People’s eyes light up when they realise they can get a €1m pension pot with only €220k of net income: Colm Moore’s Contribution to the Irish Independent

Our very own Colm Moore, Managing Director of Moore Wealth Management, recently contributed to the Irish Independent with his financial expertise and thoughts on the Irish Pension System and the benefits of starting a pension sooner rather than later in your career.

Around six in 10 Irish workers feel they’re not on track for a reasonable standard of living in retirement, according to a recent survey.

The research, carried out by investment firm BlackRock, found that more than half of us feel we’re not contributing enough to our pension savings – but what is “enough”?

It can be difficult to figure out the total sum you’ll require in retirement, and how much you should be putting into your pension pot throughout your career to prepare for it.

“Irish workers often underestimate how much they need to save, or assume that their employer contributions or the state pension will be enough,” says Conor Farrell, managing director of Elevate Financial Planning. “In reality, the state pension currently stands at €289.30 per week for those under 80 years old, or €299.30 for those over 80 – hardly enough to sustain the lifestyle most people aspire to in retirement.”

At the most basic level, the National Pension Helpline notes that you would need a pension pot of €500,000 to provide an annual pension of €16,000 – just above the poverty threshold of €15,158.

To give yourself a better sense of what to aim for, it can help to think about what kind of lifestyle you hope to enjoy when you retire. David Malone, head of operations at the Pensions Authority, advises getting a clear picture of all of your outgoings by using a budget planner, such as the free one on the Competition and Consumer Protection Commission’s website.

“We all say we should do this, and then we keep putting it off, but it’s actually quite a revelation if you do the exercise and see it down on paper, and you go, ‘Oh my God, I spend that much?’” he says. “Work back from what it is that you want in retirement.”

While a qualified financial adviser can work with you to create a detailed savings plan, there are also free pension calculators available online from the likes of the Pensions Authority and the National Pension Helpline.

Although everyone’s circumstances will differ, Mr Farrell says: “A good rule of thumb is to aim to replace at least 50-66pc of your pre-retirement income. This usually requires saving between 12-15pc of your gross salary each year over the course of your career, including both employer and employee contributions.”

There are no one-size-fits-all benchmarks, but a new study has put forth targets around pension planning for Irish workers. The Financial Planning Standards Board (FPSB) Ireland, together with consultancy firm GEM Strategic, has produced the “Prime Retirement Index”, which outlines the recommended pension pot for each decade from 35 to 65.

“I think this latest research is very helpful, because it makes answering the inevitable question of ‘how much do I need?’ quantifiable. Everyone’s circumstances are different but as financial planners, we now have great research to call on,” says Colm Moore, certified financial planner with Moore Wealth Management.

“People like targets and this gives them something to aim for and allows them to progressively benchmark their pension funding to date. You can find these figures for the UK and America, but until now we did not have this tailored for Ireland.”

The age benchmarks are as follows:

Age 35 (early career): 1x salary

Age 45 (mid-career): 3x salary

Age 55 (pre-retirement): 7x salary

Age 65 (at retirement): 11x salary

The full report will be released in the coming months, including stress tests examining scenarios where people are behind on their goals, with suggestions on how they might catch up at different points in their career.

“The options would then be to increase the risk exposure in your pension, which brings in more volatility in a potential shorter timeframe, or make more contributions into it,” Mr Moore says.

The prospect of saving 11 times one’s salary may seem impossible. When should you start? Ideally, the day you start paying tax, Mr Malone says, pointing out that it’s the most tax-efficient way of saving and will deliver the greatest returns.

“The earlier you start, the longer you’re saving for, the bigger the compounding factors come into play, and then you pay tax on it as you draw it out when you retire,” he says.

Farrell adds: “Contributing even 5-10pc of your salary in your 20s allows compounding to do the heavy lifting.”

Realistically, it can be tricky to get people to think seriously about building pension funds early in their careers. “People can’t afford them and that’s the reality of it. People can barely afford their rent,” Mr Moore says.

“They’re saving for houses, and they’re trying to live a life as well. If you’re saying to somebody, ‘start contributing Xpc of your wages and put it into something that you’re not going to see for 40 years,’ it’s understandably difficult.

“You are trying to help clients balance their current needs and future needs.”

Another chart from the Prime Retirement Index shows a breakdown of contributions and market return for someone who started their pension at 25 – by the time they will have reached 65, with 11x salary in their pension pot, 63pc of their fund has come from growth, and 37pc from contributions, with tax relief of up to 40pc on those contributions.

“People’s eyes light up when they see that chart. So for example, if you had a well-advised pension of €1m that had run for 40 years, it would have cost you €220,000 of your net income to get to that point when you factor in tax relief on contributions and growth over that term,” Mr Moore says.

If you’re just getting started, how can you work out how much to save each month?

“A simple way to calculate is to take your age, halve it and use that as the percentage of your salary you should be saving if you’re only starting now. For example, a 30-year-old starting from scratch should aim to save 15pc of their salary,” Mr Farrell says.

“However, early starters can save less and still achieve the same results. If you’re starting at 25, 10pc of your salary could be enough. If you’re starting at 40, you might need 20pc or more.”

Gerry Stewart, a qualified financial advisor and retirement planning advisor at Fagan & Partners, recommends following the limits around the amount of pension contributions you can get tax relief on in any one year, capped at €115,000 of earned income. Under 30, that’s 15pc, rising to 20pc between ages 30-39, 25pc for 40-49, 30pc for 50-54, 35pc for 55-59 and 40pc for 60 or over.

“Save as much as you can, up to the limit of what Revenue allows you from a tax relief perspective,” he says. “Secondly, if there’s an employer pension scheme, maximise that, because sometimes they might start off with a base contribution rate of 5pc, but with some schemes, if you put in more than 5pc they will match that.

“Check with your employer on a regular basis: if you increase your contribution above 5pc, how much will they match that to?” he adds, noting that employer contributions in most company pension schemes are not taken into consideration when calculating your earnings threshold.

“If you’re under 30 and an employer is paying 5pc, you can still put in 15pc – their 5pc is outside of that limit. If you can, that’s a really, really good thing to avail of, because essentially it’s money for nothing from the employer,” he says.

Mr Farrell notes that it’s also worth considering your choice of pension fund. “Too many workers assume that simply contributing to a pension is enough, but where your money is invested is just as important,” he says.

“Many older workplace pensions default to ultra-cautious or low-growth funds that may not match your risk tolerance or long-term objectives. Choosing appropriate funds based on your age, goals and retirement timeline can make a significant difference to your final pension pot.

“We’ve seen clients increase their projected retirement income by tens of thousands simply by switching out of default funds into more diversified, performance-focused portfolios. Seeking professional advice early can help align your investment strategy with your retirement goals and reduce the risk of missing out on potential returns.”

If you are an employer or an employee who needs guidance or support on Retirement or Pension Planning or the new Auto Enrolment Pension Scheme, contact us today.

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