2025 is the time to start supplementing your State Pension

The State Pension will increase to €289.30 (€15,043.60 p.a.) from January 2025 following a €12 increase to the payment in the recent Budget.

In their Election manifesto, some parties are committing to increase the State Pension to €350 a week over the next five years. Older voters are again at the centre of the election agenda, with political parties seeking to win favour from the ‘grey vote’ on polling day.

The State Pension was also a divisive issue during the last General Election in 2020. At the time, a phased increase in the age at which one could access the State Pension was due to be implemented. The State Pension age was to increase to 67 from January 2021, and to 68 from January 2028. As part of their Election manifesto, some parties promised to halt the planned increase to 67 and to lower the eligibility age to 65. This issue certainly resonated with more mature voters in 2020.

These changes were ultimately deferred and in September 2022 the Government announced that it was maintaining the State Pension age at 66.

The State Pension can help you maintain a basic standard of living in retirement. However, the significant cost-of-living increases witnessed over the past few years have effectively eroded any State Pension increases. The long-term sustainability of the State Pension has been called into question by several commentators over the years. In 2023 the Irish Fiscal Council published a report, Saving for Ireland’s Future, which noted that Ireland’s old-age dependency ratio is set to more than double by 2050. That is, the proportion of those aged 65 and over as a share of the working age population, those aged 20-64, is set to rise from 25% in 2020 to 46% in 2050.

Figures from the Department of Social Protection show Ireland spent €10.1 bn on State Pensions in 2023, up from €6.5bn in 2013 — a 55% increase in only 10 years. Some of this increase is down to inflation, but it’s also because we just have more pensioners.

State Pension costs are expected to double in the coming decade as the number of people claiming payments continues to increase, leaving the State with an enormous bill.

To highlight the issue, the cost of funding an annual retirement income of €15,043.60 which increases by 2% annually via a private pension, one would need to have a retirement fund at 66 of approximately €275,000.

While the State Pension is valuable, will it be enough to give you a comfortable lifestyle in retirement? Striving for financial independence is a worthwhile objective. Imagine arriving at a point in time when you no longer have to work, as you have sufficient private retirement assets to supplement the State Pension and maintain your lifestyle throughout your retirement.

There are several ways workers can consider supplementing their State Pension privately:

• Contribute to your workplace retirement pension plan. The best place to start is by contributing to your workplace retirement pension plan. If you are fortunate enough to be included in one, it is likely that your employer will be contributing every month, and you have scope to make generous contributions also within the age-related limits as outlined by Revenue. For example, those aged between 40 and 49 can contribute up to 25% of their earnings, subject to a cap of €115,000 and be eligible for tax relief at your marginal rate on the contribution.
• If you are not eligible for a workplace retirement pension plan, you earn over €20,000 p.a., are aged between 23 and 60 from September 2025 you will be automatically enrolled in the new State Auto-enrolment Scheme.
• If you are self employed, a Personal Retirement Savings Account (PRSA) will likely be your most efficient solution to accumulate a generous retirement fund.
• Pension funds are tax exempt investment vehicles during their accumulation phase, meaning there is no tax on the investment growth your fund achieves.
• Unlike a regular savings account, money invested in your pension can earn important tax breaks. Tax relief on your pension is based on the rate of income tax that you pay, this will be 40% for a higher rate taxpayer or 20% for a standard rate taxpayer. For example, putting €200 into a regular savings policy will cost you €200 but putting the same amount into a pension will cost you €160 if you are a standard rate taxpayer or €120 if you are a higher rate taxpayer. The new Auto-enrolment scheme will have an alternative tax relief approach, similar to SSIA’s whereby for every €3 that you contribute to your pension fund, your employer will contribute €3, and the Government will put in €1.
• On retirement from a private pension arrangement, you will have a number of options available to you. These may include taking a tax-free lump sum, subject to limits set by Revenue and investing the residual proceeds of your retirement account to an Approved Retirement Fund (ARF) or an annuity which pays you a fixed income for life similar to the State Pension.

The earlier you start investing in a Pension Fund, the sooner you will start to earn investment growth and start seeing your Pension Fund grow. Starting pension contributions early takes full advantage of the time factor in compounding. For instance, starting to save at age 25 instead of 35 can result in a significantly larger pension fund at retirement due to the additional decade of compounding. Albert Einstein reportedly said: "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.”

Pensions are long-term investment vehicles, typically their investment spans several decades. This extended period allows compound interest to have a profound impact, significantly increasing the value of the retirement fund over time. Even small contributions can grow significantly over time.

Kieran McAuliffe is the Director of Provest Private Clients Ltd.