Although most of us don’t wait that long to start one, many of us will retire on a measly pension because we have started to pay into it too late – and the contributions we are paying are too low.

The average person starts paying into a pension at the age of 37, according to a study carried out by Irish Life in 2014.

I decided to look at the effect of starting a pension at age 30 and starting at age 40. I think 30 is a realistic starting point; of course the earlier the better; the longer you are contributing the higher a fund you will potentially build up. If you start a pension early, your money has more time to grow which could give you a higher income in retirement. You could also benefit from more tax relief than someone who starts later.

However our 20’s is also a time where savings are required to buy/build our new home, possibly start a business so if we assume most people will start their pension at the age of 30, what difference does it make compared to waiting those extra 10 years until age 40?

As per quotations I completed there is a sizable difference; I assumed an increasing contribution of €200 into a Personal Pension Plan with a normal retirement age of 65.

If we start at age 30, assuming a retirement age of 65, the pension fund would be €274,046.00.
If we start at age 40, assuming a retirement age of 65, the pension fund would be €137,673.00.

Quotes were based on Irish Life Complete Solutions Plan with 98% allocation and Annual Management Charge of 1%. The growth rate assumed was 5.4%.

So how do we decide how much we need to contribute to a pension plan?

This can be difficult; we need to have an idea of how much we need to be comfortable in retirement. Of course that will depend on our financial circumstances, at that time. However we can generally assume living expenses will not be as high in retirement as they are during our working life. Most of us will have our mortgage paid off by the time we retire and children will have usually have left the nest at that stage too.

According to the Irish Association of Pension Funds, if we want to retire on a salary equivalent to two-fifths of our final salary and start at the age of 30, we would need to contribute 22pc of your salary. If we leave it until we are 50 years old we would need to pay almost 60pc of our salary!

This is a startling statistic and coupled with the expectation that the State Pension is generally viewed to be unsustainable in the long term, we should really start to sit up and think about our pension options before it’s too late!

If you want any advice in this area, please contact us.