Sunday 28 May 2017

Defined contribution: How much more will you get if you retire at 70, not 65?

EMMA is a 35-year-old office assistant earning €30,000. She has just opened a defined contribution pension into which she pays 5 per cent of her salary. Her employer also pays 3 per cent of her salary into her pension.



Emma's salary stays the same until she turns 40, when it increases to €32,500. For every five years after that until the age of 65 her salary increases by €2,500, so by the time she reaches 65, she is on a salary of €45,000. If she continues to work until she's 70, however, she will retire on a final salary of €50,000.

Pension adviser Deloitte Pensions & Investments calculated how much Emma could expect to get a week from her pension if she retires at 70 instead of 65 -- and lives until she is 90.

If Emma retires at 70, she'll get a pension of €497.94 a week, but if she retires at 65, she'll only get €321.79 a week, according to Deloitte. So by delaying her retirement by five years and retiring on a final salary of €50,000, Emma gets about €176 more a week from her pension.

In this case, Deloitte has assumed that Emma does not take a tax-free lump sum when she retires, that her annual pension payment increases by 3 per cent each year after she retires, and that the investment return on her pension fund is 5 per cent.

What kind of pension will Emma get if she pays a bit more of her salary into her pension scheme?

Let's say that Emma pays 10 per cent of her salary into her pension from the age of 35 -- and that her employer pays in 5 per cent.

In this case, Emma would get a pension of €934.78 a week if she retires at 70 -- or €604.68 a week if she retires at 65, according to Ian Mitchell, managing director of Deloitte Pension & Investments. This is almost twice the pension that Emma got when she only paid 5 per cent of her salary into her pension and when her employer paid in 3 per cent. Also, by delaying her retirement by five years, Emma gets about €330 a week more from her pension.

THE HIGH earner

JAMES is a 35-year-old IT manager earning €100,000. He has just opened a defined contribution pension into which he pays 5 per cent of his salary while his employer also pays 5 per cent.

James's salary stays the same until he's 40, when his salary increases to €105,000. For each five years after that, his salary increases by €5,000 so by the time he retires at 65, he is on a salary of €130,000.

How much James can expect to get a week from his pension if he retires at age 70 instead of 65.

Deloitte Pensions & Investments calculated that if James retires at 70 he'll get a weekly pension of €1,951, but if he retires at 65, he'll get a pension of €1,271.85 a week. So by delaying his retirement by five years and retiring on a final salary of €135,000, James gets about €680 more a week from his pension. Again, Deloitte has assumed that James does not take a tax-free lump sum when he retires, that his pension increases by 3 per cent each year after he retires, and that the investment return on his pension fund is 5 per cent.

Sunday Independent

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