Making your pension work for you

In the late 1800s, German chancellor Von Bismark introduced the concept of providing financial support to those who were ‘invalid to work because of age’.

Before this, there were two life stages – your early education and your working life – but with Bismark’s introduction of a pension, retirement became a third life stage.

At the time, it was a life stage that the majority would never see, with the pensionable age being 70, as the average life expectancy for a newborn in Germany was around 40.

Today, there are more people turning 50 than there are turning five in Ireland and a 65-year-old can expect, on average, to live for another 20 years.

As we continue to live longer, healthier lives, retirement is not what it once was. Where once it signified an end, it’s now a process of change and an opportunity to pivot into a new phase of life.

When viewed this way, it’s something that everybody should look forward to. However, some people don’t give retirement much thought.

According to Standard Life’s Retirement Pulse, almost four in ten (39 per cent) adults in Ireland say thinking about retirement makes them anxious, which might explain why less than a third (30 per cent) say they have a plan and feel prepared.

Whether you’re seven months or seven years away from the anticipated retirement age, there’s always time to reflect on where you want to pivot your future. Some people pursue new passions, others travel, some upskill and start new professions, and some savour more time with family.

Once you can visualise it, you’ll be better able to execute a plan to help you achieve it. And there are certain factors that we know positively influence a person’s journey to and through retirement.

Planning and starting a pension

Our research shows time and again that pension owners are more likely to feel prepared for and then happier in retirement. But it’s not just years or decades down the line when people benefit. On average, they tend to feel more positive about their current financial position.

There are just over six in ten workers (61 per cent) in Ireland with a pension right now. When you start your working life, you should start a pension. This is when you’re more likely to be free of certain financial responsibilities that often come down the line when you start a family, buy a house or care for loved ones. The sooner you contribute, the longer your money has to grow.

The compounding effect – where the cash your investment earns can attract additional earnings – makes a massive difference.

It also allows you to keep the money you would otherwise be paying as tax on your income. You get tax relief at the rate you pay income tax, subject to age-related limits. So, for example, if you’re paying tax at the 40 per cent rate, every €60 you save gives you €100 into your pension.

If you’re an employee, find out who is in charge of signing you up to a pension in your workplace. All employers, irrespective of size, have to offer you access to a pension. They don’t have to contribute, although most do.

Personal pension products are also available, such as the Personal Retirement Savings Account (PRSA), a Revenue-approved savings contract between you and an insurance provider. Anyone, employee, self-employed or those between jobs, can open a PRSA.

Adapting with life

How you choose to finance your second life will change as you move through life. Childcare and paying for children’s education are two of the most pressing financial concerns for Millennials (27- to 42-year-olds) and Gen Xs (43- to 58-year-olds) today.

Understandably, you might need to adapt your contributions to cater to certain stages of your life. You can stop, start, decrease, or increase your pension contributions at any stage. But a good financial planner will help tailor a plan considering current circumstances and future goals.

The AVC advantage

Consider how to maximise savings with additional voluntary contributions (AVCs). These are simply savings you make personally in addition to your employer’s contributions. Anyone saving via AVCs is miles ahead on the road to a better retirement.

Use the pay rise trick. Most people will be unable to contribute enough at the beginning. So, start with whatever you can, but each time you get a pay rise, put a quarter of it each month into your pension as an AVC.

That additional cash, which would have been subject to tax, will go a long way in growing your pension fund, and you can’t miss what you can’t spend. If you’re entitled to a bonus, consider if you can redirect a portion or all of it into your pension as an AVC.

Moving towards retirement

As you near retirement, you’ll want to consider how to rebalance the budget back towards investing in your future.

You’re still entitled to tax relief on the contributions and tax-free growth on the investments. Most people don’t realise that as you get older, Revenue allows you to save a higher proportion of your salary and avail of income tax relief.

This can make a big difference to the final value of your pension pot. For example, when you’re aged 50 to 54 you can save up to 30 per cent of your salary tax efficiently and up to 40 per cent when you are 60 and over.

From age 55, assuming you are still working, you have around 11 years until your state pension starts. You could even keep working from the state pension age and contribute up to age 75 if you’re still paying income tax.

If you haven’t spoken with a financial adviser, we encourage you to do so. They’ll assess your current retirement savings to help you understand how to boost your pot and the choices available to you at retirement when you want to draw down your income.

Planning holistically

We see the positive impact that planning holistically has on retirement outcomes. Planning holistically means considering what you need to maintain a sense of purpose and feel socially connected in retirement. Are you working 30, 40, 50, or 60-hour weeks currently? How much of your socialising is tied to work? Do you have hobbies?

On average, a retiree can expect to reclaim 2,000 hours per year. The possibilities are endless, but you need to implement a plan. Speak with family and friends.

You can also search Standard Life’s Retirement Hub to explore inspiring stories from recent retirees and free retirement planning resources.