Key Post: Want to get a pension but don't know where to start

My question concerns pensions and PRSAs.
I am 25. I left College three years ago and worked in a number of freelance jobs. My parents were anxious that I get a pension sorted out but I put it off as I didn't think it was possible without having a full-time job. I also didn't have any cash to spare to put by.
Recently, however, I started a well-paid job and I would like to start some sort of pension. I have an 18-month contract, so I am full-time but not permanent. My questions are:

(1) is a PRSA my only/best option in this case?

(2) and if so, what financial institution should I deal with? Reading about pensions in the media has made me scared I'll be ripped off or get locked into a bad value deal that won't amount to much when I need to draw it down.

Sorry my question is so basic but I really don't know where to access information for complete beginners.

Enjoying the site a lot.

Thanks.

Little Skellig

Re: Want to get a pension but don't know where to start

Hi Little Skellig

Why do you want to start a pension? Your first priority should be to buy a house. You should not start a pension until you buy a house and get your mortgage under control. Don't mind your parents who have probably succumbed to the sales messages that you cannot start a pension too early. This should be rephrased - you cannot start saving too early. Save to buy a house and then worry about a pension.

If you decide to ignore this advice...

A PRSA is the best option if your employer does not provide a pension scheme. Your employer is obliged to provide you with access to a standard PRSA and you should use their PRSA for convenience. You might save a bit somewhere else,but I don't think the difference is worth the hassle.

Don't worry about being locked into a bad deal. The whole point about PRSAs is that they are low cost and you can transfer them easily without cost. So let's say you start with an Irish Life PRSA and then decide you want to switch to EAgle Star, it should cost you nothing.

Read the PRSA FAQ at the start of this forum for further information.


Brendan

Re: Want to get a pension but don't know where to start

Thanks for your reply Brendan.
I'll print it off to annoy my folks!

I do see where you are coming from when you say buying a home should be take priority over starting a pension.

That said, my concern is it might be a very long time before I am in a position to buy a house.

If I postpone getting a pension until that point, wouldn't I be under pressure to make larger contributions to make up the difference and even if I didn't have make larger monthly payment, wouldn't it mean that I would have less of a pension to draw down when the time comes?

My other concern is that by the time I have bought a house, I'll probably have more financial commitments as well as mortgage repayments, whereas at the moment setting aside a modest portion of my monthly income wouldn't be a huge burden. I reckon I'll still be able to save for a house even if I do make pension contributions.

Given that these are my circumstances, do you still think I should postpone starting a pension?

One final question: if I do go with a PRSA and and later want to take up a job in say, the UK, could I keep contributing from there or would I lose out?

Thanks again!

Little Skellig

Want to get a pension...but don't know where to start

No your question is not basic ..indeed you appear to be well clued in!

The first thing you need to do is to check with your current employer to see if you are or are not included in their occupational pension scheme for a pension. If you are (and its very unlikely you are) then you wouldn’t be able to get tax relief on any PRSA contributions you might make and if you want to make additional provision for retirement you should ask your employer about AVCs. Therefore this is the first thing you should check out.
Assuming your employer does not include you in a pension scheme for a pension (which is more likely), they must (since 15th September 2003) have signed up at least one Standard PRSA product which they must make available to you at work. I would suggest that this is the most convenient PRSA for you and go with that. Don’t torture yourself looking for the ‘cheapest’ or ‘best’ PRSA out there; its all a matter of opinion to a large extent. Your employer must offer you a Standard PRSA, and Standard PRSAs have capped charges..the most you will have to pay is 5% of each contribution + 1% pa of your fund. So you’re not being ripped off, or anything close to being ripped off, given your young age and long period to retirement. Ask your employer for details of this product.


If you’re not included by your employer in a pension scheme for a pension, you have the right to contribute to this Standard PRSA at work by deduction from salary, which means your PRSA contributions will be deductible for Income Tax, PRSI and Health Levy....so there’s a very good tax saving. E.g. for a top rate taxpayer saving could be up to (42% +4%+2%, i.e. a gross PRSA contribution of €200pm might hit your bottom line for as little as €104pm. Your employer must legally pay over the contributions deducted from you to the PRSA provider within 21 days of the end of the month in which the contributions are deducted from you.

You can contribute as little as €25 pm, and you can stop and restart, decrease (but not below €10pm) or increase contributions, without penalty.

Re PRSI savings, note that your employer will have also be saved PRSI @ 10.75% if you make PRSA contributions by deduction from your salary at work. E.g. if you contribute €200pm gross to a PRSA, your employer’s PRSI liability in respect of your earnings will reduce by 10.75% x €200pm, i.e. by €21.50 pm. You should therefore try to persuade your employer to contribute at least 10% of what you’re going to contribute (gross amount) on the basis that there is actually no additional cost to your employer due to the PRSI savings that will accrue.

Finally a tip. You can make a lump sum payment to a PRSA ( you would have to pay this gross to the PRSA company, i.e. not by deduction from your salary) before 31st October and elect to backdate the payment to the 2002 tax year and in this way get a tax rebate from last year’s tax.

Re: Want to get a pension...but don't know where to start

Hi Little Skellig

You should look at your entire financial situation.

You may find yourself renting a flat at 65 but having a nice pension. Personally, I think you would be better off owning your own home and having a smaller pension.

I am not suggesting that you should blow your money instead of starting a pension. I am suggesting that you should save in some other medium e.g. a PRSA or a unit-linked fund. This money will compound over the years. You can use it as a deposit to buy a house. Your overall long term wealth should be much higher because the house should rise in value faster than the pension. This is because you will be able to buy a house worth 10 times the value of your deposit.

Brendan

Re: Want to get a pension...but don't know where to start

Thanks very much RAIPI and Brendan for your detailed answers. I really appreciate your help.

To pick up on some points you raised...

RAIPI - my employer does not have an occupational pension scheme I can join. I am his only employee so he has no experience of these matters. He is aware that he's legally obliged to provide me with access to a PRSA and says he has no problem doing so whatsoever, only that he is even more clueless than I am! He has told me to investigate it and set it up with his accountant, so the payments are deducted from my monthly salary. I am delighted to hear that such payments are tax deductible and that the Standard PRSAa are all much of a muchness, so I can't go too far wrong.

Brendan - thank you for your well-argued answer to my query. On this occasion I'm afraid I will probably have to bypass your advice that i should postpone setting up a pension and instead save for a house. Believe you me, if you knew how aggravating my mother can be when it comes to the importance of setting up a pension, you'd do the same!!

Want to get a pension...but don't know where to start

All your employer or accountant needs to do is to contact a PRSA provider. As I said he should aready have signed up with one at this stage anyway.

Suggest you go to Pensions Board website to get list of PRSA providers...one problem you may run into is a lack of interest by PRSA providers in a one man salary deduction scheme ...they won't exactly be tripping over themselves for your business! But you're bound to find one who will sign up your employer and you.

Don;t forget option of making a lump sum contribution to PRSA before 31st October and offsetting it against your income for last year.

Re: Want to get a pension...but don't know where to start

Thanks again RAIPI. I appreciate the info.

Want to get a pension...but don't know where to start

Final final point ...if you want to check into PRSA charges a bit more, the PEnsions Board has a very well hidden Excel sheet setting out charges of all PRSA products on the marketplace.

Its on www.pensionsboard.ie/_fileupload/uploads/PRSAProductsandCharges.xls

You coudl scan through that for Standard PRSAs to possibly narrow down the choice.

Over and out.

Re: Want to get a pension...but don't know where to start

Super, thanks a million!

Lump Sum Payment

Is there any limit on the lump sum that you can make in order to qualify for a tax rebate. Is it in my interest to borrow some money in order to benefit from the previous years tax rebate.

Lump Sum Payment

No limit on what you can pay in ,.,,but there is a limit on tax relief you can claim in respect of last year's tax, which effectively is the limit!

In any tax year the maximum you can claim in respect of all PRSAs and Personal Pension Plan contributions is related to your earnings and age ..15% under age 30, 20% 31 - 39, 25% 40 - 59, and 30% for 50+., assuming you are either self employed or in non pensionable employment in that tax year. Maximum earnings which count for tax relief is €254,000 pa.

Would not recommend borrowing beyond tax rebate expected as you can not get access to your PRSA before 60 ( or on early retirement from a job from 50 onwards) and when you do you can only take 25% tax free and balance will be taxable.

Brendan said:

Why do you want to start a pension? Your first priority should be to buy a house. You should not start a pension until you buy a house and get your mortgage under control. Don't mind your parents who have probably succumbed to the sales messages that you cannot start a pension too early. This should be rephrased - you cannot start saving too early. Save to buy a house and then worry about a pension.

Click to expand...

I know that this post is really OLD but I have to say that I found this to be one of the funniest things I read in a while. If people ever wondered how we got ourselves into this fine mess of a country then it is because of things like the above.