Journey to financial security in retirement begins with the key first step

According to the latest research from the Central Statistics Office (CSO), two thirds of Irish people in employment had some form of pension coverage other than the State pension at the end of 2022.

However, when civil and public servants are taken into account, that means about half of the private sector workforce will be mainly or solely reliant on the State pension of €14,419.60 a year for their income in retirement. And that’s if they qualify for the maximum rate.

While €277 a week might be sufficient for some people, it will not be nearly enough for many others, particularly those not fortunate enough to own their homes and who will face increasing rents and other rising costs as they grow older.

“People are worried about their income in retirement, but just worrying about it isn’t going to change anything,” says AIB head of Business Development Wealth Siobhán McNally.

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“Talking to someone about bridging the gap between what you have and what you will need can help. Doing a full review can open up options. Maybe you had a pension in the past that you are no longer contributing to and will be worth something when you retire.”

The prospect of retirement in relative penury can frighten people into inaction, she observes.

“Sometimes inertia sets in, and people don’t act. The key thing is to do something, however small. A pension is the best savings vehicle by far over time. You get tax benefit on contributions, tax free growth, and compounding growth over time. Compound interest has been described as the eighth wonder of the world. You can start pension savings small and review it over time and increase contributions when you can afford it.”

Ashling O’Neill, a certified financial planner with Clear Financial, agrees with the wisdom of the start small strategy.

“It ensures that contributing to your pension remains a sustainable and realistic commitment,” she says.

“Remember, the journey to financial security in retirement begins with the first step – initiating your own pension plan and taking control of your financial future.”

For people whose employer doesn’t offer an occupational pension scheme and who don’t want to wait for the introduction of the State auto-enrolment scheme later this year, or more likely in 2025, that pension plan is likely to be a Personal Retirement Savings Account (PRSA).

“Securing a comfortable retirement involves us all taking proactive steps, and one effective way of doing so is by starting your own PRSA,” she explains.

“Tax relief is the key player in pension funding, but also the longer your money spends invested in the markets allows for compound interest resulting in greater opportunity for growth. By taking the initiative to start your own PRSA independently, you maximise the time your money has to grow, strengthening your financial security in your retirement years.”

How much is enough, is the key question for many people when it comes to retirement savings. Personal finance expert Bernard Walsh advises people to engage in some informed crystal ball-gazing.

“You need some empathy with the future you. Try to understand how that person is going to live and what income they will need when they retire. It probably won’t be as much as you think because their mortgage will be paid off and they won’t need to pay school and college fees and so on.

“Also, people don’t necessarily retire in a straight line. You may choose to continue working beyond 65 or just reduce your working hours. Once you have worked out what you need, the Pension Authority has a very good calculator which will show you how much you need to contribute to a pension to achieve that goal.”

Time is money when it comes to pension planning, according to Ralph Benson, co-founder and head of financial advice with Moneycube.

“If you get to age 66 and haven’t thought about your pension no amount of financial engineering is going to help,” he says.

“People need to have honest conversations with themselves about what income they want in retirement and not put it off until it’s too late.

“No one seems to think seriously about income in retirement until they are in their mid-40s when they have paid off a bit of their mortgage and childcare and other costs have gone down.

“People shouldn’t let those prime earning years go to waste. They still have time to start contributing to a pension and get the benefits of tax relief, tax free growth and the compounding effect.”

He also notes that at that age, the time horizon involved allows people to take on an appropriate level of investment risk that will offer good growth prospects. The most important thing is not to be put off by the numbers. Even if you can only afford to contribute €2,000 a year to your pension for 10 years up to your retirement, tax relief will effectively turn that €20,000 into €33,000 before any investment returns. There’s no better deal in town.