Get smart about your pension payments
I am surrounded by people who work in multinational companies from my office in Little Island in Cork.
What concerns me is that on a daily basis, I come across people who are part of a company pension arrangement who have no idea they are sitting on the lottery when it comes to their pension.
Frighteningly, some don’t know what they are entitled to and where their money is going, and more frighteningly some haven’t taken advantage of this free money from their employer by not participating in the pension at all.
Take a 30-year-old is on the average wage of €45,611 per year.
If they are offered a 5% matching contribution pension, this would mean that they contribute 5% of their salary and their employer matches this.
This means they are receiving €4,561 per year into their pot for a net cost to them of €114 per month, or €1,368 per annum, as they get tax relief on their payment at source.
This is a whopping €3,193 free money per year (or 233% interest before any growth is applied).
When they reach retirement age, this would generate a “pot” of around €900,000.
If they are on a higher income, say €60,000 per year, as a lot of them are, the “pot” would be north of €1m.
I have used some conservative projections in getting to these numbers and while I haven’t factored in inflation, which would pare back the pot by about 40%, the likely increase in payments over the years would, in my view, more than compensate for this.
You might think I am exaggerating the figures but I have spoken to many clients whose companies pay in 7% to as much as 14% of salary and who are on significantly more than a €60,000 per year salary.
For at least 10 years, the Government has been saying there will be an automatic entitlement for companies, and the Government, to provide their employees with a pension and contribute to it.
It looks like finally that this auto-enrolment will happen in 2022, a full 15 years after it was first mooted.
It is envisaged the level of contributions will be set at 1% of salary for employees with matching contributions from employers and the Government adding €1 for every €3 contributed by the employee.
This will eventually rise to 6% in 2028, with the employer matching the employee contribution and the Government adding a further 2%.
With fewer than half of all workers having a workplace or private pension, and concerns over the future viability of the State pension, the need for supplementary savings is seen as essential.
It’s an approach that has worked well in other countries, with Australia, New Zealand and the UK just some of those to adopt some form of auto-enrolment.
It does matter if you are male or female.
According to the CSO, women earn about 14% less than men. In Japan the figure is 27%.
This means that the same 30-year-old who should be earning €60,000 per annum due to the difference in salary and reduction in hours is likely to end up with pot worth about 27% less than her male equivalent, or around €300,000 less at retirement, €800,000 versus €1.1m.
For those of you not fortunate enough to work in a company that offers this benefit, you will have the opportunity in the next three years to participate.
For those of you that are self-employed, you have to do it yourself.
