Key Post "Should I just save money or contribute to a pension?"

Discussion in 'Pensions' started by LDFerguson, Jul 12, 2012.

  1. Daddy

    Daddy Frequent Poster

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    Thats a great result ronaldo. I am in my pension guess 20 yrs now. Contributions approx 95k. Value today 108k. So your start is an exception to most people I reckon. Who are you with and what fund did you choose.
     
  2. daheff

    daheff Frequent Poster

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    ok, my take on pensions is this:

    Firstly if you are going to get one, get the one with the cheapest fees. Generally this is a passive fund (ie one that doesnt try to beat an index, just match it minus fees).
    Secondly most managers (over time) do not manage to outperform, they match the market at best- so stick with a passive fund that tries to match the market.
    Thirdly most people are not financially literate enough to stay abreast of the markets enough to do any better than fund managers or passive funds.

    But mostly I dont think pensions (As are currently structured) are any value for money. Think about this scenario:
    Somebody aged 35 with 50K currently in their pension fund. This person has approx 32 years left to retirement. Assume 10% growth per annum (which is unlikely), inflation at 2% (ECB long term target) and annual contributions of 2500. At retirement the person would have about 540K of a retirement fund (in todays money). This cost the person about 43K in annual after tax contributions (assuming 52%).

    How much of an annuity would 540K buy? Judging by an earlier post it would be in the region of 17K (before tax). Not bad? Well what happens if you die aged 68? Who gets the 540K fund? Not your family...the annuity seller.

    So what if you held onto the 540K in a savings account? Lets say you dont earn the 10% pa anymore...maybe something more realistic like 3%. Thats 16K per annum before tax. So you are still getting something similar to the annuity without reducing the capital amount. And if you die the money goes to your estate and your family get it...not some pension company.

    To me it would be far better for the state to allow people to lock funds away into an account like this and at retirement only allow them to withdraw any capital increases (at most) every year, with the fund value (maybe less a tax?) going to the estate on passing of the owner. Those large capital amounts going back to the population would increase wealth (and taxes) over time and the funds wouldnt be lost to a pension company

    **admittedly the 540K will be somewhat reduced by taxes from investments/interest if you dont use the pension fund...but i've also not included mgmt fees for the pension fund so its a reasonable like for like comparison.
     
  3. LDFerguson

    LDFerguson Frequent Poster

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    You've just pretty well described an Approved Retirement Fund, which is available as an alternative to an annuity.
     
  4. daheff

    daheff Frequent Poster

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    Ah i didnt realise thats what an ARF was...just goes to show how badly its explained by the Financial world (and i'd count myself as extremely financially literate)!
     
  5. lowpoint

    lowpoint Frequent Poster

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    Gents,

    I've read all the previous posts which are quite detailed in fairness but with all those details I got lost halfway through unfortunately.

    I'm not even sure whether there is an answer to the OP's question but from my point of view I didn't get a clear definition although I'm sure I just don't have enough info/experience to decipher whether or not it is worth it.

    From a personal point of view I have the below details and would appreciate your comments based on the info I can give you.

    Just turned 31 yrs of age.
    Started pension 8 months ago
    Contributions of €120 p/m (wanted a year of low contributions just to settle in as my financial situation was up in the air due to personal circumstances at time of commencement)
    Planned contributions of €250 p/m starting in November.
    Annual management fee of 1% of performance (Zurich Life)
    Allocation rate of 100%
    No hidden fees (AFAIC) but open to correction as my question is "How do I know" as it's hidden?

    I'm also saving €800 p/m into a savings account but my contribution increase will be coming out of this money so pension/savings fund/s will essentially remain the same total.

    My very basic questions are:

    What should I be asking myself after 8 months into this pension?
    How do I know I'm doing the right thing? (aware that this is not an exact science and nobody can ever really know) but am I doing anything completely wrong based on the above.

    All pointers and advice would be greatly appreciated as I'm only doing a pension as it's the common advice given to anyone who would like some security for retirement.

    Savings for 8 months €6400
    pension contributions for 8 months €960
    retirement age 68
     
  6. mmclo

    mmclo Frequent Poster

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    Surely the two simplest questions for (PAYE) people are;

    Are you a higher rate tax payer?
    Does you employer contribute?

    Seems to me the answer would have to be no to *both* to consider not contributing to a DC scheme

    Higher rate contributions despite the prsi and USC exemptions still experience a considerable boost to what they contribute and employers contributions are usually like for like

    If you're in a position to worry about higher rate tax on the way out you must be close to the new limits on contributions then and be looking at a fund of over 1m. I'd say most people are nowhere near that and if they were this would be well down their list of issues
     
  7. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Contributing to a pension makes huge sense.

    For €60, you get €100 moved into an investment world where there is no income tax and no capital gains tax.

    At retirement, you can take out 25% of the value of your fund. The first €200k of this is tax free and the next €300k is taxed at 20%. That's only €60k of tax on €500k.

    The balance in the ARF/AMRF can be withdrawn at will, with a 4% mandatory minimum withdrawal. Because of the 20% band, you probably won't pay top rate tax on everything. And there's no PRSI once you're 66.

    Re cost, just shop around. 100% of your contributions should always be invested.

    I pay 0.5% - That's it.
     
  8. PaddyW

    PaddyW Frequent Poster

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    I started my pension back in 2005 (if I remember correctly). I pay higher rate tax and I also have employer contributions. Total contributions to date have been €48,500 (roughly) and when I checked 2 days ago, the total fund was worth €71,500. Not bad! I'd advise people to start asap on their pensions.
     
  9. Jim2007

    Jim2007 Frequent Poster

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    I would ignore this - no one can tell you what the tax situation will be like when you come to retirement other than the later you retire the more likely that it will be fully taxable like it is in other Euroland countries.
     
  10. Gordon Gekko

    Gordon Gekko Frequent Poster

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    That depends how old you are...
     
  11. facetious

    facetious Frequent Poster

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    There are some hefty figures being put forward here. I would ask a simple question, what value is the average pension pot?

    I read recently that in the UK, the average pot was about 45k.

    You put money into a pension fund and cannot get at it until you are at retirement age (or sometimes from 55 years. Not a lot of use to you if you are having your home repossessed and have money in a pension pot but can't access it!
     
  12. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Equally not much good to get to 66/68/70 and to be forced to live on €12,000 a year...
     
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  13. facetious

    facetious Frequent Poster

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    I'll be 70 next year and retire due to ill-health just before my retirement age. I am on the non-contributory pension (just under 250 per month, winter time!) and my main expenses are for electricity, food and clothing etc plus nearly 1k for management services charges (I own my own apartment). My food bill per week is less than €25 per week (and I eat well), I have a medical card, free travel, and free TV licence.

    Thus, per year, food is €1,300 p.a.
    Management charges are €1000 p.a.
    Electricity less than €1000 p.a.
    Total on main expenses is €3,300
    Leaving me €6,700 p.a. for anything else, holidays clothing etc.

    €12,000 a year is plenty to live on.

    Sorry, I've gone off topic.
     
  14. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Fair play to you. However, I would strongly dispute your contention that €12,000 a year is plenty to live on.
     
  15. trasneoir

    trasneoir Frequent Poster

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    To my mind that's an argument against un-affordable mortgages rather than against pension investments.

    I see no evidence that the state will be able to afford an old age pension by the time I get there, so funding my own is mandatory.
     
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  16. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Absolutely. My own view is that all State Pensions will be means tested by the time I retire. The numbers just don't stack up (i.e. more retirees and less workers).

    The present system is fine - It's malinvestment and disgraceful charges that have given pensions a bad name.
     
  17. SBarrett

    SBarrett Frequent Poster

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    Well done Paddy. There will be crashes along the way and that €71,500 will drop in value. As long as you are invested in a portfolio that is within your comfort zone, there is no need to panic. Stick with it and things will come back.

    Sometimes I come across policies that people took out 25-30 years ago. They invested £50 a month into a managed fund and they have done nothing with it since. There have been a lot of ups and downs along the way and they just rode them out. Those policies usually have returns of 8/9 times the amount paid in.

    Steven
    www.bluewaterfp.ie
     
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  18. SBarrett

    SBarrett Frequent Poster

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    It depends on what you want to do and the cost of your lifestyle. If you were earning €100,000 when you were working, a drop to €12,000 a year would be quite a shock as your lifestyle is based around a €100,000 salary.

    The reality is people won't have enough in their pension pot to have the lifestyle that they want in retirement. Pension funding should be part of a overall strategy to provide an income in retirement, you should also look at other income streams, if possible.

    Steven
    www.bluewaterfp.ie
     
  19. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Asset allocation seems to be key. As is cost. And a 20/30/40 year old should be nowhere near the lower end of the risk spectrum. Volatility is your friend as you pick up units during market weakness.

    A young person who allocates 100% to equities and who pays reasonable fees will be in a great place at retirement.
     
  20. SBarrett

    SBarrett Frequent Poster

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    That would be grossly unfair. The old age pension of €12,000 costs about €300,000. If you work and pay your PRSI stamps all your working life but have a private pension, you get nothing but someone who works but never bothers saving for retirement gets handed a pension worth €300,000?

    The government should start with ring fencing PRSI contributions to actually pay for old age pensions i.e get the pension reserve fund back. As with every tax they collect, they just lump it all into one pot and take what the need from it.

    Steven
    www.bluewaterfp.ie
     
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