Wouldn’t it be great if you received a massive discount whenever you booked the family summer holiday! Let’s say the discount was 40 per cent. Sure why not – it’s only pretend?
Take me for example. I’m married with three young children, so the average cost for myself and my wife to take the kids away for two weeks in the sun (pre and post-Covid of course) is €5,000. If we could get a 40 per cent discount on that, so a saving of €2,000, we would be nothing short of delighted. That sort of saving would pay for Christmas.
Let’s think of another capital expense that we would love to get a nice discount on. How about paying for a wedding? A quick search on google tells me that the average cost of a wedding in Ireland these days is €25,000. Let’s stick with the 40 per cent discount to keep things simple. If you are a parent who is fortunate enough to be in a position to help out a child with this cost, then I’m sure you wouldn’t say no if you were asked to cut a cheque for €15,000 instead of €25,000!
Or, if you and your husband or wife to be are paying for it yourselves (along with trying to buy a house, start a family, cover ordinary everyday expenses) and you need to borrow for it, wouldn’t you rather have the lower repayment costs on a €15,000 loan as opposed to a €25,000 loan. I know I would!
Okay, okay, last one. What about saving in order to maintain your standard of living when you’ve finished working? Imagine if for every penny that you put into a long term savings account – to be used to support your ability to live well, eat out regularly, travel whenever you want, help the kids out financially if they need a dig out, and so on and so forth – imagine if you got a discount of 40 per cent on all of that!
That would be the bargain of the century. Especially with long-term bank deposit rates at or near zero. Oh wait, we have that already – it’s called a pension!
Around this time of the year, every year, we all hear the stats about inadequate pension provision and we all think “I should really contribute more to my pension”, but we rarely do. The facts are that only around 50 per cent of private sector workers currently contribute to a pension, and only half of that 50 per cent contribute enough to build a sufficient retirement pot that will enable them to comfortably enjoy their retirement.
To make matters worse, right now, across the Irish banks, deposit holders are sitting on €120 billion in savings, which is earning pretty much zero, and is expected to earn pretty much zero for the foreseeable future.
So, if you are employed in any shape or form, you have deposits that are not intended for any specific purpose (eg a rainy day fund, children’s education, buying a house), and you have scope to benefit from tax relief on a pension contribution, then I think it’s a no-brainer to invest some of it in your future.
If you are a higher rate tax payer (ie your annual earned income is higher than €35,300) and you make a pension contribution of €5,000 today, then you will receive a discount (tax relief) of €2,000. So, you pay €3,000 to get €5,000 put into that long-term savings account that I mentioned earlier. Ramp that up to a contribution of €15,000 (net) and you get €25,000 lumped into the savings account. So what are you waiting for?
Naturally, there is a little bit more to it than as presented above, so I recommend that anyone who would consider making a pension contribution to first seek financial advice from a competent adviser with a strong understanding of the pensions landscape.
As always, in BCP we are happy to help if you don’t already deal with an adviser, or if you simply wish to get a second opinion. However, regardless of where you seek advice, the tax relief is the tax relief so the discounts are real. Take advantage.