Moneymakeover Why does everyone say "Max your pension contributions"?

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Sprocket77

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Brendan Burgess said:
You should be maxing your pension contributions. I doubt if Cornmarket are the best way to do this. But someone else will be able to tell you the options to do it more cheaply.
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Can I ask why the advice is always to max out the pension contributions? I know it's great tax relief and all, but they are both going to receive 50% of their salaries as DB pension plus 1 1/2 times tax free lump sum and they already have AVCs that will give a pot of €600k which should allow them to retire early if they want, so they are already very well set up for retirement.

I would think it might be better to just say you're in a really good position and go and actually spend some of that extra money on yourself and your family now while you are healthy and while the kids are at a great age and you can enjoy it.
 
Great question.

And I have also raised the issue on a few occasions as to whether it is worth contributing if you are likely to break the €800k or €2m threshold.

People should not be sacrificing today to max their pension contributions. But if they have plenty of cash or surplus income, I think that they should be.

It's just the best method of long-term saving.

Maybe there should be a general key post: - something like the following

1) Pay the pension contributions which are required to maximise your employer's matching contributions. In other words, if they match 3%, you should always pay 3%. If they match 5%, you should always pay 5%.
2) Pay down any expensive debt - e.g. credit cards, car loans etc.
3) If your mortgage is uncomfortably high or you face uncertain employment or income prospects, pay down your mortgage.
4) If you are planning to trade up/extend in the near or immediate future, maximise your savings for this.
5) If your kids are going to college within 5 years, save for this
6) Then maximise your pension contributions.
 
Pre-2013 public sector workers don't retire on half final salary unless they work for 40 yrs.

One rationale for maxing out pension contributions is to enable early retirement which could be desirable or unavoidable depending on how one's life pans out.
 
Or perhaps -

1) Pay the pension contributions which are required to maximise your employer's matching contributions. In other words, if they match 3%, you should always pay 3%. If they match 5%, you should always pay 5%.
2) Pay down any expensive debt - e.g. credit cards, car loans etc.
3) If your mortgage is uncomfortably high or you face uncertain employment or income prospects, pay down your mortgage.
4) If you are planning to trade up/extend in the near or immediate future, maximise your savings for this.
5) If your kids are going to college within 5 years, save for this
6) Use your money to enjoy a comfortable life now (buy back time with family, holidays, hobbies, sports, convenience)
7) Then maximise your pension contributions.
8) Invest surplus in world equity fund
 
Sprocket77 said:
Why does everyone say "Max your pension contributions"?

Can I ask why the advice is always to max out the pension contributions?
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Everyone doesn't always offer that advice. It's often more nuanced.

Key Post - Overpay mortgage or contribute to pension or do something else?

This comes up in a lot of different threads, so I will set out some principles here to kick off the discussion. I will edit it in the light of feedback. There are many options with your savings in excess of your emergency cash fund Pay down your mortgage Build up a fund to enable you to trade...
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Just for context, this question was originally posted in a money makeover where the couple in question were only spending €36k per annum including mortgage and holidays for a family of four, while saving nearly the same again. They were also already in a position where without increasing contributions they would have much more than what they currently spend in retirement.

I think that there are times where people over estimate what they need in retirement. My parents aren't even spending their full pensions and they only have a joint pension income of €40k per year. Dad complains about needing to find somewhere for saving what they're not spending.
 
Sprocket77 said:
I think that there are times where people over estimate what they need in retirement. My parents aren't even spending their full pensions and they only have a joint pension income of €40k per year. Dad complains about needing to find somewhere for saving what they're not spending.
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People also fail to realise that spending will decrease as you get older. You won't be going on the same holidays or doing as much when you are 85 as you did when you were 65.
 
Not everyone will have a family and friend support network later in life and for them health and residential care costs may skyrocket to thousands per month.
 
CharlieMac said:
Not everyone will have a family and friend support network later in life and for them health and residential care costs may skyrocket to thousands per month
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That's a good argument for spending it all early so that the State (other people) pick up the tab through the Fair Deal scheme.
 
Fibbernacci said:
If you plan to retire as early as possible then maxing pension contributions is a must
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Not always…

Some people can only access their pension (and associated AVC fund) age 60 at the earliest. If you want to retire earlier than 60 then it may be better to put money in a “bridging” fund, rather than into an inaccessible pension fund.
 
Purple said:
The fair deal scheme takes care of that.
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Is the fair deal scheme not in danger of suffering the same issues as the state pension? It works fine when the impact is watered down across many workers but as we move from 4:1 to 2:1 is 1) the model sustainable, and 2) is it prudent to budget for it?
 
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jpmackey said:
Some people can only access their pension (and associated AVC fund) age 60 at the earliest. If you want to retire earlier than 60 then it may be better to put money in a “bridging” fund, rather than into an inaccessible pension fund.
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Similar to the OP in the original thread, there are a number of special cases especially around public service workers with defined benefit pensions, with limited lump sums and overfunding risks, where maximising pension contributions isn’t as clear cut as for most other workers.
 
Setforlife said:
Similar to the OP in the original thread, there are a number of special cases especially around public service workers with defined benefit pensions, with limited lump sums and overfunding risks, where maximising pension contributions isn’t as clear cut as for most other workers.
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Yes, that's why the advice is not always maximise your pension contributions.

Moneymakeover - Why does everyone say "Max your pension contributions"?

You should be maxing your pension contributions. I doubt if Cornmarket are the best way to do this. But someone else will be able to tell you the options to do it more cheaply. Can I ask why the advice is always to max out the pension contributions? I know it's great tax relief and all, but...
www.askaboutmoney.com
 
The average time a person spends in a nursing home in Ireland before their death is less than 3 years & only a minority of people spend any time in full time care. Most of us can expect to live at home until we die. Care plans are likely to be & are a fraction of NH costs in such scenarios. I suspect many people significantly overestimate the care costs of old age and are unnecessarily frugal in the years before & after they retire as a result. Their estates beneficiaries are the only ‘winners’ as a result.

Of course the great unknown is no one can predict the future. Perhaps, god forbid, AI will soon be able to individually tell us how long we will live & we can adjust our financial planning as a result…
 
It can be very useful for early retirement planning, if you have surplus money now. You can save 42% tax on entry, tax free growth and pay 20% on exit (up to €53,000 annually). By maximising pension, it can still leave you with sufficient pot at the time of retirement age of 66.
 
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