Pension Adequacy – The First Step
Start your pension as early as you can! Once started, let’s sit down and think about your number. How much do you need to live the life you want in Retirement? Let’s be realistic and aim for a comfortable retirement.
People tend to get lost in the pension planning fog! They feel pension planning is complicated and they don’t understand that it can be quite simple.
So let’s make a complicated thing simple!
What is your number?
How much do you want in your fund at age 50, at age 60, and 80?
I ask my clients to list out their retirement goals, what items can they live without in retirement. This could be their annual holiday, their tv subscription, or their usual weekly night out. I ask them to review their goal as time goes on and indeed priorities change. It is healthy to review these goals as it reminds people why they are saving for their retirement.
The state pension is the foundation to build from. It is important to note that this state pension cannot be relied on as the only income stream at retirement.
Sample Pension Planning:
An individual retired recently on a final salary of €35,000. This client is entitled to the full state pension of €12,912 per annum. This is 37% of their final salary.
Another individual’s final salary was €50,000. The OAP is only 26% of their salary. Is it enough? This is the reason why everyone should consider starting a pension plan.
35% of people in private employment have a pension in place. This is a significant problem especially as there are changes to when we qualify for the OAP. The concept of pension adequacy refers to the pension pot one has built up and if that pot will provide a pension that matches one’s expectation. Can they live the life that they want?
2 main factors to Pension Adequacy
1. Pension Contributions
The more you pay into your pension throughout your working life, the more you can expect to have in your pot when you retire. The role of tax relief here is paramount. You can pay in more in gross terms and the amount of tax relief you receive is based on your age.
The available tax relief increases with age; 15% in your 20’s up to 40% in your 60’s. As you progress over your career and as your salary tends to increase it is a worthwhile exercise to ensure your contributions are linked to your updated salary.
2. Investment Returns
It is important to make sure that your asset allocation is correct. Far too many individuals have too little investment risk in their pension.
This is not surprising, with the memory of past recessions and market crises like last March due to Covid-19. People’s behaviours tend to not change. In simple terms, those of us who have decades left before we retire should have most, if not all, our pension money in equities so short-term and even medium-term volatility should be of none or little concern. Be in the right funds based on our age and attitude to risk.
In general terms, those who are younger invest in funds designed for investment growth, while those who are closer to retirement will invest in more cautious funds to protect the funds they have built. I will argue the toss with you on this.
As everyone is different, and their circumstances are also different it’s worth taking advice. This is even more relevant for those 10/15 years from their retirement age as they have significant funds that need monitoring.
Take control of your pension
Demystify all the noise that happens around pensions and bring it back to you, what is best for you. Book your free virtual appointment with us. What we leave you with is a high-level road map of how we could help you achieve your retirement goals.
Take care,
Managing Director, Pension Advisor
[email protected]
01-5310566
