In June this year, a piece ran in the Irish Times with the headline “Pensions are boring, but they are still the best way to earn money tax free”. Susan O’Mara, Business Development Manager in CPAS examines if this is true.
Working in Pensions for nearly all of my adult life, I felt inclined to challenge that assumption. Are pensions really that boring?
I will agree that Pensions can seem needlessly complicated, and because they are a financial product, the regulatory framework around them, which is designed to protect consumers, is so prescribed and detailed that it can make pensions seem very off putting.
For example, the annual benefit statement, which is your annual pension update, can run to 14 pages of text, simply to outline how much you have contributed to your fund, how it has performed and what it is projected to be when you retire. As both a pension saver and a pension professional, I can see the logic of why so much of information is supplied, and also how off putting and potentially boring this can be.
But stick with me if you haven’t drifted off already…. Pensions are brilliant!
Pensions are the key to living a great life in retirement. The State does not provide enough for the fun stuff, and this is where pensions come to the rescue. A well-funded pension can ensure that you can afford to do the things that make you happy when you are no longer working.
Pensions are tax efficient – that may sound boring, but if you are paying tax at 40%, then every €100 invested into your pension costs you €60 – that, in ANY other scenario is exciting, €100 for €60… what a deal!
Pensions are long term savings accounts – that is where our friend compound interest comes in. Albert Einstein (yes, him) said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Compound interest is the interest earned on interest, or the gains made on gains. It’s how the rich are rich, how credit card companies make all their money, and it’s how the real magic happens in pensions.
The sums
If you contributed €100 per month for 30 years, your total investment would be €36,000 (pre-tax relief). Assuming a rate of 40% tax relief throughout those 30 years, your actual outlay would reduce to €21,600. After three decades, your value, assuming a conservative growth rate of 3%, would increase to €58,519. This remarkable outcome demonstrates the power of time, tax relief, and compound interest, turning €21,600 into an impressive €58,519. Surely, that isn’t boring!
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