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

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

  1. Gordon Gekko

    Gordon Gekko Frequent Poster

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    It would be terribly unfair - But so is plenty of what's done in this country. The pension levy is grossly unfair.
     
  2. rob oyle

    rob oyle Frequent Poster

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    That's what I was thinking when I read Steven's message - it's not what should be done but probably is what will be done once we've passed the point of no return (and we're getting there fast).

    Regardless of what anyone thinks the solutions are, we can all agree that nothing is been done at Government level which would come any way to resolving the issue for the future... adding a couple of years to normal retirement age might help for now. I can only envisage that if I do provide for my own retirement, by the time I reach retirement age the State will have to bail out anyone that didn't as part of its social contract and there won't be sufficient funds to cover everyone. As long as unfunded schemes are acceptable, the problem will continue to grow.
     
  3. trasneoir

    trasneoir Frequent Poster

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    You'd need an electorate who were prepared to patrol the fence (and break the legs of any politician who looked sideways at it). It seems that we reserve this kind of fervor for water and children's shoes.

    How would you appoint the fund manager?
     
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  4. SBarrett

    SBarrett Frequent Poster

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    With the lack of interest in pensions in Ireland, I don't think you will find the electorate campaigning for this one.

    The Pension Reserve Fund had fund managers. There's plenty of highly qualified fund managers who would take the job.

    If the OAP was means tested, there is a high chance there would be protests. Public servants are in a mandatory pension scheme and in a lot of cases, their pension is LESS the OAP. Would they suddenly get no OAP?

    As long as I can remember, we have been told that our PRSI pays for our OAP when we get old. Are they going to turn around and say, we're going to take that as tax and give you back nothing.

    And all of this will come from the mouths of people who themselves will be taking €100,000 + from the State every year in retirement?


    Steven
    www.bluewaterfp.ie
     
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  5. jessicapoul

    jessicapoul New Member

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    i want to save my pension money but problem is that i was going in loss
     
  6. Firefly

    Firefly Frequent Poster

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    Thanks to North Star for producing the figures above for a different thread.

    OK, so what I am trying to figure out is whether it would be easier and better to just put money in the bank for someone aged 40 planning to retire at 65, i.e. 25 years. I'm close to this age and have a pension but I'm not sold on whether to continue or just put the money into the bank. I am ignoring the potential growth of the fund (or potential risks). I realise this growth could be significant but I am also ignore the fees involved in building up and drawing from the pension fund any money grab by another goverment in the future.

    I am not ignore tax benefits and these are included below

    Monthly budget is 1,000, higher rate tax payer.

    Option 1 - Pension.

    For a net cost of 1,000 per month, 1,666 per month can be put into a pension fund (higher rate tax payer). After 25 years, this amounts to almost exactly 500k (499,800). Based on the figures above for 1m, this would be something as paltry as 10k per year or thereabouts.

    Option 2 - save directly to the bank

    1,000 per month for 25 years would yield 300k. The same 10k a year would see this person / couple (it doesn't matter!) reach 95 before the money runs out. I appreciate there is inflation at play and the figures above include an inflation rate of 3%, but even taking this into account the couple would probably be 90 before the money runs out. All the while they have full access to the entire amount and don't have to worry about the stock market value when they reach 65.

    I could be completely wrong above and if so I would love someone to point out to me where I am wrong. I have a feeling the potential growth of the fund would be the biggest omission...
     
  7. dub_nerd

    dub_nerd Frequent Poster

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    Just my tuppence worth: I very much take the "bird in the hand" approach. I would go for the bank saving option. That's what I've done with my own money. I do have a pension fund from previous employment but my employer contributed most of the funds and I paid the minimum possible amount into it from my own salary. My concerns about its performance were amply realised -- it yielded miserable returns over more than twenty years. It's still there for whenever I draw it down but I'm not holding my breath for the annuity it will buy.

    Meanwhile I saved more than ten times the amount I contributed to the pension. Rates of return on cash were reasonable until a few years ago, and I locked in some rates that are only expiring now. Yes, I paid punitive tax on the earned income and then more through DIRT, but the money is now available for whatever I want. The government hasn't (yet) dipped into it like it did with my pension. If I want exposure to the stock market I'll invest it myself -- from my admittedly limited experience so far my returns are vastly better than anything my pension ever achieved.

    I value liquidity, mostly as a way of keeping my options open to escape the ravages of government.
     
  8. username123

    username123 Frequent Poster

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    Why not do both? Spilt the cash and get best of both worlds. If your mortgage is paid then this should be possible.
    Also, you didn't mention the 250k (225k?) tax free lump sum on pensions. Finally you don't have to buy annuity, you can continue to invest in an ARF.
     
  9. username123

    username123 Frequent Poster

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    Actually, 225-500 is taxed at 20%, above that is at marginal rate. Can you quit your high paying job just before retiring, take up a lower paid job so you drop back to being a lower rate tax payer and then only pay 20% tax on amounts above 225k? I assume not, surely they've thought of this and somehow closed this option?
     
  10. Firefly

    Firefly Frequent Poster

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    That's probably the best option actually, maybe 60/40 for cash/pension. It would be handy to have fixed income as well as a reserve fund.
     
  11. Fella

    Fella Frequent Poster

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    Personally I wouldn't put a penny into a pension , if pensions are going to be unsustainable in the future like most here are saying then I'd expect the government to get involved and they can just do what they want. They'll interfere again , id rather cash all day long , I can move myself and my cash easily it's not locked in till I'm 65 with me hoping that the clowns in charge leave it alone.
     
  12. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Guys,

    The negativity about pensions is incredible. With the time horizon that's been talked about, it would be insane to provide for one's retirement using "after-tax funds".

    Even using Firefly's cash option, the position is clearcut. Of the €500k, €125k would come out tax free, with the balance going into an ARF/AMRF. Someone at that level would pay little or no tax on the ARF drawdowns, so they have 50 years of money at €10k a year rather than 30 years of money using after-tax funds.

    But with a time horizon like that, investing makes perfect sense. People's bad experiences with pension are never as a result of the structure; it's a great structure. You get the free use of government money to invest (i.e. tax relief). The problem is when people get scalped by unscrupulous brokers or banks, and when people invest in rubbish, whether that's bank stocks that go to zero or fee-laden rubbish funds. Pay no more than 1%, go into a managed fund with circa 50-60% equity content (e.g. Zurich Pathway or Standard Life My Folio) and contribute as much as you can.

    With that sort of time horizon, nobody has ever lost money when investing in a globally diversified manner. Advisers can never say this, but with a 25 year time horizon, reasonable fees, and diversification, you simply cannot lose. The guy who invested in 1928 didn't lose. The guy who invested in 1999 didn't lose. The guy who invested in 2008 didn't lose.
     
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  13. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Fella, with all due respect, your strategy is ill-judged and you will regret it.

    The penalty tax that applies to larger pension funds also applies to public sector pensions. If they were to drop that level at which the tax problem arises, it would start to capture mid-ranking public servants, which would cause uproar.

    You are leaving a massive opportunity on the table here.
     
  14. Fella

    Fella Frequent Poster

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    I'm invested in the stock market , I can easily liquidate it and have cash to do what I want with , locking in money for the next 30 years is crazy imo, they done it before so they'll do it again especially with the pensions been unsustainable , it's not worth the risk for me, I'm a low rate tax payer anyway so it's an easy decision but my decision would be the same if I was on high tax .
     
  15. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Someone paying tax at 20% should still divert money into a pension. Because of the numbers involved, he or she will end up paying tax on the pension income at the lower 20% level (or even 0% in certain circumstances).

    Consider two options:

    - Trying to invest €80 in non-pension world where income tax and capital gains tax are chipping away at your investment.

    - Instead putting your €80 and an interest free loan of €20 (i.e. tax relief) into pension world where there is no tax and your €100 is free to compound away for a very long time. Then you draw 25% of your fund out tax-free and draw an income taxed at a combination of 0% and the 20% rate (plus the lowest rates of USC) in retirement (with no PRSI).

    Personally, I don't believe that your scepticism is well founded, but in any event such restrictions are far less likely to impact on someone with a smaller fund like yourself.

    I genuinely believe that you are making a mistake.
     
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  16. Merowig

    Merowig Frequent Poster

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    If the government starts to introduce again government levy I move my PRSA abroad (though my Occupational scheme am contibuting now won't be moveable unless I leave Ireland...)

    It looks they might ring fence private pensions
    http://www.independent.ie/business/...to-safeguard-new-pension-scheme-35090920.html


    Bank accounts are guaranteed only up to 100k - I believe the risk of a bank failing is higher than the government taking away the pot.
     
  17. dub_nerd

    dub_nerd Frequent Poster

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    +1. Totally agree with this. I understand the objections of others who perhaps understand the pension industry better than I do, but from a purely personal and subjective point of view:
    • government has set a completely disastrous precedent by raiding private pensions. From what I can ascertain, the compounding effect is much worse than the modest percentage they swiped, and will result in a 5% or so reduction in final pension for me. Why on earth would I trust that this won't happen again?
    • annuity calculations are at daft levels. Looks to me like you'd have to live to well over a hundred just to get back the money you put in. Why should I line the pockets of the pensions companies?
    • the internet is full of advice about choosing the right products from the right companies, with the right fees and the right investment mixes. With all due respect to the experts here, the problem is that the non-specialist must trust advisers whose impartiality is unknown at best. The pensions world is hideously opaque, jargon-filled and a minefield for someone like me. I make a point of never trusting anything I don't understand. Having paid advisers retained by my last company did not result in good returns for the pension investment, quite the opposite. Anecdotally I have seen other individuals get completely wrong or unsuitable advice from paid advisers. Basically, I wouldn't trust a pension as far as I could kick it. Hilariously, neither did the salespeople who sold my last pension -- I later discovered they had no pensions themselves!
    • Life's expenses don't come in neat monthly or annual chunks. Having your own lump sum put by lets you vary your own expenditure as you want, whether for voluntary leisure activities or involuntary expenses.
    • With all the downsides of pensions, I consider the tax inefficiency of saving from net earnings to be a necessary evil.
     
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  18. Gordon Gekko

    Gordon Gekko Frequent Poster

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    But the pension doesn't give you bad advice or rip you off...an adviser does. So seek referrrals or recommendations.

    Why should the fact that the State took an average of circa 0.5% condemn you to a less comfortable retirement?
     
  19. Firefly

    Firefly Frequent Poster

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    But 30 years would get me to 95 which I think most people would take. You also have the freedom to do what you want - say something bad happens in the future, like the government does actually go broke. You could have your money safely out of the country and your future more secure.

    I'm in a lucky position - Mrs Firefly has worked for a large portion of her career in the HSE and has recently returned. Even if the government of the future goes broke, her pension will probably be the same or better than most private pensions anyway. In this regard, I think I will choose carefully and go for a mix of cash / investments and a low cost pension. That would leave a mixture of fixed income and OAP to meet day to day expenditure and a reserve fund to cover big ticket items, be they for pleasure or for health purposes.

    One other thing.....surely the government of the day could do away with the 25% tax free lumpsum?
     
  20. Fella

    Fella Frequent Poster

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    I wanted to say exactly what Dub Nerd said but he said it better!
    I really don't see how I am losing out , I'm still getting the same returns from the stock market as a pension fund , but I have access to my money whenever I want it. There's a big opportunity cost of locking money away for that long and as I already said I just don't trust the tax changes that will be made by governments over time. I don't want to be told when I can touch my money and how much I can withdraw, if theres a property crash in a few years and I think houses are silly cheap I can cash in some shares and buy a house , why would I lock my money away for 30 years now in a pension and the year before I retire the government of the day could decide lets means test pensions , lets do away with the tax lump sum etc etc and there is absolutely nothing I will be able to do. I would argue having your money when you need it invested in the stock market is worth more than the tax relief over time.