Should person continue pension.

[Stapeler]

A Friend who's 63 started his pension approx 3yrs ago. He's paying in €200/month and is is a paye worker at 20% rate. Statements indicate a retirement value of €35 per month. Considering falling fund values and another 3 years of contributions would the person be better off to stop paying in or invest elsewhere. They've indicated that the €35 month isn't going to make a huge difference to their lifestyle. All inputs appreciated.

 

[sanne]

Someone aged 63 really should not be investing in a fund that would loose money. Typically at age 63 your balances should be directed to safer funds. If it was my money and I was age 63 I would direct the lions share of contributions to the fixed income fund that the pension plan offers (sometimes referred to as cash fund). This way I know my money is safe and I still enjoy the benefit of the tax break on the contributions that I am making.

Everyones situation is different though!

 

[Conan]

You could take the view that in the current climate, a secure Cash fund is the way to go. Whilst secure, the actual return will be modest and likely to get even more modest as rates come down.
The other approach, for someone who left it so late to fund a pension, is to go for broke. Go into equities (something high risk/potential high return) on the basis that the safe approach will beliver very little (€35pm) in any event.
The only other factor to bear in mind is what he will do with the fund on retirement. If we has to convert the bulk of the fund into an annuity (€35pm) which will be taxed, then either approach can be justified.
However if he can take the full fund tax-free (under the 150% of Final Salary rule, if no other occupational pension) then the conservative route becomes more attractive i.e. tax relief on contributions going in )both PAYE and PRSI) but tax-free on the way out. So even if the fund simply remained level, there is a 20% plus tax gain.

 

[Don_08]

Put it this way - did your friend do an SSIA. This is the equivalent if he has no other pension.

He would get 35% per annum return on top of every net contribution he makes on top of any return he gets from a cash fund. 3 years of that and take it all out tax free at 65 if its value is less than 18.75% of his total gross earnings at 65. ( Assumign he started the pension at 60).

Or if its a PRSA - it will be 25% of the total value, and the rest would be taxed.

You won;t get a better savings rate than that.

 

[Stapeler]

Thank you all for your replies, I guess it's not all doom and gloom when you consider there's a net gain. I need to check with him to ensure it's in a "safe" fund to ensure he gets something out of it. As previously said €35/mth isn't much but it might go somewhat towards his VHI or the likes. Thank you.

 

[LDFerguson]

Unless he has income in retirement from other sources, it's reasonably likely that his pension will be under the tax exemption threshold and therefore tax-free. Although who knows what Government tax changes may bring.