FAQ Friday: I keep promising myself; ‘I’ll start a pension next year’, but never do – how can I take the first step?

September 24, 2021

Each month, we share the answer to one of the most frequently asked questions (FAQ) from the hundreds of consumers who contact us. For this FAQ Friday, we take a look at pension planning with our step-by-step guide for beginners, as well as some top tips you need to know along the way:

Step #1: Check in with your employer

The first step on the road to pension planning is to find out if your job has an occupational pension scheme, (company pension scheme) which is a pension that is set up by an employer for their employees. If your employer offers an occupational pension scheme, ask them for more information on how it works and if you are eligible to join, as some schemes may have certain conditions attached. For example, you may need to be employed for a certain length of time, or you may need to be a permanent member of staff to be able to join, so be sure to ask for as much information as possible.

If you are a member of an occupational pension scheme, any contributions you make will be deducted from your salary, making it simple and easy to manage. If you leave or move jobs, you may have a number of options when it comes to your pension. For example, you may be able to transfer your pension pot to your new employer’s occupational pension scheme. Alternatively, you may be able to transfer your pension to a private pension, or take a refund of contributions made. Be sure to check in with your current employer to discuss your options before you leave.

Step #2: Explore your pension saving options

If your employer doesn’t offer an occupational pension scheme, make sure to ask them what other options are available to you. By law, employers must offer their employees access to at least one standard Personal Retirement Savings Account (PRSA), so be sure to ask for more information. A PRSA is essentially a savings account used to save for retirement. Like an occupational pension scheme, the fund is invested on your behalf by the PRSA provider to try to raise the value of the fund over time, to help boost your retirement income. There are different types of PRSA options available, so be sure to speak to a registered financial adviser about what would suit you best.

Step #3: Check if your employer is making contributions

Whether you choose an occupational scheme, or a PRSA, your employer may also contribute to your pension scheme. When it comes to occupational pension schemes, employers will often contribute a set amount or percentage to your pension pot each month. Be sure to find out how much your employer is contributing and remember, the earlier you start your pension, the more your pot will be topped up by the extra employer contributions.

If your employer contributes to your PRSA, this payment is treated as a Benefit-in-Kind (BIK). A BIK is a non-cash benefit provided to you by your employer, for example; pension contributions or paying for your health insurance. In general, a BIK it is taxed in the same way as income however, a pension-related BIK is not, which means it is a more tax-efficient type of employee benefit. For this reason, you may even consider negotiating a pension-related BIK as part of your salary review.

Step #4: Work out how much you can afford to save

Regardless of the type of pension plan you have, your next step should be to work out how much you can afford to contribute on a regular basis. It’s important to remember that it doesn’t have to be a large sum. A general rule of thumb is a minimum of 1% of your salary each month, but only if this is realistic for you and your financial situation. Remember, you can always contribute more in the future, but it’s important to make a start. You’d be surprised at how contributing, even if it’s a small amount, to your pension plan can quickly add up over time. Check out our online budget planner Money Tool to help plan your finances and work out how much you can contribute.

Did you know?

Pensions are one of the most tax-efficient ways to save.

Contributions you pay into your pension are essentially tax-free, making it one of the best ways to save for your retirement.

E.g. Income tax relief on pension contributions are calculated at your marginal tax rate, which is currently either 40% (for a top rate tax payer) or 20% (for a standard rate). This means if you put €100 into a pension plan, after tax relief is applied, it would only cost you €80 if you are a standard rate tax payer, or €60 if you are a top rate tax payer.

Step #5: Make time for regular Reviews

Once you have your pension set up, it’s important to get into the habit of regularly reviewing your pension pot, to make sure you getting the most out of your retirement savings. When reviewing your pension, ask yourself:

  • Can I make more contributions? Each time your salary increases, or you receive a bonus payment, you may consider increasing how much you pay into your pension each month.
  • Am I getting as much tax relief as possible? Check out revenue.ie to see what the maximum limits are on how much you can contribute to your pension annually. The more you pay into your pension, the more tax relief you get.
  • Is this pension plan still the best option for me? Whether you are just starting out in your career, or are well on the way, it can be beneficial to speak to a regulated financial adviser to get some guidance when it comes to pensions and other big financial decisions.

For more information on pension planning and to watch our pension explainer videos with financial adviser, Eoin McGee, click here.

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