Question: I am going on maternity leave shortly. This will be my first child. My boss will top up my state maternity pay – but not up to my full salary. My earnings (including state maternity pay and top-up pay from my boss) will be about two-thirds of what they usually are. At the end of my six months of maternity leave, I also plan to take parental leave and a few months of unpaid parental leave. While my boss completes my maternity pay, he won’t complete my parental leave or unpaid parental leave, so I will lose a good chunk of my income. I plan to stop contributing to my occupational pension during the nine months or so that I won’t be working to take care of my baby. Is it a good idea? Saoirse, County Kerry
To respond: When it comes to maternity leave or even parental leave, short gaps in pension contributions can have a cumulative negative impact on your final retirement capital.
Firstly, your pension rights during maternity leave depend on the nature and conditions of your pension scheme. Generally speaking, if your salary continues during maternity leave, pension contributions should continue as normal. If your employer decides not to continue paying you during your maternity leave, they are not obligated to continue making pension contributions. Furthermore, an employer has no obligation to pay pension contributions if the period of maternity leave extends beyond the legal period of 26 weeks.
You mention a working pension and therefore as a member of a pension scheme your membership must continue while you are on statutory maternity leave. You will therefore accumulate years of pensionable service during the period of statutory maternity leave. As your employer intends to raise you up to two-thirds of your full salary (minus your statutory maternity pay), this means that your pension contributions will be reduced by this figure. One thing to bear in mind is that the pay cut could put you under the 40% income tax threshold and therefore you will no longer be able to benefit from the 40% level of tax relief on your pension contributions.
There is no greater event in life than having a baby, especially the first. I suggest you start by first looking at your current financial situation. Look at potential obvious ways to cut your expenses, know what benefits you’ll be entitled to, and set a monthly budget. The budget will need to be revised when you decide to return to work to account for childcare costs etc.
If you think maintaining your pension contributions while on a reduced salary will cause you more sleepless nights than the sleepless nights you’ll already have with a newborn baby, you should probably consider suspending your contributions. Suspending contributions is not the end of the world and when you get back to full pay you can make up for lost ground by reinstating your contributions and paying a Contribution Volontaire Additionnelle (CVA – an addition or supplement to your existing pension).
Making up for lost ground with post-Covid pension
Question: I have just returned to the office after working remotely since March 2020. My husband having lost his job during the pandemic, I have been the primary breadwinner for two years. Before the pandemic, I had saved 5% of my salary in my working pension (which is a defined contribution pension) – with my boss matching my contributions. However, I could not afford to continue saving in my pension throughout the pandemic because my income had to support the whole family. Since my boss will only match pension contributions made by an employee, I have also lost my boss’ pension contributions for the past two years. My husband has returned to work, so I want to start saving for my pension again – and make up for lost ground during the pandemic. What’s the best way for me to do this? I am 43 years old.
Gemma, County Meath
To respond: While stopping pension contributions, even for a relatively short period, can have a big impact on the eventual size of your retirement savings, especially if you miss an employer matching contribution, you can still minimize and make up for the shortfall.
Now, with two incomes coming back, you can make up for lost time by reinstating your regular pension contributions, which means your employer’s matching contribution will also start again. Then you should consider having a stroke.
At age 43 you can contribute 25% of your relevant net earnings, but there is a ceiling of €115,000 on the maximum annual earnings on which pension tax relief can be claimed. The pension tax reduction is granted at your marginal tax rate. Since you were still earning throughout the pandemic, you might consider creating and backdating a stroke for last year in addition to having a stroke for this year.
Should I start a pension at only €50 per month?
Question: I am a single mother who works part time. I earn around €30,000 a year. I am in my early forties. I never saved for a pension because I never had much disposable income.
I could probably afford to save €50 a month on a pension now, but I’m not sure it’s worth it. Also, since I don’t pay the highest rate of income tax, I would only be eligible for pension tax relief at a rate of 20% instead of 40%.
In addition, my boss does not offer occupational pensions, so I would have to open a Personal Retirement Savings Account (PRSA) myself. Would it be worth starting a pension?
Emma, Dublin City
To respond: Yes, it would be worth starting a pension. Where pensions really come into their own is when it comes to tax benefits.
Starting with tax exemption, if you decide on a contribution of €50 per month, as a taxpayer at the normal rate, the real cost of this contribution for you is €40. Spread that €40 over the month and it would be less than the price of a coffee a day.
As you correctly state, as a PAYE employee without access to a company-sponsored pension plan, you can set up a PRSA.
The PRSA belongs to you personally and gives you the opportunity to contribute whenever you want (regularly or irregularly).
Another option could be a savings plan, which is another way to put money aside – but in this case, you can access it whenever you need it.
However, for long-term needs like retirement, ease of access is a disadvantage, not an advantage.
It might be too tempting to dip into savings. Unlike a savings plan, you can’t access your pension fund until you’re 60, so my advice would be to keep contributions to a level you can comfortably afford.
Your pension shouldn’t stop you from enjoying your life, so affordability is key.
With a PRSA contract, you can take contribution breaks if you need them – and you can reduce or even increase your contributions as your circumstances change.
Some PRSA contracts may have a minimum monthly premium in place, so watch out for that. The other great feature of a PRSA is that it is portable, so if you change jobs, or even take a break from your career, you can take your PRSA with you.