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  • Writer's pictureNiamh De Búrca

What's the point of Pensions?

  1. Increase your overall wealth to leave to your loved ones should you pass,

  2. Increase your wealth in retirement so that you have a good standard of living once you have finished working,

  3. Invest the government's money on your own behalf by investing the tax relief on contributions,

  4. Grow your investments in a tax free environment.

Pensions get such a bad wrap because they are misunderstood! and they are also something we don't see the value of when we are younger and in the throws of life.

But a pension is one of the best investments you will ever make. To explain it let me introduce you to Sam.

Sam has just turned 30 and has bought a home with an outstanding mortgage of €200,000 over 33 years at 4%. She earns a gross income of €50,000 a year.

After mortgage and outgoings Sam has an average €870 per month to direct towards savings or longer term goals. Sam has no pension and is confident that she will be OK with the state pension come age 68.

However even though Sam might increase her savings in her own name over time, as soon as her income stops at age 65, she will need to dip into these savings to supplement her standard of living. Assuming she leaves this excess cashflow on deposit, forecasts suggest that she will run out of money at age 87, and probably at a time of increased health care costs!

However, if Sam was to direct up to her annual tax relievable pension amount into a well invested pension (yielding a smoothed 6% net of costs a year) Sam's retirement could look very different.

By making these pension contributions through her payroll system, any contributions avail of the tax relief at source and she sees the immediate tax relief benefit. For those making lump sum or annual contributions outside of payroll this tax relief is seen through a reduced tax bill of up to 40% of the pension contribution (depending on your marginal rate).

For Sam, even after these pension contributions she will still have €370 per month in excess cashflow and an estimated pension at retirement of approximately c.€2m.

Now if Sam was to invest some of this extra cashflow too, say €200 per month at a net after tax and cost return of 2% a year, she would further improve her net worth over time.

So in summary, through active decision making on Sam's part she can go from a place of running out of money at age 87 and risking poverty in her final years to potentially being a millionaire throughout her retirement!


This note is not financial advice and independent financial advice specific to your own circumstances should be sought. The contents of this note are for illustrative purposes only and do not form any guide to future returns.

Investments will go down as well as up and you may get back less than you invest. Past performance in no guarantee of future returns.

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