The Power of Early Pension Contributions

The Power of Early Pension Contributions: Case Study


Meet Sarah: Sarah, a 45-year-old marketing professional. When she started working at her first job at age 25, her employer did not offer a pension scheme. She thought it prudent to start funding her own private pension, as she knew the importance of building up a retirement fund for the future. At age 25, she made the maximum allowable contribution of 15% (based on her age and earnings) to obtain the full pension tax relief available to her.


While her friends focused on enjoying their disposable income, Sarah understood the long-term benefits of early pension planning and the associated tax benefits.


Let’s look at a retirement case study 👇




  1. Both Sarah and her friends are all marketing professionals and started earning €30,000 per year at age 25,
  2. By age 45, their salaries had doubled to €60,000.
  3. Sarah started contributing at the age of 25, while her friends only started contributing at the age of 45.
  4. To simplify the case study, we have assumed an average annualised investment return of 6%; however, in real life, this will likely fluctuate every year.
  5. Inflation significantly impacts future value forecasts when calculating your pension and future retirement income. To account for this, we’ve factored in an average inflation rate of 5%.


Assumptions not included: 


  1. We have not included the full state pension that you may be entitled to, which is €277.30 per week.
  2. Its important to note that contribution amounts will vary each year due to factors like annual salary increases, pausing contributions or taking premium holidays. For the sake of this case study, we will keep the contributions consistent throughout the term.


Early Pension Contribution Case Study

Sarah’s Pension Calculation:


Sarah's Pension Calculation - The Power of Early Pension Contributions





Using the above figures, Sarah started contributing €375 per month (15% of her salary) into her pension at age 25, of which the actual net cost to her each month is only €300 (20% tax relief at her marginal rate of tax).



Pension Contribution Calculation: (Age 25 vs 45)


Pension Contribution Calculation (Age 25 vs 45) - The Power of Early Pension Contributions



Sarah’s total contributions over the 40 year term from age 25 to 65 would have amounted to €180,000. At retirement, Sarah would have walked away with a staggering €746,809. The power of compound interest, along with tax-free growth in her pension, would have significantly increased her retirement nest egg.


If Sarah started her pension at age 45 along with her friends, her retirement pot would have only amounted to €173,265. We can observe the significant impact that the first 20 years have had on the growth of her pension.


However, when calculating her retirement pot at age 45, we have not factored in the assumption that Sarah’s salary would have most likely increased between age 25 and 45. If we assume that Sarah and her friends salaries as marketing professionals doubled to €60,000 by the time they reached age 45, then we can use the below calculation to determine a more accurate outcome.


We will now calculate the retirement pot that Sarah’s friends would have accumulated if they started contributing at age 45. 👇



Sarah’s Friends Calculation:


Sarah's friends calculation





Similar to the first example, we will assume a rate of return of 6%, and that Sarah’s friends also paid the maximum allowable contribution into their pension, which at age 45 would be 25% of their net relavant earnings, equal to €1,250 per month.



Sarah’s friends start contributing at age 45:


Pension Contribution Calculation


Looking at the results above, you will notice that we haven’t adjusted Sarah’s contributions in line with any increase in her salary but have kept her contribution level at €375 per month over the 40 year term. Despite maxing out their pension contributions at €1,250 per month, Sarah’s friends’ pensions still fell short of Sarah’s by a significant €169,258 at retirement.


This exemplifies the critical impact of time horizon, compounded returns, and consistent, regular contributions on the long-term growth of paying into a pension.


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The Impact & Key Takeaways:


Early Contributions:

The power of compound interest is significant. Starting a pension early, even with small contributions, makes a huge difference in the long run.

Tax Advantages:

Pension contributions offer valuable tax benefits, effectively reducing your taxable income and giving your retirement savings a boost.

Pension Growth:

Sarah managed to accumulate a pension pot of €746,809 at retirement by contributing €375 per month over the 40-year term. Keep in mind, we have not factored in any increase in her contributions over the period simply to demonstrate the powerful effect of early contributions. If she had increased her contributions in line with her earnings, her pot would be significantly larger.


Sarah’s strong pension allows her to consider early retirement or pursue career breaks without financial worries.

Financial Security:

Over a 40-year period, Sarah’s pension pot has grown substantially, providing her with a sense of financial security for her future.

Peace of Mind:

Sarah enjoys a greater sense of control over her financial future, knowing she has a solid foundation for her retirement.



Relevant Resources:


How to boost your pension - The Power of Early Pension Contributions




Benefits of Employer Contributions - The Power of Early Pension Contributions




Reduce your Income Tax bill - The Power of Early Pension Contributions





Where to from here?


Planning for retirement can feel overwhelming. Everyone’s situation is unique, and there’s no one-size-fits-all answer.

We offer complimentary consultations to help you navigate your options. Contact our team if you’d like to learn more.



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