Brendan Burgess
Founder
- Messages
- 52,257
This is a key question for anyone with a defined contribution pension scheme such as a PRSA. And there are no clear answers. This is my view and many disagree with it.
You should not ask this question in isolation – you should look at your entire wealth:
Your savings and investments outside a pension scheme
Your business if you have one
Your home
Your expected inheritances
While it is a mistake to squander money which you should be saving for the longer term, it is also a mistake to make unnecessary sacrifices now for yourself and your family only to die rich.
Financial priorities
Your financial priority should be to own your own home and to get the mortgage down to a reasonably comfortable level. This should take priority over starting a pension. If you contribute to a pension, you cannot access the fund if you need it for a deposit to buy a house. So don’t start a pension until you buy a house.
If you have an SSIA, you should be contributing the maximum amount to this. This is better than a pension scheme as it gets an immediate 25% contribution from the government and it is available to you when the SSIA matures. On maturity, you can then feed the proceeds into a pension scheme, so the SSIA beats the pension scheme all the time.
The only rare exception to the above is companies like Microsoft,( any other major employers who operate a similar scheme?) who match your contribution to the pension scheme. If you put in 3% of your salary, they put in a further 3%. If you put in 5%, they put in 5%. In this rare case, you should put in the maximum you can afford into your pension scheme.
I have a car loan, a credit union loan and I am paying interest on my credit card?
These are very expensive forms of borrowing ranging from about 9% through to 20%. You would be far better off paying off these loans before contributing to a pension scheme. By having these loans, you are borrowing money to invest in a pension.
OK, so I own my own house and I am maxing my SSIA, now how much should I contribute?
A pension is the most tax efficient method of long term savings. If you have surplus earnings on which you are paying tax at 42% and PRSI at 2%, then you should put the maximum allowed into your pension scheme.
If you will need money in the next few years to do up your house or buy a new car, you should keep this money aside. It doesn’t make sense to borrow at 9% while contributing to a pension scheme. But it might make sense to remortgage your home at 3% to invest in a pension scheme.
If I start contributing €1000 per year at age 30, what will the fund be worth at aged 60?
I don’t place a lot of value on these calculators or their results. They can only guess at the rate of return you can expect over the next 30 years. They can only guess at how long you will live after retirement. They can only guess the final salary you will be on at retirement.
Eagle Star has provided the following figures:
If you start contributing 20% of your salary at age 30, you will get a pension of 36% of your final salary when you retire at aged 65.
If you wait unitl you are 40, you will get only 26% of your final salary.
You should try to get a balance between spending now and saving for the longer term. You should neither make unnecessary sacrifices now nor go wild in the hope that you will be well off in retirement.
Here are some calculators if you want to play with them:
[broken link removed]
[broken link removed]
Edited by ClubMan to fix Onestop pension calculator link.
You should not ask this question in isolation – you should look at your entire wealth:
Your savings and investments outside a pension scheme
Your business if you have one
Your home
Your expected inheritances
While it is a mistake to squander money which you should be saving for the longer term, it is also a mistake to make unnecessary sacrifices now for yourself and your family only to die rich.
Financial priorities
Your financial priority should be to own your own home and to get the mortgage down to a reasonably comfortable level. This should take priority over starting a pension. If you contribute to a pension, you cannot access the fund if you need it for a deposit to buy a house. So don’t start a pension until you buy a house.
If you have an SSIA, you should be contributing the maximum amount to this. This is better than a pension scheme as it gets an immediate 25% contribution from the government and it is available to you when the SSIA matures. On maturity, you can then feed the proceeds into a pension scheme, so the SSIA beats the pension scheme all the time.
The only rare exception to the above is companies like Microsoft,( any other major employers who operate a similar scheme?) who match your contribution to the pension scheme. If you put in 3% of your salary, they put in a further 3%. If you put in 5%, they put in 5%. In this rare case, you should put in the maximum you can afford into your pension scheme.
I have a car loan, a credit union loan and I am paying interest on my credit card?
These are very expensive forms of borrowing ranging from about 9% through to 20%. You would be far better off paying off these loans before contributing to a pension scheme. By having these loans, you are borrowing money to invest in a pension.
OK, so I own my own house and I am maxing my SSIA, now how much should I contribute?
A pension is the most tax efficient method of long term savings. If you have surplus earnings on which you are paying tax at 42% and PRSI at 2%, then you should put the maximum allowed into your pension scheme.
If you will need money in the next few years to do up your house or buy a new car, you should keep this money aside. It doesn’t make sense to borrow at 9% while contributing to a pension scheme. But it might make sense to remortgage your home at 3% to invest in a pension scheme.
If I start contributing €1000 per year at age 30, what will the fund be worth at aged 60?
I don’t place a lot of value on these calculators or their results. They can only guess at the rate of return you can expect over the next 30 years. They can only guess at how long you will live after retirement. They can only guess the final salary you will be on at retirement.
Eagle Star has provided the following figures:
If you start contributing 20% of your salary at age 30, you will get a pension of 36% of your final salary when you retire at aged 65.
If you wait unitl you are 40, you will get only 26% of your final salary.
You should try to get a balance between spending now and saving for the longer term. You should neither make unnecessary sacrifices now nor go wild in the hope that you will be well off in retirement.
Here are some calculators if you want to play with them:
[broken link removed]
[broken link removed]
Edited by ClubMan to fix Onestop pension calculator link.