When it comes to pensions don’t have regrets, have a plan.
“‘How do I make up for lost time’ is a question that comes up all the time,” says Brian Kingston of wealth management firm Brewin Dolphin.
The reason a person’s pension pot isn’t as full as it could be is primarily because people either start too late, don’t contribute enough, or both.
Of course, the best way to remedy that would be to turn back the clock and get it right the first time, because it’s never too early to start.
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Kingston has children aged 11 and seven. “I’ll be advising them to start a pension at 18 if they are working or at least as soon as they leave college, to take advantage of the tax benefits and to get them into the savings habit, even if it’s just €50 a month, then advising them to up it when they can,” he says.
Yet he understands why gaps emerge. “In your twenties there are so many competing needs, whether its rent to pay or you’re saving for a house. Once you have a family, holidays become a priority and when you’re in your forties your kids are at university or you want to move house,” he says.
“It’s really about accepting that not all the money you earn this month or year is for you to spend this month or year. Some of it is to be kept for you in your sixties, seventies and eighties.”
If your employer has an occupational pension scheme, join it. That way you are taking advantage of tax relief on your contributions, and your employer is matching - or even exceeding - them.
If you have a personal pension, with no employer to match contributions, your contributions are limited by age and salary. To achieve the biggest pension pot possible, make the biggest contributions you can.
That’s easier said than done but remember, once you can no longer work, if you don’t have a pension or other means behind you, “you are dependent on the state pension of €13,000pa to maintain your lifestyle,” notes Kingston.
The earlier you start and the more you put in, the more you will benefit from the power of compounding.
“Warren Buffett once credited compound interest as the main factor for his wealth. Benjamin Franklin described it as - “Money makes money. And the money that money makes, makes money’,” explains Shane O’Farrell, director of products at Irish Life Corporate Business.
“The main ingredient you need for compound interest to work is the magic of time, so starting early, and building your savings gradually, will allow your pension savings to grow with you as you progress throughout your career.”
As your income rises, commit to putting in more.
“Women may also need to consider starting a pension sooner rather than later as Irish Life published a report in 2019 which showed a 22% gender pension gap,” cautions O’Farrell.
This gap equated to women retiring with €120,000 less than men and is caused by two key factors: time out of the workplace and the gender salary gap.
“When people are planning to take time out of work, they consider how they’ll manage with the drop in income, but often forget to consider the impact on their pension. It can be very difficult to make up for lost time and money saved into a pension during periods of unpaid leave so starting a pension early and planning for what happens to your pension when you will be out of the workplace is extremely important,” he says.
If you have gaps, Additional Voluntary Contributions or AVCs are a good way for people to boost their pension pot.
“AVC payments are treated the same way as normal pension savings for tax purposes, so you qualify for tax relief at the highest rate of tax,” explains O’Farrell. “You can choose to make regular ongoing AVCs to your pension or you can decide to make once-off payments, both are eligible for tax relief.”
