5 Major Mistakes in Pension Planning – Are You Making One?

When you’ve worked hard all your life, the last thing you want is to fall into a pension trap just as you’re about to retire. Whether you’re a business owner or professional, having a robust pension plan in place can make or break your retirement dreams. But it’s easy to make missteps. Let’s walk through the five major mistakes many people make when planning their pensions – and how you can avoid them.

1. Starting Too Late – The Biggest Mistake

There’s a common misconception that you can start saving for your pension “later.” Unfortunately, later can be too late. The earlier you start, the more time your pension has to grow and compound.

In our 20s, we all thought we’d never see retirement, in our 30s and 40s, mortgages and family commitments take priority (and rightly so), but imagine for one moment you started investing say €1,000 per month into your pension from age 25, for 10 years until age 35, and then stopped contributing to your pension completely. Assuming an average growth rate of 7% per annum, the value of your pension at age 65 would be €1.32m. Now imagine for a moment that you instead of contributing to your pension from 25 to 35, you instead started contributing €1,000 per month to your pension each and every month from age 35, all the way to age 65. Applying the same assumed growth rate of 7%, despite contributing 3 times as much to your pension (i.e. €360k v €120k), the value of your pension would be less at €1.22m!

The key here is compound growth. The earlier you start, the more interest your pension pot will generate. In Ireland, a good rule of thumb is to always aim for pension contributions that are ‘half your age’. What we mean by this is, if you are aged 40, aim for a 20% of your salary pension contribution. At age 50, aim for 25% of your salary and so forth. This may seem like a lot, but when you factor in tax relief, it becomes a lot more palatable and tees you up for a more comfortable retirement.

Many of us are long past the age of 25 however the key point here is to start contributing to your pension as soon as you possibly can. As the old Chinese proverb goes, “the best time to plant a tree was 20 years ago, the second best time is now”.

2. Ignoring Inflation – The Silent Erosion of Your Pension

Inflation is often overlooked in pension planning. If you’re not careful, the money you think will support you comfortably in retirement may not go as far as you expect.

If inflation continues to rise at just 2% a year (which is likely understating what it will be in reality), the purchasing power of €100,000 today will be worth much less in 20 years. For instance, in 20 years, €100,000 will only have the purchasing power of around €67,000. That’s a significant drop​.

A pension plan needs to account for inflation. Failing to do so can leave you with less spending power during your retirement years. The best way to tackle this is by opting for investment funds that are designed to outpace inflation over time. Equities, for example, tend to provide returns that surpass inflation when given a long-time horizon. Including them in your pension portfolio can help your fund grow in real terms, protecting your future buying power​.

3. Overlooking Tax Implications – A Costly Oversight

Tax benefits on pensions are one of the greatest incentives for contributing, but if you’re not careful, taxes can become a significant burden when you start drawing from your pension. While contributions to pensions in Ireland come with tax relief (up to 40% depending on your marginal rate), the withdrawals are taxable when you retire​.

The current ‘Standard Fund Threshold Limit’ (i.e. the maximum you are permitted to have in your pension before suffering penal rates of tax on the excess), is €2,000,000. This is due to increase by €200,000 per annum between 2026 and 2029 to €2,800,000. It is anticipated that it will increase thereafter in line with wage inflation.

Careful planning, that incorporates future pension value growth, future SFT limits and tax relief on contributions is required to ensure that you are maximising your pension…without going over the top!

It’s important to work with a financial planner to ensure that both your pension contributions and withdrawals are structured in the most tax-efficient way possible. This may involve spreading out lump sums or planning contributions and withdrawals in a manner that minimises your tax burden. Efficient tax planning can keep more of your pension in your pocket rather than in the Revenue’s.

4. Failing to Diversify – Too Many Eggs in One Basket

A diversified portfolio isn’t just a buzzword. It’s essential for protecting your retirement. Many people make the mistake of over-concentrating their pension in a single type of asset – often a low-yield savings account or bonds. While these are considered ‘safe options’, they can also limit the growth potential of your fund – which is, in reality, a major risk when it comes to your spending capacity in retirement.

Many choose to invest heavily in high-risk assets like equities (a.k.a. “stocks & shares”). This asset class has historically always provided the best returns, however it is important to, at the very least, consider de-risking from this asset class in the 5 years or so as your approach your retirement to try protect any accumulated gains in your portfolio.

For others, a well-balanced pension plan should include a mix of asset classes, such as stocks, bonds, property, and cash. This ensures that if one asset class performs poorly, others can offset the loss​​. Think of your pension as a long journey – there will be bumps along the way, but a diversified portfolio can help smooth out the ride.

Risk (volatility) and return are correlated. The right investment portfolio is ultimately the one that gets you the best possible return without keeping you awake at night. As your Financial Planner, it’s our job to help you identify portfolio that suits you.

5. Not Planning for Longevity – Underestimating How Long You’ll Live

This is one of the most common mistakes. People underestimate how long they’ll live and how much they’ll need to fund their retirement. Thankfully, with advancements in healthcare, people are living longer than ever. In Ireland, the life expectancy is now around 81 for men, and for women, it’s 84​. That’s a long time to rely on your pension.

Without proper planning, you could outlive your savings, and relying on the state pension alone could mean a dramatic decrease in your standard of living​​.

To avoid this mistake, plan your pension as though you’ll live well into your 90s, and know that there are pension solutions that allow for any ‘surplus’ in your pension to be passed to your estate in a tax efficient manner.

Plan Smart, Retire Happy

Pension planning can feel overwhelming, but avoiding these five major mistakes can set you on the right path. Start early, protect your fund from inflation, consider tax implications, diversify your assets, and plan for a long life.

Consulting with a financial planner can ensure that your retirement goals are realistic and that your pension is optimised to meet your needs. After all, the goal is to retire with peace of mind, knowing that you’ve made the best decisions for your future. Contact us today if you’d like to talk to us about your pension needs.