How many reasons do you need to start a pension?

06 Jul 2015

Reasons to start a pension

The dictionary defines a pension as “A fixed amount, other than wages, paid at regular intervals to person or to the person’s surviving dependents in consideration of past services” or “an allowance, annuity, or subsidy.”

This Pension, in today’s terms, can refer to either a guaranteed income for life, paid by a pension scheme or life assurance company, or, the distributions drawn from an Approved Retirement Fund (ARF).

The majority of people, young and old understand these definitions.  The lack of understanding around “Pensions” however is that people don’t understand that “they” are responsible for saving a pot of money in order to provide themselves with this “pension”.   

Can you live on just over €12,000 per annum?

The state pension in its current form (€12K for an individual) is unlikely to meet the goals of most people and if you are 50 or under, you will have to wait until you are age 68 to receive this.  Our increased life expectancies put further pressure on this income to provide for us, potentially for 30 years into retirement. 

This should be enough to make the idea of pension savings attractive, but if it isn’t, here are 5 more reasons;

  1. Income Tax Relief – When you make a contribution to a pension savings vehicle, you will get tax relief at your marginal rate.  If you are a higher rate tax payer, this means that a contribution of €1,000 into your arrangement will only cost you €600.  In effect, it’s like getting €400 extra from the government.  Why pass this up
  2. Tax Free Investment Growth – there are many different types of pension vehicles for people to choose from.  They all provide access to a variety of investment funds, which endeavour to achieve growth in excess of inflation while saving for retirement.  Unlike other savings and investments where there are exit taxes of 41%, growth on Irish Pension Funds is exempt from Tax.
  3. The early bird catches that worm – The sooner you start making contributions the better.  A contribution of €100 per month from age 30 will provide a pension pot at 65 of approximately €88,000 where as a contribution of €100 per month from age 50 will provide a pension pot of approx. €24,000.  Its compound interest and its effective.   These figures assume an annual rate of investment return of 4.08% p.a. and a 3% administration charge on contributions.
  4. If your employer contributes to your pension, it’s free money – if you are lucky enough to be included in an employer sponsored arrangement, it means that along with your own contributions that have income tax relief & tax free investment growth, you will also be increasing your pot with employer contributions that haven’t cost you anything.  If you are self-employed, or don’t have access to an employer arrangement this doesn’t mean you should be left out in the cold.  You should contribute yourself.
  5. The odds of winning the lottery are 1 in 8,145,060 million!  There are many cognitive biases that attract people to the lottery.  However, one of the main problems with the lottery is our misunderstanding of probabilities. Odds as small as those above, outlining a potential lottery win in the Irish National Lottery are outside the range of our experience of probabilities in everyday life.  Simply put, you are highly unlikely to ever win the lottery and you will have to fund for your own retirement.

For further information regarding saving for your retirement please contact Susan O’Mara and the team in Milestone Advisory

Milestone Advisory Limited t/a Milestone Advisory is regulated by the Central Bank of Ireland

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