Pension Investing in Your 50s.

Your 50s can often feel like a turning point. Your mortgage may be nearly paid off, and your children may be leaving home or going to college.

It’s likely when you’ll see your highest paychecks yet, which can give you more flexibility over spending and saving.

It’s also when the once distant idea of retiring comes into clear view, and it’s crucial that you start reviewing your pension more regularly to ensure you’re well prepared for the future.

Whatever your personal circumstances, this guide is designed to help you on your unique journey towards retirement, giving you the tools you need to achieve the best possible pension when you’re ready to retire.

But before we get into exploring tax relief, lump sums and balancing risk, let’s look at 6 core principles for people in their 50s interested in reviewing or boosting their pension.

In your 50s, you should begin to prioritise maintenance over growth, which could mean moving your savings to a less volatile, lower risk portfolio if your current fund is unsuitable.

After you find out your current pension fund, you will be able to see its long-term performance and annual charges. This information can be used to make comparisons with funds of a similar risk profile, or possibly funds with lower risk profiles depending on your current situation.

To simplify this process, we’ve chosen 7 popular pension funds for people in their 50s to compare based on their risk profiles and asset allocations.

Before you decide how much to contribute, you should have a rough idea of how much you will need when you retire to achieve your desired annual income.

Bear in mind that in retirement, it is likely that you will be able to maintain or even surpass your current standard of living with much less than your current salary. 

Your mortgage may be paid off, your kids will probably have left home, and you might decide to downsize or make other lifestyle decisions that reduce your outgoings. Whatever your personal circumstances, expenditure usually decreases as you get older.

Having said that, you will want to achieve the best quality of life possible by building up your pension fund. The bigger your pot when you reach your 60s, the more you will be able to withdraw each year.

Let’s say you aim for around 50% of your current salary. The full State Pension, if you are entitled to it, would currently cover €15,000 – so your private pension would need to make up the remainder.

Simply put, if you earn €60,000 and want to withdraw €15,000 from your pension pot every year for 20 years, you’ll need a pension around €300,000.

In reality, people tend to spend less as the years roll on, so a slightly smaller pot might be enough. 

You may need to increase your contributions to meet your desired pension – but if you are in a moderately high-risk fund, you may need to ‘de-risk’ in your 50s to protect your savings, which can mean a lower annual growth rate.

So let’s now look at some strategies for ‘de-risking’ – and what this could mean for your savings.

If we were speaking to you 30 years ago, we would recommend something like this: choose the best performing high-equity fund, sit back, and allow compound growth to do its thing.

In your 50s, it’s time to take a different approach. You no longer have decades to watch your pension savings rise and fall with the market, and your retirement is quickly approaching.

Over the next decade, you should begin to prioritise capital preservation over long-term growth.

Having your savings, or a percentage of your savings, in a more steady fund with a higher allocation of bonds or cash will do two things:

So how do you know if your pension fund is too volatile?

This is more straightforward than you might imagine thanks to a risk rating system, ESMA,  which is used to rank pension funds from 1 (very low risk) to 7 (very high risk). These ratings are based largely on historical volatility.

In your 50s, you can move down this risk rating scale to protect your pension pot. This can bring some reassurance that your savings won’t vanish into thin air.

You may even decide to move some of your savings to a safer fund, while leaving the remainder in a fund with higher growth prospects.

But lower risk funds generally have lower growth prospects, so you might want to think about maximising your contributions in the coming years. There is a huge added benefit of doing this – tax relief.

When encouraging younger people to start a pension, it is useful to explain how making small contributions compound over time. 

But in your 50s, you have less time to benefit from compound growth. It’s in your 50s that tax relief becomes the primary incentive to invest as much as possible in your pension. If you are currently contributing a set percentage of your salary through an occupational pension, this can be done by making AVCs – Additional Voluntary Contributions.

If you are aged between 50 and 54 you can contribute 30% of your salary with tax relief. This rises to 35% of your salary from 55 to 59.

Let’s look at an example. 

If you are 53 years old and earning €75,000 gross per year, you could put €22,500 towards your pension (30%). 

Your taxable income would be reduced to €52,500, meaning you’d pay 40% tax on €10,500 instead of €35,000.

Contributing 30% of your salary might be unrealistic, but if you are a higher earner, your pension can be used as a smart way of paying less tax, while investing in a fund that also grows tax free. 

These funds can then be withdrawn in the near future, or passed on to your estate after your death. 

Another benefit of pensions for high earners is that the tax on inherited pensions is a flat 30% – as opposed to 33% for other assets which are subject to Capital Acquisitions Tax. 

This is an especially efficient means of passing on large inheritances, and pension inheritance does not affect your CAT threshold, which means that CAT allowances remain unchanged and other future tax-free inheritances are unaffected.

The overall point is this: not only will your investments grow tax free during your lifetime, they will also be taxed at a lower rate when they are inherited compared to other assets such as deposits or stocks. 

If you are not in your 50s, check out our maximum contributions calculator to see how much you can benefit from tax relief.

John, 50. Salary: €60,000

Current Pension: €120,000

Withdrawal Target: €15,000 per year 

Overall Pension Target: €300,000

Brigid, 50. Salary: €100,000

Current Pension: €200,000

Withdrawal Target: €25,000 per year

Overall Target: €550,000

Thomas, 50. Salary: €300,000

Current Pension: 287,000

Withdrawal Target: n/a

Overall Target: €1,250,000

These examples show the huge tax savings that you can make by increasing your contributions. Essentially, increasing the percentage of your salary you put towards your pension will decrease the amount of tax you pay on your earnings. 

However, they do not take into consideration employers’ contributions – which can greatly boost your pension, and reduce the amount you need to contribute. Employers can contribute to your pension tax-free, so this is yet another tax bonus.

This not only increases your pension pot resulting in a more enjoyable retirement, but it can also be used as an extremely tax-efficient savings mechanism and inheritance tool.

From the age of 50, it is generally possible to take a tax-free lump sum of 25% of the value of your pension, up to €200,000. These lump sums can only be taken from pensions with previous employers.

Deciding to take your lump sum as soon as possible may be a lifeline, or a well-deserved boost in your 50s, as you prepare for retirement.

However, it is not always sensible to withdraw 25% of your pension early. Remember, after you withdraw your tax-free lump sum, you will no longer be able to make contributions to that pension. Most people transfer the remainder to an ARF – Approved Retirement Fund, and you will need to start withdrawing 4% annually from the age of 61.

This is important to consider, especially if you are planning to increase your contributions as you near retirement to make the most of the generous tax relief from Revenue (which rises to 40% of your salary in your 60s).

Generally, if you calculate your pension to be less than your target, you may be planning to increase your contributions. In this case, taking the lump sum would be counterproductive to your goals. 

On the other hand, if you are content with your pension pot and continue to make the most of tax relief in the meantime, withdrawing a percentage of your pension can serve as a great boost. You can use the money for anything from paying off your mortgage to paying for your children’s tuition fees.

In short, whether to take the lump sum, and when to do so, will depend on your personal financial situation. You should weigh up the pros and cons before making a decision, and do what is best for you and your family now and in the future.

Before we let you go, have a read through the final checklist, which summarises everything in this guide to pension investing in your 50s.

We hope this guide has been useful to you in some way, and we will leave you with some further reading on some interesting topics related to pensions, specifically for those in their 50s.

We wish you all the success and good fortune that you deserve on your journey towards retirement.