Every year, Goodbody conducts hundreds of financial reviews for clients and prospective clients – and the most common issues they come across focus on savings plans, inheritance and pensions.
Our client Katie* (35) came to us as she had a new job on a higher salary and was looking to buy a house in the next five years. She had a big short-term financial goal, but wasn’t yet thinking about her long-term financial future.
While her employer automatically paid 5 per cent of her salary into their pension scheme, she learned that she could also make Additional Voluntary Contributions (AVCs) with which she could avail of 40 per cent tax relief in her monthly paycheck.
Katie was shown an example of a 35-year-old and a 50-year-old contributing to their pension:
From age 35, if you contribute €100,000 over 30 years that equals €270 a month, but after tax relief the contribution will only cost about €160 a month. Based on a potential annual return of 4.5 per cent, this will result in a pension pot of about €202,000 at the retirement age of 65.
From age 50, investing the same €100,000 over 15 years with the same annual return will total €138,000 at 65.
Beginning a pension earlier also means that if Katie has to take time off work for any reason and can’t contribute to her pension, she will still have a scheme working hard for her.
Katie was advised to aim towards having two-thirds of her current salary in her pension years. This assumed that she would have paid off a mortgage by then and may have some inheritance at that stage. However, her needs could increase depending on other costs including paying for a child’s education or house repairs. Katie settled on an annual income figure that she would like to have in retirement and worked backwards from that. Katie also included the state pension to her far future annual income, but kept in mind that this number could decrease.
Working off her final income number, Katie decided to put €270 towards AVCs every month which only cost her €160 after tax relief. This allows her to save towards a house deposit and eventually secure a mortgage without greatly impacting her lifestyle.
Katie reviewed her monthly budget and progress annually, and was eventually able to pay more contributions. As retirement approaches, she can move her pension from high-risk to low-risk investments and into a post-retirement fund.
*Names have been changed to protect client anonymity.
Whether you’re looking to grow, manage or protect your wealth, contact the all-female advisory experts at Goodbody to discover what’s possible for you, or to request a free financial consultation at investmentclub@goodbody.ie.