1: Fees
It may seem like a small amount but the difference between a 1.5 per cent annual deduction on your pension fund and a 1 per cent charge for fees is very significant. And the myriad of ways in which a pensions provider imposes fees can obfuscate the true cost. Consider for example, a charge of €10 per month; a deduction of 5 per cent on your monthly contributions; or an annual management charge of 1 per cent. Which do you think works out as the most expensive? Well, according to the Pensions Authority, the €10 fee will see your pension fund fall in value by just 3.3 per cent – but the annual management charge will leave you with a whopping 10.6 per cent less to live on in retirement.
2: Performance
How your pension fund performs is going to have a massive impact on how frugal or otherwise your retirement is going to be. If you’re set to enjoy the comfort of a defined benefit scheme, where your income is fairly guaranteed, it’s not so much of an issue; but if, like a greater proportion of the population, you will be dependent on your defined contribution scheme to come good, then you need to keep an eye on performance. Staying with a poorly performing fund manager, or sticking with cash when you should have been in equities, can cost you. For example, a fund that has returned 6 per cent a year will give you a retirement fund that’s 50 per cent higher than that returned just 4 per cent.
3: Contributions
A pension fund is only as good as how much money actually goes into it. Typically, it comes from two sources – you and your employer – and a good employer contribution rate can be worth its rate in gold. Unfortunately however, many employers don’t rise to the occasion and we have seen contribution rates of as low as 3 per cent on offer. Most experts suggest you will need to contribute between 15-20 per cent of your salary to retire on a third of your income, so if your employer isn’t providing enough, it will mean you will have to dig deeper.
4: Duration
The longer you save, the more you’ll save. Obvious isn’t it? But it’s not just down to the greater number of contributions you’ll make. Compounding is that little magic button that can turn small contributions into a significant lump-sum.
If you put just €10 a month into a pension over 50 years, this €6,000 or so can turn into a chunk of money worth about €26,000. Now this is based on a compound rate of about 5 per cent a year, so is not something easily achieved given interest rates today.
So the earlier you start the pension, the easier – and cheaper – it should be to build up a sufficient nest-egg come retirement.
5: Tax relief
Like “rocket fuel” for your pension fund, tax relief on your pensions can significantly increase both the amount that goes in – and the amount that there will be there to draw down come retirement. It works in a number of ways. Firstly, you will earn tax relief based on your marginal rate of tax on all contributions up to an age-related limit. So, if you pay tax at 20 per cent, for example, a contribution of €100 will only cost you €80, or €60 if you pay tax at 40 per cent. Moreover, your pension is allowed to grow tax free, which means the returns should be greater at the end, while you can withdraw a cash-free lump sum upon retirement, typically of the order of 25 per cent of the fund’s value.
