The power of starting your pension early

Starting your pension early can be one of the most important financial decisions you make. The earlier you begin, the more time your pension has to benefit from the effects of compound growth. Even modest contributions made in your twenties or thirties can grow into a significant retirement fund, often outperforming larger contributions made later in life. 

When it comes to investing for retirement, time spent in the market can be more valuable than trying to 'time the market' itself. Markets naturally experience periods of growth and decline. However, investing consistently over the long term gives your pension more time to benefit from potential market growth and can reduce the pressure to make larger contributions as you approach retirement.

The longer your money is invested, the more time it has to potentially grow, helping you build a more secure financial future.

Why it matters

Many people delay pension planning because retirement feels a long way off. However, delaying pension contributions means your savings have less time to benefit from potential investment growth. Starting early allows you to spread contributions over a longer period, making pension saving more manageable and affordable. It can also provide greater flexibility later in life, helping you achieve your retirement goals with confidence and peace of mind. 

The table below shows the limits that apply to tax relief on personal pension contributions, based on an individual’s age and earnings.

Table 1: Pension contribution tax relief limits by age

*The maximum amount of earnings considered for calculating tax relief is €115,000 per year

Consider two individuals, both earning €115,000 per year and both contributing the maximum amount eligible for tax relief purposes throughout their working lives. 

Table 2: The impact of starting pension contributions earlier¹

¹Warning: These figures are estimates only. They are not a reliable guide to the future performance of your investment. 

If Person A begins making maximum pension contributions at age 30 and continues until age 65, while Person B waits until age 35 before doing the same thing, the difference can be significant.

*Assuming annual investment growth of 5%, Person A could build a pension fund of approximately €2.7 million by age 65, compared with €2.1 million for Person B. 

Based on these assumptions, delaying pension contributions by five years results in a projected fund value approximately €580,000 lower at age 65, despite both individuals contributing the maximum allowable contributions once they begin.

This example illustrates the potential benefit of having more time invested in the market. Those additional 5 years give Person A's contributions more time to benefit from compound growth, where investment returns have the potential to generate further returns over time. Starting earlier does not just mean contributing for longer. It gives your money more time to work for you.

The impact of contribution levels    

While starting early is important, the level of pension contributions made throughout your career can also have a significant impact on retirement outcomes. Pension contributions benefit from valuable tax relief and, where available, employer contributions can further increase the amount invested for retirement. Some employers may also match employee contributions.

To demonstrate the potential impact, we compared two scenarios for the same employee: one where the employee contributes 5% of salary and receives a 5% matching employer contribution, and another where the employee maximises their age-related tax-relievable contributions while continuing to receive the employer contribution.

Table 3: The impact of higher pension contributions²

²Warning: These figures are estimates only. They are not a reliable guide to the future performance of your investment. 

* For the above analysis, we have assumed both employees are aged 30, earn a salary of €115,000 per annum inflation indexed, receive a 5% employer contribution and achieve an annual investment return of 5%. Pension funds grow tax-free.  

The findings highlight the significant impact that higher contribution levels can have over the long term. Where possible, taking full advantage of employer contributions and maximum age-related tax-relievable contributions can help employees build greater retirement savings.

Conclusion

When it comes to retirement planning, two factors can have a significant impact on your eventual pension fund: how long you are invested and how much you contribute. Starting earlier gives your pension more time to benefit from potential compound growth, while increasing contributions can further boost your retirement savings.

Combined with tax relief and employer contributions, where available, consistent contributions and long-term investment growth can make a meaningful difference to your retirement savings and financial security.

If you would like to learn more about how your pension strategy could support your long-term financial goals, why not book a no-obligation consultation with a member of our team?