Key Post Should someone paying tax at 20% contribute to a pension

[Kev1964]

Is the employer contribution capped at €200? I thought it might be more and related to whatever contribution she makes

From what you've said the employer contribution is up to a maximum of 6% of salary (€40,000 x 6% = €2400 divided by 12 = €200 per month).
It makes sound financial sense to trigger the maximum employer contribution by the employee contributing 6% herself.

6% is low enough in this day and age - The employer pension contribution is part of her benefits package like salary, health insurance etc. Something to consider when next in negotiation with an employer. Ten % is more common I think and even higher as your grade increases.

 

[bish123]

This is interesting thread to check if we are doing it right. Wife earns €40,000 in age bracket of 40-45. At the moment she only contributes up to 40% tax relief. Is there any benefit of maximising contribution as per age bracket which include a proprtion at 20% tax relief ? Presumption, mortgage is at comfortable level.

 

[presidenttttt]

Bish123, I think paying down mortgage faster (thus getting an ROI by avoiding interest) is likely to be as lucrative as paying into a pension for 20% relief. It might be marginal, and I have not done the spreadsheet.

I agree with Brendan, home buying seems unattainable for this generation, but that should not put people off saving a deposit. Things change.

If young/relatively young and earning in the 40% tax bracket you should be able to save a deposit, once pot of money is saved you can put it into the stock market if you do not see home ownership coming in the short-term at that stage. This at least this gives you funds which are liquid/accessible if a home buying opportunity arises. Once that amount is saved, then save via pension. I do not think someone would lose out on much with this approach (unless close to retirement). Would people have a different view on this?

As an aside I think banks should look at pensions when accessing mortgages, but that is for another topic. Some people have very good DC pensions, and in the case of a DB pension I can not see why a bank would regard that as less relevant that some precarious current earnings they accept. Indeed, if governments encouraged lenders to include pensions then that may drive a very positive behaviour of encouraging younger people to build understanding of pensions

 

[Dr Strangelove]

Does anyone have nay advice for me and/or her?

She should contribute to the max and take advantage of employer contributions.

20% tax relief is better than 0% tax relief, and funds accumulate tax free. When you add in employer contributions it would be mad to turn down.

 

[lff12]

Home ownership will never be attainable for very many young Irish people. By following your advice some of these people may end up homeless in their retirement.

That's exactly why I started saving in my late 20s, and the first 3 years was when I was not earning enough to pay the higher tax rate. I really thought I'd never be able to afford a home, but I figured out it was worse to have no home and no pension, than no home but a modest pension. But you do you.

 

[lff12]

This topic is of interest to my daughters situation at the moment. She is now 2 years with her employer and can now avail of the "Defined Contribution Pension Plan". She asked my advice but my full working life experience is within public service pension schemes, so it's all a bit puzzling to me.

It seems if she contributes a minimum of 4% of her salary (40,000 p.a.) her employer will match this contribution up to a maximum of 6%. The employer has given an 'assumed contribution' from my daughter of €100 per month.

She is currently single, aged 25, doesn't have (or need) a mortgage. In terms of money management, she is (thankfully) a sensible spender and saver and is happy to start planning for her pension right now. €100 per month sounds low to me and I wondered if €150 might be more realistic?

Does anyone have nay advice for me and/or her?

Bsaically her employer is going to give her an extra 6% provided it goes into her pension, and her side of the bargain is to also contribute 6%.
She can play it easy, contribute 3% and the employer will also contribute the same 3%. Its money on the table for the taking imo. I know when I was in my 20s it represented a very small sum - maybe 57.5 euro a month or something, but the modest tax relief at the 20% I was paying marginally decreased my overall tax burden (which at the time was a lot, I was earning 23k pa) so while small it did pay off. I left that job after 3 years of contributing, and that tiny sum plus employers contributions are now over 17k.

 

[lff12]

From what you've said the employer contribution is up to a maximum of 6% of salary (€40,000 x 6% = €2400 divided by 12 = €200 per month).
It makes sound financial sense to trigger the maximum employer contribution by the employee contributing 6% herself.

6% is low enough in this day and age - The employer pension contribution is part of her benefits package like salary, health insurance etc. Something to consider when next in negotiation with an employer. Ten % is more common I think and even higher as your grade increases.

in private sector typically its up to 6%, not 10%.
Financial services however often does pay a lot more - as much as 16%

 

[lff12]

As an aside I think banks should look at pensions when accessing mortgages, but that is for another topic. Some people have very good DC pensions, and in the case of a DB pension I can not see why a bank would regard that as less relevant that some precarious current earnings they accept. Indeed, if governments encouraged lenders to include pensions then that may drive a very positive behaviour of encouraging younger people to build understanding of pensions

Actually it was the first thing my bank asked me when I applied, some banks will allow a longer term if you're in a company known to have a good scheme.

 

[Brendan Burgess]

She should contribute to the max and take advantage of employer contributions.

20% tax relief is better than 0% tax relief, and funds accumulate tax free. When you add in employer contributions it would be mad to turn down.

Just to be absolutely clear, it is always right to contribute enough to maximise employer contributions.

40% tax relief is much better than 20% tax relief so someone who is paying 20% tax who will be paying 40% in the future should wait until they are paying 40%.

If they will never be paying 40% tax, it's more complicated.

Brendan

 

[Kev1964]

Just to be absolutely clear, it is always right to contribute enough to maximise employer contributions.

40% tax relief is much better than 20% tax relief so someone who is paying 20% tax who will be paying 40% in the future should wait until they are paying 40%.

If they will never be paying 40% tax, it's more complicated.

Brendan

Here is an alternative view Brendan. Over the last two budgets the threshold where 40% tax kicks in has seen significant jumps (now it’s €42k). If the government continues this trend and there is talk of indexing thresholds..…following this advice may mean that some people would never start a pension. It’s also made more complex by the fact that tax relief may be partly 40% and partly 20% depending on how much they earn/ invest in a pension.

The second scenario is an unknown in many cases - when do you realise that it applies to you to then trigger a review of the “complications”?

Aside from the bald mathematics involved there is the subjective benefit of creating a saving discipline for life and I would encourage everyone to start a pension as soon as they become liable for income tax, at any rate.

 

[Conan]

Another way of looking at this.
If the Employer matches the Employee's 3%, then even tax relief of only 20% on the Employee's 3% (so a net 2.4%) the Employee is still getting 6% invested . So a net cost of 2.4% to get 6% , might be a good deal.