Business Personal Finance

Tuesday 21 January 2020

When is the best time to start a pension?

John Cradden

THEY say it is never too early to start a pension but even if you are well into your 30s (or even 40s), you would be forgiven for feeling a little ambivalent about starting one now.

Aside from all the reports of underwhelming investment returns over the past few years and the growing number of companies closing their final salary pension schemes to new entrants, the recent report by the Department of Social Protection on fund charges has given many of us yet another – very strong – excuse to put off starting a pension.

The report, which was written with the help of the Pensions Board, showed that up to almost one-third of the value of an individual's retirement savings could be swallowed up by charges.

But while most pension experts would not dismiss the negative impact such stories and reports have on efforts to encourage more workers to start a pension, the main message of the ongoing pensions awareness campaign – start one as early as you can – remains one that is hard to ignore.

Liam Ferguson, of Ferguson and Associates, said: "Given that compound interest is so powerful, I would be encouraging everyone to start a contribution to a pension as early as possible, from when they first start earning a wage."

He said the recent Department of Social Protection report on pension charges showed how they can vary greatly depending on where you go to arrange your pension product.

"It is possible to arrange a pension with low charges, so it's very important to shop around," he said.

He adds that returns are hugely influenced by the level of risk you are willing to take.

"If you're not comfortable with the variability of medium or higher-risk funds, then you can get a range of lower-risk funds that will offer lower returns but with lower risk of fund drops so that you can just lock in your tax relief," said Mr Ferguson.

"For younger people, I would encourage a modest pension contribution as well as a separate monthly savings account."

But younger people may have higher financial priorities than starting a pension, said Jerry Moriarty, chief executive of the Irish Association of Pension Funds.

"People do need to consider their financial priorities carefully, and for many younger people it may make more sense to pay off debt," he said.

But Mr Moriarty said that "there are significant advantages to starting early", and added that, if someone had the opportunity to join an employer's scheme, they almost always take that as the employer will be making contributions and often pays the administration costs.

While he acknowledged the poor returns of pension funds in recent years, Mr Moriarty pointed to a "strong recovery" as the average managed fund return to the end of September 2012 was 20.7pc, while the average 10-year return was 4.9pc per annum, according to figures from Rubicon Investment Consulting.

In addition, the amount you needed to put by every month needn't be too frightening, he said.

"One way of looking at it is if you pay 5pc of your salary to a pension, that is the equivalent of working one day out of every 20 for your retirement.

"As you generally work 20 days in a month, working one day a month to save for your retirement isn't too scary. When you factor in tax relief, it isn't even 5pc of your net pay."

But given that younger people will almost certainly have a range of financial priorities depending on their situation, at least one expert advised them to think more in terms of retirement financial planning rather than focusing purely on pension products.

Bob Quinn, of Kildare-based financial advisers Money Advisor, suggested a more "holistic" approach to financial planning, including finding out what your "financial hierarchy of needs" is and finding the best way to allocate your spare cash to each of those needs, including retirement savings.

"The financial hierarchy of needs concept is to clearly establish what is important in a client's life, from perhaps buying a house or upgrading the one they are in, getting married and planning for a family, to establishing a rainy-day fund and children's education and so forth," he said.

Once that hierarchy of needs is agreed, the task is to allocate cash to each of these needs in the most efficient and suitable way.

"There is always a compelling argument to start a pension as early as possible, but both the goalposts are movable," said Mr Quinn.

"If a 25-year-old's priorities are to buy an apartment as soon as possible in order to redirect rent payments into their own mortgage, it doesn't make much sense contributing a portion of their salary into a pension."

Getting a deposit together will therefore take centre stage because it would be highest in this person's financial hierarchy of needs.

"This is only a temporary measure, however, and as soon as he or she has bought that property the retirement planning should commence."

For the negative equity generation – those folks in their 30s and 40s who bought investment properties 10 years ago that they haven't been able to sell – they are now looking at these properties as long-term investments.

"You now have an asset that will be mortgage-free in 30 years. This has now become a retirement asset and should be classed so," said Mr Quinn.

Irish Independent Supplement

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