Need to Know: A dummies guide to pensions

We are all told that we should start our pensions when we start working. However, that’s not really on any young twenty-year-old's agenda!

When you are twenty you are enjoying life and exploring new things. In their thirties, people are probably getting married and have the expense of building a house and starting a family or a business.
So, if your employer has a pension scheme, you should get into that as soon as possible. It’s taken at source; they might contribute up to 5% or more and you can match this also if you wish.

If that’s not an option, then you should start thinking about a pension in your mid-thirties. It’s never too late to start a pension, or so they say. Let’s hear what our financial expert has to say on the matter.
“We still get people coming into us at the age of 55 and 60 to start a pension, because they need to put money into one to get tax relief from the contribution,” says financial advisor Gearoid Cleere.
“For example, if they are on the higher bracket of tax, earning €100,000 p.a., they can maximise their pension and get 40% tax relief on whatever they put in. If they put €10,000 into a pension, it’s only going to cost them €6,000, because they are going to get €4,000 back from the Government in the form of tax credits.”

That’s all well and good if you have plenty of money but some people break into a hot sweat at the mere mention of pensions. Can they be that complicated?
“Pensions are a win for the future because it's free money from the Government and people don’t see that. In the above case it is only costing them € 6,000 as they will be availing of tax relief.
“To break it into simple terms, a pension is a long-term savings account, and you get tax relief on whatever marginal rate you are paying. That basically means if you are on the lower bracket of tax, which is 20%, you’ll get 20% tax relief on everything you put in and if you are on the higher bracket, you get 40% relief.

“Instead of giving it to the taxman, if you put it into a pension, you will get tax relief. So, you are saving yourself money and I’m sure you’d rather it in your pocket than in the taxman’s pocket!”
Surprisingly Gearoid is seeing that people want to retire earlier.

“The pandemic has opened their eyes and some smart people want to finish work sooner at the age of 60 years,” says Gearoid. “ They are coming to me requesting financial reviews at the age of 35 or 40, they want to work smarter and retire earlier. If they retire at 60, their main concern is if there will be enough in the pot for the next 20 to 30 years.”
However there's no point in having saving plans, pensions etc., if your income is not protected. So what do I need to protect all of my savings, especially if I fall sick and I'm not able to work? No work means no income, no savings, no early retirement and definitely no pina coladas at sunset!

Gearoid says that you need to have your income covered in the event of a serious illness or injury. Income Protection will cover up to 75% of your salary up to the age of retirement be it 60/65 years.
“The key thing here is the tax relief you receive at your marginal rate of 20% or 40%.
“This will reduce your monthly premium each month. Your employer might cover your salary for the short-term period of three or six months. This is where the Income Protection then kicks in and continues to pay you going forward until you return to work.
“We also have other options such as wage protector, again once you sit down with a financial broker all these options should be looked at."

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