How big should my pension be?

When we start talking to clients about their retirement, they often ask us “how big should my pension be?”

While, realistically, you want it to be as big as possible, the answer is “it depends”. The maximum you can save in your pension pot before you start paying premium levels of tax is €2.15 million – so as close as possible to that figure is as good a guideline as we are going to get.

The question that you are probably asking yourself now is, “how can I possibly get close to €2.15 million without having it impact my normal day to day spending?”

The honest answer is that many people will never reach the €2.15 million limit. But that’s okay! Chances are, you won’t even need to reach that figure. Knowing how much is enough is extremely beneficial and I urge you to figure this out sooner rather than later.

How much is enough?

That’s a fair question. As we’ve discussed time and time again, there really is no “one size fits all” approach when it comes to planning for your retirement. How big your pension pot will be will depend on your goals, dreams, aspirations, assets, and plans – what is the money for, and how much do you need to fund it?

The answer can vary drastically depending on your plans. For example, you may decide to retire at 50 and be satisfied with a lower annual pension drawdown. Alternatively, you may be happy working until age 75 and continue contributing to your pension right up until you retire to maximise your annual drawdown amount.

That’s why we put such a great emphasis on getting to know you and your plans when you start working with us. Your financial plan is specific to you, and no two Metis LifePlans are the same.

Regardless of if you want to retire early or continue working, we can model various scenarios and show you the trade-offs of one over the other so that you can make an informed decision.

What else should I consider?

In certain pension schemes you can draw down your pension fund from age 50 – this is the earliest age that you can access a pension. When you begin to access your funds, you are entitled to take a 25% lump sum.

If you were to take your lump sum at 50, you do not have to take an annual amount immediately if you don’t want to.

However, once you reach age 61 it is an obligation. From this point, you must take a 4% withdrawal from your remaining pension fund every year, which increases to 5% when you reach age 71.

In the best-case scenario, you should aim to hit the maximum (or as close as possible for you) by 50, take the lump sum, and allow the remainder to grow until your obligation to draw annually kicks in at 61.

So, what does this look like in practice?

When calculating your potential income in retirement don’t forget the State Pension, which could be worth €13,795 to you per annum.

Let’s look at an ideal example:

Let’s say you reach age 50 and have the maximum €2,150,000 in your pension and you decide to take €500,000 as a lump sum. The first €200,000 would be tax free and the next €300,000 would be taxed at 20%.

 

The remaining €1,650,000 can continue to grow tax free. If it were to grow by 4% per annum, it would reach €2,540,099 when you are 61.

 

At age 61 you are obliged to take 4% of this per annum and in this case that would be an amount of €101,604 in Year 1. Add the state pension amount to this annual amount and most people would live a comfortable life.

What next?

So, the question that you all wanted to know – how much should be in my pension? The honest answer is the bigger the better. But if this bigger fund comes with sacrifices such as not doing the things you want during your younger years, then is it worth it?

There are many ways you can work on increasing your pension pot and if you would like to discuss these or would like a Metis LifePlan built for you, please don’t hesitate to give us a call on 01 908 1500 or email us at info@metisireland.ie.

Ronan Queally
Financial Planner