We’re always being told we should save more into our pensions. But deciding how much depends on what you can afford to save each month. Here’s Moneycube’s guide to working out how much you should put into a pension to start with.
First, the obvious
Because of the tax advantages, for many people, saving into a pension is the best saving plan around – even if you usually can’t touch it till you’re 60.
If you pay tax at the basic rate, every €100 you contribute from your pay packet (that is, after tax) turns up as €125. If you’re a top-rate taxpayer, it’s even better. Every €100 you put in from net pay is worth €167 in your pension.
So it’s worth making an effort to maximise your contributions.
Secondly, you can afford it
Even if you can only spare a small amount each month, it’s possible to contribute to a pension in Ireland. Pension contributions can be set as low as €10.
However, if you are going to assemble a worthwhile pension pot, it’s worth trying to saving substantially more than this.
A rough guide
One rule of thumb is that you should contribute a percentage of your salary equal to half your age. For example, if you’re 30, this suggests putting 15% of your salary into a pension.
This rule of thumb also matches up nicely with the amount of tax relief Revenue will grant you on your contributions. For example, someone between over 40 and below 50 can get tax relief on up to 25% of their earnings, if contributed to a pension. (After the age of 50, it gets even more generous).
Can I afford to save that much into my pension?
If that sounds a little scary, remember that the money can come from several places.
First of all, there’s the benefit of the tax relief, as explained above. A 15% contribution of your pre-tax salary doesn’t mean a 15% cut in your take-home pay.
Secondly, your employer may be willing to contribute towards your pension. If they don’t already, it’s a question worth asking.
And thirdly, this is no more than a rough guide. If it’s more than you can afford, remember, it is far better make a start now and develop a plan to plug the gap as your finances improve in the future.
You can estimate the monthly income, tax-free lump sum and total retirement fund you could build with Moneycube using our pension calculator.
Start now, improve later
Once you make a start, there are lots of simple things you can do to improve your pension provision.
One common suggestion is that every time you receive a pay rise, to consider upping your pension contribution before you get used to your new, higher income.
Another is to choose investments appropriate to your retirement timeframe. If you’re not intending to retire for a couple of decades, funds with high risk-reward potential can help with the heavy lifting to grow your pension pot.
Because of investment growth, a contribution of €100 per month when you’re 30 can have the same impact as around €450 per month when you’re 50.
And lastly, remember that your retirement funding can come from many sources, such as inheritance and other savings, the state pension, and more.
Where do I start?
One thing is clear: the sooner you start a pension, the easier your pension planning will be, as your pension funds can grow in value over many years.
Talk to Moneycube today about how we can help you work out a personalized plan for your situation.