice from a qualified professional.

If there is anything help we can help with you can contact us at any of the below.

Phone – 01 890 3518

Email – info@pensionsupportline.ie

Book your complimentary consultation:

https://pensionsupportline.ie/speak-with-an-expert/

We are happy to help!

Start your pension today

*This blog should be used for information only and not taken as financial advice.

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