Research has shown the quite startling impact of late starting on pension fund values at retirement. An individual who joins a scheme at 25 will have a pension worth 20 per cent more than someone who joins at 30 on the same level of contributions when they both reach 65. The gap widens to 48 per cent when compared to an individual who joins at the age of 35. Ten years makes an enormous difference.
What can be done to get more young people to join pension schemes and prevent them from suffering this loss of income in retirement? Is Government action required to make the pension system more attractive to younger people?
According to a 2023 survey by the Central Statistics Office, 32 per cent of workers aged between 20 and 69 are not signed up to a private pension, says Gavin Moran, head of wealth management, WTW in Ireland. “Everyone, young and old, is aware of the importance of retirement planning but particularly when you are younger, you will have many other expenses competing for your disposable income. Starting a pension can be put off to ‘next year’ — always on the horizon but never quite today’s priority.”
However, where you can start a pension, it is important to remember that the funds are invested which allows for compound interest and exponential growth over time, says Moran. “Therefore, the younger that you start the pension will mean that you don’t have to contribute as much later in life, compared to those who start later and have to play catch up.”
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In today’s tough market, it’s understandable that saving into a pension isn’t a top priority, says Alan McCarthy, Head of Distribution, Standard Life. “We see through our research that Millennials are grappling with a host of financial challenges at once, saving for a deposit, childcare, children’s and often, their own education. It’s not hard to imagine how overwhelming that might be.
“Once you’ve started a pension you always have the choice to change or pause contributions at any time. The main issue is that people prolong setting one up in the first place.” The reality is there is no opportune moment for starting a pension as financial responsibilities tend to grow in number as we age, McCarthy says. “Take the opportunity to start as soon as you’re earning. Keep it simple by setting up contributions directly from your salary and you’ll quickly build a savings habit.”
According to a survey by iReach Insights on behalf of Zurich earlier this year, which examined the attitudes of adults towards paying into a pension, not having any spare money (56 per cent) is still the top reason for not having a pension. “Starting a pension might appear to be an impossibility as you go from pay cheque to pay cheque but if you were able to carefully budget and a bit of sacrifice, this can be achieved, and I promise that this be a great benefit to your future self,” says McCarthy.
“We regularly see where there is an offer of an employer contribution to a pension scheme provided that the employee matches the contribution up to a certain percentage. This is essentially free money that is on the table for your future self, and you should do all that is possible to avail of this offer.”
The Government is concerned about the lack of pension coverage and is introducing a long-awaited Auto-Enrolment scheme, supposedly in September of 2025, says Moran. “The scheme will mean that 800,000 workers will be automatically added into a pension scheme, in addition to their State pension.”
Under the scheme, the employee, employer, and Government all pay a certain amount into the employee’s pension fund and, subject to certain criteria, employees will be automatically included in the scheme although you can opt out after six months.
If you leave the plan or suspend your contributions, you will be automatically re-enrolled after two years if you are still eligible for the scheme, Moran adds.