Is it too late to get a cof­fee now?

On a dark Thursday, at half past four in the afternoon during the final months of the year, a middle-aged man stands by the coffee machine and asks himself that pressing question from the song of the same name by our beloved musician, his late highness Prince Polo. But what about supplementary pension savings — is it too late for me to start now?

Supplementary Pension Savings

Throughout life, we all make quite a few major decisions. Some are measured in money or assets, such as real estate or various kinds of savings. Others touch on aspects that have a profound impact on our lives, such as investment in education, family, personal relationships, or our own health.

It could be said that supplementary pension savings encompass all of the above, as this is essentially an investment in our financial wellbeing in the broadest sense. It is important to understand that people choose to begin this type of saving themselves — it does not happen automatically. The savings are made up of an employee contribution of up to 4% of wages and an employer contribution of 2% under most collective agreements. No tax is levied on the savings at the time of deposit, but income tax is paid upon withdrawal. The savings are inheritable, payouts are flexible upon retirement, and individuals now also have the option of using the savings tax-free when purchasing their first property or as a mortgage payment.

The Effect of Time

Supplementary pension savings are long-term savings, and it makes sense for individuals to start as early as possible so that returns yield the most favourable outcome — to maximise the employer's supplementary contribution, to have access to greater flexibility, and to experience less income loss upon retirement.

However, if individuals begin saving late for whatever reason, there is still much to be gained. Take the example of a 45-year-old individual earning 850,000 ISK per month until the age of 70. They decide to begin making supplementary pension contributions at 4% of their wages and receive a 2% matching contribution from their employer, with an annual return of 3.5%. By the age of 70, the individual should have approximately 24.3 million ISK, of which their own contributions amount to 10.2 million ISK, the employer's contribution amounts to approximately 5.1 million ISK, and returns amount to approximately 9 million ISK. Anyone reading this can calculate a corresponding estimate based on their own circumstances regarding age and income, for example on the website of Frjálsi lífeyrissjóðurinn or Arion Bank.

So What Is the Right Answer?

Coffee is, in my opinion, a gift from God, but it is far less clear to me when one may indulge in the last cup of the day. Each and every one of us probably just has to make that call for themselves.

When it comes to supplementary savings, however, the conclusion is clear — it is never too late to start saving, even if some years have already passed in the workforce. I therefore want to encourage those who have not yet taken advantage of supplementary savings to familiarise themselves with this form of saving and to begin as soon as possible, because there is much to be gained.