When is the best time to start a pension?

It’s true to say that the sooner you start a pension, the longer it has to grow and the easier it can be to build up a meaningful fund for you to live on for the rest of your life after you stop working. Even a small regular payment could deliver big results if you start early.

We are always told to start a pension but do we ever really know why this is such a good idea? Is it worth it at all? When is it too late to start a pension?

In reality, when you retire, you will not need a big salary to pay a mortgage or look after dependent children. Retirement is about living the life you want. Holidays, new cars, fun and relaxation! Or at least, it should be.

We’re going to look at a few age profiles. People in their 30s, 40s and 50s. Where do you fit in and what do you need to do now!?

Let’s take the early years first. You’re in your thirties and maybe a friend of yours is starting a pension, or you’ve been offered a pension through work. The strange thing about your thirties is that, although you’re probably getting paid more than when you were younger, you seem to have less in your pocket at the end of the month. So how do you fit a pension into all of this? The answer, one small piece at a time. A small monthly contribution into a fund now would be invaluable to you later down the line. Arrange for your employer to take it out of your salary before you even get your hands on the money. That way, you get the tax relief that comes with a pension done for you and you can get used to making the contributions. It’s so much easier this way!

Now, I know, retirement seems a long way off when you’re in your thirties. Whereas paying a mortgage, raising kids and buying a new car all seem very close and urgent. It’s something you can afford to put off, isn’t it? Unfortunately, no. The person that will lose most is your future self. The sooner you start, the easier it will be and the less it will cost you in the long run. So then, what if your thirties have gone by and you’re now in work, in your forties, with no pension.

What now? TIME FOR ACTION!

If you haven’t started a pension, now is the time to get serious. You can expect to be spending as many years if not more in retirement as you actually have left to work. By starting your pension plan today, you still have the opportunity to get income tax relief on your pension payments and have the time to build up an adequate pension fund. In your forties you can contribute 25% of your salary and get tax relief on this. That means after tax relief, putting €500 a month into a pension may only cost you €300 out of your take home pay (assuming you are taxed at the higher rate). Tax relief and investment return are key reasons to start the pension.

Some may question whether putting money into a pension plan is a priority at this point. But if you don’t do it, no one else is going to do it for you. The current single State Pension is a grand total of approximately €15,000 a year. That’s actually below the Government’s own minimum wage. Even if you have no mortgage left to pay in the future, that’s not much to get by on. It’s just above the breadline. On average it costs approximately €10,000 per annum to run a single household, so if you are living on €15,000, there is not a lot of room for fun in retirement. Looking further ahead now, you’ve entered your 50s and retirement doesn’t seem quite so far away. If at this point, you have still not started your pension, it’s time for some more detailed planning. The key thing to realise is that, whatever your current situation, there’s plenty you can do to improve your lifestyle in retirement, providing you act now. You must review and discuss your expected retirement goals. What is it you need in retirement and how do you get there?

It’s true to say that the sooner you start a pension, the longer it has to grow. But if you don’t have a pension, that doesn’t mean you’ve missed the boat altogether. The system is designed to help you catch up. The older you are, the higher the percentage of your salary you can use to make payments to your pension plan. Don’t worry about the years that have gone, just maximise your efforts in the years to come and use all your extra income tax relief. You can now put from 30% to 35% of your salary into your pension and still qualify for tax relief.

Whatever your age, always remember that it is never too late to start planning for retirement. There are a number of ways you can fund your retirement lifestyle and having a pension is one we would highly recommend.

If there is anything in this article that you would like to get more information on, email our Personal Financial Planner Jonathan McDonnell at jonathan@castlecapital.ie.

Castle Capital Financial Planning