Pension delayed, comfort denied

The importance of starting a pension early is repeated over and over again yet all the evidence points to the message falling on deaf ears. But the consequences of this unwillingness or inability to act on advice can be very severe indeed.

“At present, people start contributing to pensions in their mid to late 30s. That’s quite late,” says David Boylan of Davy. “Younger people tend to go travelling and are faced with the rising costs of property and so on. Ideally, you should start contributing to a pension the day you start work. If you don’t see the contributions in your first pay cheque, you’re not going to miss them. The later you start the more you have to put in.”

He illustrates this point with the example of a 25-year-old who puts €5,000 a year in for 40 years with average growth of 5 per cent a year. “They would end up with more than €600,000 by the time they reach 65. If they wait 10 years until they are 35, they would have just under €350,000. Starting a pension when you are younger makes a big difference down the line. Using your first pay rise to start a pension is another good time.”

The situation is actually worsening in the view of Bank of Ireland pensions director Bernard Walsh. "We are now seeing people not starting pensions until they are in their mid-40s," he notes. "That's quite scary. There are a couple of drivers behind this. The cost of buying a house has risen substantially, for example, and it's taking longer to accumulate savings for a deposit. People are putting off saving for their retirement. The day a person starts work is the day they should start a pension. The proposed auto-enrolment scheme should be compulsory from the day you start work."

The example Walsh gives is of an individual saving €200 a month from age 30 until 65. They will end up with €215,000; waiting until 45 will cost them €134,000 and they will end up with just €81,000.

KPMG pensions actuary Joanne Roche puts these figures in context. "The cost of funding even a modest level of pension in retirement is significant," she explains.

“For example, the cost of a €15,000 per annum pension which is largely inflation-proofed in retirement is about €500,000 at today’s prices. Someone on €40,000 today, starting to contribute aged 30, wanting to retire aged 65 and looking for a pension of 50 per cent of their retiring salary, would need combined contributions from employer and employee of 14 per cent per annum. If they started at age 35 they would need combined contributions of 22 per cent. So, in the vast majority of cases, the advice is to start as early as possible and pay in as much as is affordable for as long as possible.”

‘Clear goals’

David Boylan points to another reason to start as soon as possible. “The earlier you start the easier it is to ride out market volatility,” he says. “If you invested €100 in an MSCI World Equities fund in 2006 you would have €170 now despite the crash of 2008. The key thing is to have a focused plan with clear goals. Goals can change, and you have to be able to adjust the plan as you go along. The earlier you start, the easier it is to do that.”

That is easier said than done, KPMG partner Eoghan Quigley points out. “In practice, the competing financial demands of funding the business are likely to mean that entrepreneurs begin to make pension provision, or at least meaningful pension provision, at a later stage in their working life than an employee. There are design features of the supplementary pension regime that are at risk of adversely affecting entrepreneurship and more generally those with atypical careers.”

In particular, the rules around tax relief mitigate against entrepreneurs and others catching up later in life or, indeed, making earlier provision. “The age-related limits which set maximum allowable amounts are not aligned with the real costs of funding even a modest level of pension in retirement,” Quigley continues.

“They should be adjusted to support higher contributions at an early stage in the working life if the individual’s financial resources allow. Also, there is no facility to carry back unused relief which does not support funding contributions in a ‘lumpy fashion’.”

The message is clear – start early or repent later.