5 Common Pension Mistakes That Could Cost You Tens of Thousands of Euros

Pension planning isn’t a fun or glamorous way to invest your hard-earned money. Most people struggle to plan a few years in advance, never mind a few decades in advance.

As a result, many people are making mistakes that could come back to bite them in the future.

With that in mind, financial expert James Dorrian of the National Pension Helpline has outlined five of the most common pension mistakes that people make in Ireland – and, importantly, how to avoid making them.

1. Starting Too Late

The first mistake many people make is delaying starting their pension. This is because for 20-year-olds, it’s almost impossible to envision their lives as a retiree. However, it would be a mistake to delay pension planning, as starting early has a massive impact on retirement savings.

For instance, a 20-year-old who aims to retire with €1,000,000 would need to contribute approximately €265.30 per month. By waiting until age 30, that monthly contribution jumps to €533.72, and delaying until 40 means contributing around €1,162.94 per month to reach the same goal.

The earlier you start, the less you’ll need to set aside each month, thanks to the long-term benefits of compounding returns.

Starting your pension early is crucial; the longer you wait, the more you’ll need to contribute to achieve the same retirement goals. These calculations assume a 7% annual return, 2.5% inflation, and 1.02% cost structure.

2. Not Making the Most of Tax Reliefs

Many people overlook the chance to increase their pension contributions as they age, missing out on valuable tax savings.

With age, the percentage of your salary that can be contributed to a pension with tax relief benefits increases. For example, a 20-year-old can only contribute up to 15% of their salary tax-free, while a 60-year-old can contribute up to 40%.

It’s important to remember that these contributions are capped at a maximum salary of €108,000, meaning tax relief only applies to contributions based on the first €108,000 of salary.

3. Underutilising Company Contributions

Most people are unaware that company contributions are in addition to their personal contribution thresholds.

This means that when a company matches your personal pension contributions or makes one-time contributions on your behalf, these contributions do not count toward the personal pension thresholds outlined above.

For higher-rate taxpayers receiving a bonus or a raise at work, opting to take it as a pension contribution can be highly tax-efficient.

Direct company contributions also allow you to avoid paying PAYE, PRSI and USC on that income, all while bypassing your personal pension contribution threshold.

4. Leaving Behind Old Workplace Pensions

When you leave a job with a pension scheme, it’s easy to leave your pension with your former employer. However, doing so means you become a “deferred” member of the scheme, which often results in a loss of control over your pension.

Over time, the investment strategy of your old workplace pension may no longer align with your current risk tolerance or retirement goals.

To regain control and ensure your pension continues to work in your best interest, it’s often advisable to transfer this old workplace pension into a pension vehicle where you have full oversight, such as an ARF (Approved Retirement Fund) or a PRSA (Personal Retirement Savings Account). This gives you more flexibility to adjust your investment approach as your needs evolve.

5. Lack of Regular Pension Reviews

Many people set up a pension and then forget about it. This “set it and forget it” approach can lead to missed opportunities for optimising growth or adjusting contributions.

Review your pension annually. Consider increasing your contributions when possible, especially after salary increases or life changes. Regular reviews help ensure that your pension plan is on track to meet your goals.

So what should you do?

Understanding and avoiding common pension pitfalls can make a significant difference in your financial security during retirement.

By starting early, maximising tax benefits, and regularly reviewing your pension plan, you can ensure that your retirement savings stay aligned with your goals.

Taking control of your pension strategy now means setting yourself up for a more comfortable and worry-free future. With the right planning, retirement can be a time to enjoy the fruits of your hard work rather than a time of financial uncertainty.

Building up your pension is about getting started as soon as possible, maximising your tax-free contributions and benefiting from compound growth over time. Anyone with a pension is advised to contribute as much as they can, as it’s by far the most tax-efficient investment in Ireland.

Calculate your pension pot with the National Pension Helpline’s free online pension Calculator.