Start your pension early or risk getting by on €28 a week
Published 13/07/2014 | 02:30
Put your pension on the long finger and you could have to retire on €28 a week. This is the kind of pension you could end up with if you wait until your 60s to open one.
Although most of us don't wait that long to start one, many of us will retire on a measly pension because we have started to pay into it too late - and the contributions we're paying are too low.
The average person starts paying into a pension at the age of 37, according to a recent study by Irish Life.
Put off paying into one until then, however, and you could end up with a pension of about €7,900 a year (€152 a week) when you retire, according to the study. This assumes you're earning €46,000 and paying 10pc of your salary into your pension.
Of course the State pension will bump up your pension by €11,975 a year - as along as you're entitled to it. So if you're eligible for the full State pension and have a private pension worth €7,900 a year, your total pension would come to €19,875 a year. This could still come as a shock if you're used to a salary of €46,000. The shock will be even greater if you're not eligible for the full State pension, which can often be the case.
As many defined benefit schemes - which have traditionally 'guaranteed' to pay a percentage of your salary when you retire - have run into financial difficulties in recent years, there is a growing shift towards defined contribution schemes. With a defined contribution scheme, the value of your pension depends on how much you and your employer (if they choose to do so) pays into the pension scheme over your working life - and how well that money was invested.
So if you haven't yet started to pay into a pension, chances are you'll be joining a defined contribution scheme when you do so. But just how tiny could your pension be when you retire?
You won't have much chance to build up a reasonable pension if you leave it until your 60s to pay into one. The average person pays 11.1pc of their salary into a defined contribution pension, according to the Irish Association of Pension Funds (IAPF).
Start paying 11.1pc of your salary into a defined contribution pension scheme when you're 60 years old and you'll retire on a private pension equivalent to only 2.4pc of your final salary, according to James Kavanagh, chairman of the IAPF's defined contribution committee.
Assuming your final salary is €60,000, your pension in this case would put only €1,440 a year into your pocket, which works out at about €28 a week.
Start paying 11.1pc of your salary into a pension when you're 50 years old and you'll end up with a pension equivalent to about 7.7pc of your final salary.
Leave it until you're 55 years old to join a pension and you'll retire with a pension of no more than 5pc of your salary. Assuming your final salary is €60,000, this would give you a pension of €3,000 a year or about €58 a week.
Start paying 11.1pc of your salary into a pension from the age of 40 and your pension will come to only 13.7pc of your final salary, according to Kavanagh.
Wait until you're 45 and you'll be retiring on a pension equivalent to 10.6pc of your salary. This works out at €6,360 a year or about €122 a week, assuming your final salary is €60,000.
Start paying into a pension when you're 30 years old and you'll end up with a pension equivalent to 20.5pc of your final salary, according to Kavanagh.
Wait until you're 35-years-old before you start paying into your pension and you'll retire on a pension equivalent to 17pc of your salary. Assuming your final salary is €60,000, this means your private pension would be worth €10,200 a year or €196 a week.
The earlier you start your pension, the better the pension you end up with - so starting a pension in your 20s is usually a wise move. Pay 11.1pc of your salary into a pension from the age of 20 and you'll end up with a pension equivalent to 28.3pc of your salary; or 24.3pc if you delay paying into a pension until you're 25 years old.
So in this case, the 20-year-old starter would retire with a private pension worth €16,980 a year or about €326 a week, assuming a final salary of €60,000.
So what should my target pension be?
When deciding how much of a pension you should be aiming for, you need to have an idea of how much you will be comfortable living on when you retire. This can be difficult - and will largely depend on your financial circumstances at that stage. Living expenses are generally not as high in retirement as they are during your working life. Most of us will have our mortgage paid off by the time we retire. Children will have usually left the nest at that stage too, leaving their parents with more disposable income.
Let's say you want to retire on a salary equivalent to two-fifths of your final salary. How much would you need to be paying into your pension to get there? Start paying into your pension at the age of 20 and you would need to contribute 16pc of your salary to hit that target, according to the IAPF. Start at the age of 30 and you would need to contribute 22pc of your salary. Leave it until you're 50 years old and you would need to pay almost 60pc of your salary. Wait until you're 60, and you would need to contribute almost twice your salary into your pension scheme.
So if you're dreaming of retiring early, start your pension young and make sure you're paying enough into it. Otherwise, you run the risk of not having enough to get by on when you eventually stop working and you can kiss goodbye to your dreams of early retirement.
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