There can often be a gulf between the pension we think we have and the one we actually end up with. Coupled with the fact that we are living longer and healthier, the price of a comfortable retirement for 20 years or more may not tally with our pension contributions.
A 2024 Central Bank of Ireland report highlighted this, noting that people often have unrealistic expectations regarding their retirement needs. “There is a concern that the long-term nature of a pension, combined with the complexity of pension products, means some consumers do not sufficiently engage with the value of their pension or take meaningful action to address any shortfall,” the report states.
The reality is that simply having a pension is not enough any more, says Shane O’Farrell, director of workplace markets, employer solutions at Irish Life. “Anyone who has simply opted into their pension plan at the default contribution rate and done nothing since is at risk of inadequacy, in other words, not having enough money saved up when they finish working to deliver a decent standard of living,” he explains.
According to Fergus Moyles, head of private wealth strategy at Mercer Ireland, financial literacy also plays a “massive” role in determining pension adequacy. “Low levels of financial literacy, and in particular a lack of understanding of the pension system, are key drivers of low levels of pension adequacy in Ireland,” he says.
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A significant education component is needed in pensions, Moyles believes. “We need to help people understand all the benefits of pension saving, such as the tax relief on contributions, tax-free investment growth and further tax benefits at the point of retirement,” he says. “As a result of this deficit in understanding and engagement, individuals can often struggle to understand the level of contributions needed to build up a sufficient retirement pot.”
According to O’Farrell, people need to be informed and make active choices to achieve the “dream retirement”.
“Generally, in a standard workplace pension plan, you can increase your contribution rate quickly and easily whenever you like and, thanks to the tax relief, it probably costs a lot less than you might think,” he points out. “Even better, thanks to the compounding nature of pensions, that little bit extra has a big impact over the course of your working life. On top of that, many employers offer tiered structures, where the more an employee saves into their pension, the more their employer will pay in too. So, you get even more bang for your buck.”
Yet many people in tiered contribution structures do not realise it or make the most of it, he notes. “That’s basically leaving free money from the boss on the table.”
Common mistakes, Moyles says, are usually starting too late, not taking advantage of the highest contributions offered by their employer, and not making additional voluntary contributions (AVCs).
“Most of us will need to top up our pension savings further through AVCs,” he notes. “These are contributions above the basic contribution rates and are a great way of boosting your pension, particularly if you have started contributing later in life.”
Additional voluntary contributions can be paid regularly via payroll or via a lump-sum payment, with generous tax back, albeit subject to certain limits. “So, if you are a higher rate taxpayer with €10,000 in your bank account, you can pay that into your pension and Revenue will give you €4,000 back as tax relief provided you are within set annual limits,” Moyles explains.
Pensions are also sexist – women are more at risk of inadequacy across the board. Recent Irish Life research identified a gender pension gap of 36 per cent, says O’Farrell.
“This comes down to two things: salary disparity and time out of work,” he says. “Women are underrepresented in higher-paid jobs and are also statistically more likely to take time off work for things like maternity leave or reduce their working hours to fulfil caring responsibilities. The unfortunate reality is that if you are not working, no money is going into your pension savings, which creates a gap. And in the same way that saving a little bit extra into your pension along the way can have a much bigger positive impact than you think, saving a little bit less can have a surprisingly significant negative impact.”
In a standard workplace plan, women typically have the option to pay a little extra when they return to work to offset or fill any gap that might have been created.
While it’s difficult to generalise, O’Farrell says people typically need at least 20 per cent of their earnings from their mid-30s onwards to go into their pension to produce a decent outcome. “At the end of the day, the adequacy of your pension will directly impact – maybe even dictate – the lifestyle that you have when you’re finished working. So, understanding the basics and feeling confident to make informed, active choices along the way is fundamental to building a better future for yourself.”
