It is crucial to understand how the 10% social security contribution you pay monthly as an employee works.
A wrong understanding of how this works can affect your decision making for retirement negatively.
The 10% social security contribution is paid on your average gross wage only. This means that you do not pay any contribution on any fringe benefits or employment conditions that do not form part of your gross salary: production bonus, overtime, shift allowance, transport allowance, danger allowance, communications allowance, etc.
The Table below shows how this difference can have a negative effect on your retirement pension income.
|Basic Wage||Allowances,||Total||Contribution Paid|
|and Fringe Benefits|
The example above shows Employee B, even though he has a lower annual gross wage than that of Employee A, at the end of the year has a higher gross income. His salary is supplemented by overtime, a production bonus, and several allowances. Nevertheless, the annual national insurance contribution that he pays is significantly lower than that of Employee A by €798.
Thus although Employee B has a higher income, due to a combined gross annual wage and allowances, s/he will receive a lower pension during retirement than Employee A. This is because no contribution is paid on additional allowances, employment conditions and fringe benefits. In other words employee B will have a lower pension income given that the 10,000 are not included in the basic wage.
It is essential that in planning your retirement, you do so based on the average gross salary earned, and not the average gross wage earned plus other additional income earned from allowances, employment conditions and fringe benefits.
It is vital that if you are in a position to do so, you start saving for your retirement at an early age. Also noteworthy is that you educate your kids so that they too begin saving for retirement early. Note that saving €83 monthly for 40 years from the age of 25 years will, as a result of a cumulative interest rate of 2.5%, give a person a retirement nest egg of €70,000 or so.