Explain pensions to me like I'm five

Tar.Aldarion

Hi, just started the first job of mine as a graduate and I am looking at paying into the pension. I was just wondering how it works, benefits and risks? I have no idea about pensions.

Apparently in this company they match 10% of your wages so I should be looking to put that amount in really? or how much?

A person is supposed to come around once a year and discuss your options but that is in june. You can choose low/medium/high risk or something.

HowFinancial

If your company paying in for you, and matching up to 10% salary contributions you should go for it.
Any explanation will probably be boring, but...
If you pay 10% of your salary each month, as well as getting your company contributions, you will receive tax relief on your own contributions. This reduces the net cost of your contributions by your marginal tax rate....
Here are the basics on tax relief:
For a lower rate tax payer every €100 they put toward their pension has a net cost of €80.
For a higher rate tax payer every €100 they put toward their pension has a net cost of €59.

In terms of investment choice best approach is to treat it like a long term investment. You have the option to switch investments as you see fit.

More on this herehttp://howfinancial.blogspot.ie/2011/05/retirement-planning-for-self-employed.html

seamus

Tar.Aldarion wrote: »

Hi, just started the first job of mine as a graduate and I am looking at paying into the pension. I was just wondering how it works, benefits and risks? I have no idea about pensions.

When you retire (which will probably be 70 years of age by the time you and I get there), the government will pay you a standard government pension. This will happen without you having to do anything.

Paying into a private pension is effectively putting away money into a savings account in order to give yourself additional income on top of your normal pension when you retire. The amount you get will depend on how much you have saved in your pension fund, so logic dictates that the earlier you start putting money into your pension fund, the more you will have when you retire. Pension funds accrue interest and such, so €20 a week when you're 30 years old is better than €40 a week when you're 50.

Pension funds are better than just putting away savings however because the money you put into your pension is tax-free, can't be dipped into on a rainy day, etc.

Apparently in this company they match 10% of your wages so I should be looking to put that amount in really? or how much?

Whatever you can comfortably afford. When you do the calculations, the return on pensions seems piddly. It seems as though they take a massive chunk out of your current salary to give you back a tiny pension in 40 years time. 10% is a great offer by your employer and you should go for the full 10% if you can afford it. What most people (like me) end up doing is not even looking at pensions until we're bogged down with mortgages, car loans and children, and at that stage 10% of your salary is something you can't afford to part with.
However, if you put this percentage in now then you will never miss it so it shouldn't be an issue.

You can choose low/medium/high risk or something.

OK, so your pension isn't exactly like a savings account. Pension funds are typically invested into shares/bonds/stocks etc. This is what the low/medium/high thing refers to. Low risk investments mean that you will only gain a little interest on your pension, but its value is fairly secure and it will tend to grow over time. High-risk pension funds have the potential to massively swell the value of your pension, but also the risk that its value will drop massively.

You probably heard a lot about the value of pensions back 2008 and 2009. Many pension funds would have invested in the likes of Bank of Ireland shares during the boom years, but when the price of these shares collapsed, the value of these pensions went with them.

Pension funds are the ultimate in long-term planning. There's often a lot of stick given about people being dullards, but after the housing market collapse a lot of people have realised that you can't sit on your mortgage to rely on having a big chunk of cash when you retire.

Tar.Aldarion

Cheers, great answers. Sounds like the company have a great deal there matching 10% and I should go for it tbh. Medium or low risk sounds fine.

Browney7

Tar.Aldarion wrote: »

Cheers, great answers. Sounds like the company have a great deal there matching 10% and I should go for it tbh. Medium or low risk sounds fine.

Low risk ie cash would be pointless at the age you are at. The yields on cash are at all time lows and may even give you a negative return after charges. If you are very risk averse though you might be happier. I probably have a bad way of looking at it but if youre on the higher rate of tax youll get a 20% contribution to your pension and its only costing you 6% of your take home pay.

Also if youve just started youre probably paying no tax so best to wait till the new year

Tar.Aldarion

Yep, no tax for this year so starting in the new year, i probably shouldnt have went on the bike to work scheme so fast either!

So you suggest medium or high and then lowering it as I get older? I'm in the lower rate of tax.

HowFinancial

If you never want to look at the investment performance ask about "lifestyling" investment options. They will automatically put you into fairly high risk investments initially (because of your age), and as you approach your retirement age your pension investments will revert to lower risk (on an ongoing basis).

juan.kerr

HowFinancial wrote: »

For a higher rate tax payer every €100 they put toward their pension has a net cost of €59.

For the moment, anyway.