As with most things, the answer is it depends. Not every situation is the same and you have to look at your own circumstances.
Large Debt
If you have taken on a large amount of debt, it is certainly advisable to get it to more manageable levels. Mortgages are long dated in nature, so while you may be able to afford repayments now, will you be able to do so for decades? What other costs will you have over those decades that you don’t have now? Children for starters! We all know they aren’t cheap. Will you be able to manage your debt levels and raise a family? Or are in you in a starter home and want to save for a bigger house sometime in the future?
You also need to consider the nature of your work. There is a big difference between a doctor for example with a guaranteed income and being a serial entrepreneur who will have different cashflows restrictions over the years.
Get debt down to a level that you are comfortable that you can cover. A debt to income level of 35% or less is what you should be aiming at.
Company Owners
Company owners have the advantage of being able to put large amounts into their pensions. This gives them the ability to increase their earnings to pay down debt quickly and then concentrate on putting large contributions into their pensions as they play catch up.
Although PRSAs contributions are now limited to one time salary, Master Trusts still have the old company pension funding rules, so there is ample opportunities to put in very big contributions (the company may not be able to claim tax relief on all of the contribution in the year that it is paid).
Self Employed
Self employed people are limited to putting in a percentage of earnings (which is capped at €115,000 earnings). There is no ability to catch up on lost years like a company owner can do. You can make a pension contribution for the previous year but otherwise it is use it or lose it. It is not a good idea to skip years of pension contributions when there is no way to catch up.
Company Schemes
If you are a member of a pension scheme through work, you may be obligated to contribute to the scheme. A lot of company schemes have tiered contribution levels where they will contribute more if you contribute more. This is free money, why wouldn’t you increase your personal contribution by a few percentage if your employer is going to contribute more?
Always be Contributing to a Pension
Pension contributions is one of your foundations of personal finance. Always be contributing to a pension plan in some form. Contributions can be increased and decreased over time but it should always be ticking away in the background. Compounding is the magic sauce to investing, which takes time. And you can’t cheat time. The less time you have, the less compounding works.
Throughout our lives, we have to manage our money and allocated the funds we have to different obligations. Paying down debt and funding retirement are both important parts of that. The problem is that people don’t see funding retirement as being urgent…and when it does become urgent, it is too late.
- By Steven Barrett of Bluewater.
