If you are in your 20s or 30s, there’s a good chance you haven’t given much thought to your retirement. You’re still in the early stages of your career and it can seem like a long time away, a problem for future you. It makes sense that you would focus on prioritising what’s important to you right now; whether it’s buying your first home, having a family, covering monthly bills or squirrelling away some short-term savings for a holiday or a new car.
Aside from this, pensions can be boring, overwhelming and downright confusing. So why bother? Simple: Money follows certain, straightforward rules. One rule of money is the earlier you start saving the more of it you’ll have. Conversely, the later you get your financial act together the poorer you’ll end up being. This might seem obvious, the longer you pay in the more you will accumulate. But there are other factors at play that you can use to your advantage;
- Tax Relief – If you don’t use it you lose it
One of the huge benefits of saving into a pension in Ireland is the tax relief that’s available. Pension contributions can be eligible for tax relief at your marginal rate (up to a max % of your earnings*). This means that as a higher-rate taxpayer, for every €60 you pay into your pension, the government will contribute €40, resulting in €100 in total going into your pension pot. That’s a pretty good deal right? But what’s the catch? Well, your tax relief has to be used within the given year. If you don’t pay into your pension, your tax relief allowance for that year is gone. So the earlier you start contributing, the more tax relief you can take advantage of.
- Compound interest
Private pensions are generally a pot of money that is regularly invested on your behalf. This opens your money up to compounding interest. But what does that mean? Compound interest is the interest you earn on interest. Every time your pension fund grows, the full amount continues to be invested and is open to earning more interest. And so the process continues over time.
- Start small and take the pressure off
One of the big benefits of starting a pension early is the length of time you have to get it right. If you have a target fund you would ideally like to achieve, spreading your payments over a longer period of time will allow you to keep your contributions affordable and manageable. Leave it too late and you may find yourself under pressure to save a lot of money in a short space of time or even having to push out your retirement date as a result.
We all get old sooner or later if we’re lucky, and I’ve yet to meet a client who reaches retirement and wishes they hadn’t saved into their pension. In fact, helping people reach a position where they can retire early with a healthy income is one of the most satisfying parts of my job.
There are of course things to take into account before starting a pension, or any financial plan for that matter. Talking to a Financial Advisor can be a great first step, they will be able to talk you through your options and help put you on the right track.
Whatever you decide, make it happen sooner rather than later, your retired self will thank you for it!
Written by Colin Whelan – Senior Financial Advisor
*Subject to current Revenue rules and regulations. See https://www.revenue.ie/en/jobs-and-pensions/pensions/tax-relief-for-pension-contributions.aspx for more information.
IPF Irish Pensions & Finance Limited t/a Irish Pensions & Finance is regulated by the Central Bank of Ireland.