Contributing to Your Pension: When and How to Start

Introduction

If you're like most people, you probably don't give much thought to your pension until you're getting close to retirement. But actively contributing as early as possible to your pension is one of the smartest things you can do for your future. The sooner you start, the more time your money has to grow.

There is no one-size-fits-all answer to the question of when and how to start contributing to your pension, but there are some general guidelines that can help you make the best decision for your individual situation. The most important factor to consider is your age and how close you are to retirement. If you're young and have many years until retirement, you can afford to start with smaller contributions and gradually increase them over time. If you're closer to retirement, you'll need to make larger contributions in order to catch up.

In this blog, we'll take a closer look at when and how to start contributing to your pension in Ireland. We'll also talk about the different types of pensions available and the importance of speaking to a financial advisor when making pension contributions.

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The Importance of Starting Early

The most important factor in deciding when to start contributing to your pension is your age. The younger you are, the more time your money has to grow. For example, let's say you're 25 years old and you start contributing €300 per month to your pension and contribute just this same amount until you're 65 years old, you'll have contributed a total of €144,000 .But thanks to the magic of compound interest, your account will be worth much more than that. If your investments earn an average annual return of an assumed 3%, your account will be worth approximately €278,000 at retirement.

Now let's say you wait until you're 35 years old to start making pension contributions. If you make the same monthly contribution of €300 and your investments earn the same 3% annual return, your account will be worth approximately €174,000 at retirement. That's a difference of over €100,000 just by starting 10 years earlier. So, as you can see, the difference between starting when you are 25 rather than 35 is significant.

It's difficult to say just how much one should be putting away each month to achieve their retirement goals. A good place to start is to use an online pension calculator, however, the results offered by these calculators are only ball-park figures. To get a true understanding of how much you should be contributing to your pension, it’s best to reach out to an experienced financial advisor. 

The bottom line is, the sooner you start contributing to your pension, the better. Even if you can only afford to contribute a small amount each month, it's important to get started as early as possible.

In Ireland, the Standard Fund Threshold (SFT) is €2 million. Currently the SFT is €2 million but it's only if your fund is in excess of €2,150,000 you would be liable to a double tax, so it should be noted that once you hit the pension limits it is not tax efficient to keep investing in your pension. While this €2 million figure may look daunting, if you are a young professional with 35 plus years in your professional career ahead of you, it's far more achievable than you think - especially if your pension is employer-contributed. It's also important to remember that it's the value of your pension fund at retirement, not the amount you have contributed.

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How Much You Should Contribute, Based on Your Age

Unfortunately, the answer to this question is not as simple as a one-size-fits-all number. The amount you should contribute to your pension depends on a number of factors, including your age, your salary, your other sources of income and your overall financial goals.

If you're in your 20s or 30s, a good rule of thumb might be to contribute at least 5-10% of your salary to your pension. If your employer offers a pension scheme, you should try to contribute at least enough to get the full employer match. For example, if your employer will match your contributions up to 5% of your salary, you should contribute at least 5%. If you're in your 40s, 50s and close to retirement, you may still have some time to catch up on your pension savings. The key is to start saving as much as you can, as early as you can.

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What Types of Pensions are Available to You?

In Ireland, the two main types of pensions available to individuals who are looking to reach the personal pension fund threshold are Personal Retirement Savings Accounts (PRSAs) and Occupational Pensions schemes. Both are great options for young professionals just starting their careers.

PRSAs are pension schemes that are set up by individuals. They can be opened with any authorised pension provider, and contributions can be made through payroll deductions, standing orders or one-off lump sum payments. PRSAs offer a great deal of flexibility when it comes to how much you can contribute and how often you can make contributions. You can also stop and start contributions at any time. Under Irish law, if your employer does not offer an occupational pension scheme, they must offer you the option to join a PRSA.

Occupational pension schemes are pension schemes that are set up by employers for their employees. Employees are usually automatically enrolled in the scheme, and contributions are made through payroll deductions. In most cases, both the employee and employer make contributions to the pension scheme. Occupational pension schemes tend to be less restrictive than PRSAs when it comes to how much you can contribute and how often you can make contributions. However, they often offer certain benefits that PRSAs do not, such as death benefits and pension protection in the event of insolvency. The rules and challenges regarding transferring an occupational pension when leaving employment can be complex, so it's important to seek professional advice if you're thinking about leaving your job. Additionally, be sure to stay tuned as we will be covering this topic in a later blog series.

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The Importance of Speaking to a Financial Advisor

When it comes to pension planning, it's important to seek professional advice. A financial advisor, like those we have here at FitzGerald Flynn Insurances, can help you understand the different pension options available to you and how they fit into your overall financial picture. They can also offer guidance on how much you should contribute based on your age, salary and retirement goals.

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Ways to Make Contributing to Your Pension Easier

If you're self-employed, the process of contributing to your pension can be a bit more challenging. However, there are a few things you can do to make it easier. First, consider setting up a personal pension plan with a pension provider, they can put in place a direct debit on your account to go directly to your pension, if you have an accountant or bookkeeper, they can adjust your monthly tax figures to take into account the pension contributions and then at year end they can make any adjustment to your tax depending on your earnings. Second, consider using pension software to automate your pension contributions. This can help you stay on track and ensure that you're making the right contributions at the right time.

If you are not self-employed, pension contributions may be something that you have been automatically paying into since you started your first job. If you are employed, pension contributions are usually deducted directly from your salary, so you may not even realise that you're making them. If this is the case, then congratulations! You're already on your way to a comfortable retirement.

If you're not sure whether or not you're making pension contributions, the best thing to do is to check with your employer. They should be able to tell you whether or not pension contributions are being deducted from your salary, and if so, how much is being contributed.

Making pension contributions can seem like a daunting task, but it doesn't have to be.

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Conclusion

When it comes to pension planning, it's important to start early and seek professional advice. A financial advisor can help you understand the different pension options available to you and how they fit into your overall financial picture. They can also offer guidance on how much you should contribute based on your age, salary and retirement goals. By starting early and speaking to a financial advisor, you can ensure that you're on track to reach your retirement goals.

FitzGerald Flynn Insurance offers a wide-range of pension planning services and our advisors would be happy to help you plan for your retirement. Contact us today to learn more!

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