# 25yr old-How much should I contribute to pension



## aishling (30 Jun 2011)

Hi,
I recently changed jobs, I have a pension from previous employment 3% salary, employer matched contributions. There should be 4-5k built up. Nobody contacted me in relation to pension when I handed in notice, should I move it?

I now earn 42K, employer has a plan but doesnt contribute to pensions at the moment. So how much should I put in? Had to fill in forms when I started so put down 5%, is that enough? 

Thanks!


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## eirefinq (30 Jun 2011)

you should check out some of the calculators on the web


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## LDFerguson (30 Jun 2011)

The Pensions Board have a calculator [broken link removed].  

While it is important to make provision for your retirement, in your case that's a long time away (lucky thing).  Make sure you also have short and medium-term savings, for more immediate needs.


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## pconsidine (7 Sep 2011)

Hi, Aisling.

The answer to your question is simple. Nothing. (That is, until the pension companies provide products that are decent value for money and are more transparent)
This week say yet another massive loss of pension value by the geniuses in the pensions industry. And just in case you think this loss is confined to equity based funds, here is a dose of reality. Last year I or any other mug could have put our cash in a perfectly safe cash deposit account and obtained 4% interest on our money. Last year (a year of fairly stable exchange-rates) Irish Life fund-managers managed to generate earnings of 0.6% (Yup, that's right - ZERO point 6!) on their cash fund having first deducted 3.5% of the fund to pay the management charges demanded by their brilliant fund-managers. In other words, their cash fund is down a net 3% for the year. You or I would be stretched to produce such incompetence, even if we tried.
I have written to Irish Life for an account of their stewardship of my pension fund. I have not even had the courtesy of an acknowledgement.


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## Baracuda (7 Sep 2011)

Would agree entirely with LD but yet again i will have to disagree with pconsidine. 

pconsidine. May I point out a number of inaccuracies in your post, this info should help you understand how these funds work. A cash fund is considered as a holding account while the person decides which fund he/she would like to invest in. A cash fund is not like a deposit account at all. It invest money in up to hundreds of different instutions as short term corporate deposits through out the world so as to devirsify risk. The instutions must have top credit ratings, as a result the return is very low. So to be fair you are not comparing like with like. 

Cash funds returns are gross so management charges are deducted after the declared rate as fund charges are different from product to product.

If I am not mistaken (not very familiar with CS PRSA) there is a "self invested fund" in the PRSA which you could have invested in a deposit account and you could have got the best rate in the market at the time.Poor form of Irish Life not to acknowledge your letter, perhaps a phone call to their complaints department with a follow up letter after? 

I do think that it is unwise to advise someone not to prepare for their retirement. Perhaps the best advise a person should give the OP is read and understand the paperwork and documents that they receive! If a person does, they will never be disappointed or feel aggrieved.


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## Brendan Burgess (8 Sep 2011)

Hi Aisling

You should save for your retirement.

But you should not contribute to a pension fund anymore. 

At the end of this year, the tax relief is being reduced from the tax rate, so you will get tax relief at lower than the top rate and when you retire you may be taxed at your top rate.

The  government has just raided pension funds which sets a very dangerous precedent. 

Set aside a percentage of your net income and invest it by reducing your mortgage or other borrowings. If you have no other borrowings, invest it directly probably in equities.


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## Bronte (8 Sep 2011)

It is wise to prepare for retirement.  But one needs to understand the costs of investing in pensions and the likelyhood of getting something or relatively nothing back.  There are no guarantees in life.  If you are unlikely to save, then maybe a pension is the correct way to go.


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## Boyd (8 Sep 2011)

Brendan Burgess said:


> You should save for your retirement.
> 
> But you should not contribute to a pension fund anymore.
> 
> ...



Thats a very sweeping statement Brendan! Youre saying we currently get tax relief on pension contributions at top rate but thats going to drop and then you'll get taxed at top rate on cashout?! What the heck?!!

I have a pension in work with 5% salary and 5% matched by employer. What would your advice be in relation to this situation (OP has no matchd % so its not quite the same). Should one continue with a pension in this scenario? Im 29....


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## TheFatMan (8 Sep 2011)

I'm with Mr Burgess on this one! I'm taking a holiday from pension contributions next year, bringing the kids to disney and the wife away for a few weekends. Might as well see some benefit for my hard work rather than watch the state pick over the corpse that is my pension fund.


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## serotoninsid (8 Sep 2011)

Brendan Burgess said:


> You should save for your retirement.....But you should not contribute to a pension fund anymore.


It's not my intention to hijack this thread (and I hope I'm not!) but would it be wise then to cut my AVC's back to the percentage level that my employer matches the contribution?  Currently have 9% AVC.


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## Mel (8 Sep 2011)

username123 said:


> I have a pension in work with 5% salary and 5% matched by employer. What would your advice be in relation to this situation (OP has no matchd % so its not quite the same). Should one continue with a pension in this scenario? Im 29....


 
I'm 35, paying in for last 8 years, same setup as above. 
Very disillusioned with both the pension and the government's raid on these funds. When I heard about the levy I thought about cashing in to reduce the mortgage but this is not possible apparently. 

What do you suggest Brendan?


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## Boyd (8 Sep 2011)

Might be worth a separate thread explaining the changes?


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## Brendan Burgess (8 Sep 2011)

TheFatMan said:


> I'm with Mr Burgess on this one! I'm taking a holiday from pension contributions next year, bringing the kids to disney and the wife away for a few weekends. Might as well see some benefit for my hard work rather than watch the state pick over the corpse that is my pension fund.



Just to make it clear. I am not suggesting that people should squander their money instead of saving for retirement. 

I strongly recommend that people should save for retirement. I just don't recommend using a pension fund anymore. 

I feel a Key Post coming on...

If your employer is matching your contributions, then it is worth contributing to a pension fund. 

Brendan


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## T McGibney (8 Sep 2011)

Brendan Burgess said:


> At the end of this year, the tax relief is being reduced from the tax rate.



Is this a certainty? I think not. The Finance Minister who made this proposal is not only no longer in office (ditto his party) but he is also, sadly, deceased. There is no indication that his successor agrees with him.


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## LDFerguson (8 Sep 2011)

Brendan Burgess said:


> Hi Aisling
> 
> You should save for your retirement.
> 
> ...


 
Hi Brendan, 

You already did a Key Post on this which wasn't nearly as sweeping. 

In reality, only a certain percentage of the population will have pensions that are big enough to put them into the higher rate when they retire. And even those that do won't be paying the high rate on ALL their pension - only on some of it. The rest will be either exempt or taxable at the lower rate. 

So only those lucky ones who know their pension is already big enough to knock them into the top rate of tax should consider ceasing contributions *IF* tax relief is reduced on contributions in the future. Everyone else should look at their own circumstances. 

Key Post


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## Marc (8 Sep 2011)

You are 25 now so current tax rates should not feature at all in your long term retirement plans.

Things will change a lot more in the 30 or 40 years ahead.

You currently receive a tax deduction on contributions albeit probably reduced in the future.

You pay only 0.6%pa on profits both income and capital gains compared to 27%pa in a gross roll up fund or 25% on capital gains tax with dividends and rent also subject to marginal rate tax on investments outside a pension.

In retirement currently 200k is tax free as a lump sum with a couple able to earn 40 grand every year before paying any income tax. So currently there are plenty of tax incentives associated with traditional pension planning.

A rule of thumb on contributions is a percentage of your gross earnings which is half your age so a 25 year old should be paying about 12.5% of top line earnings.

Another rule of thumb is the amount you need to save doubles every 5 years just to get the same result.

So
If you could have managed on €100pm at age 20 you would now need to save €200pm just to catch you aged 20. By age 30 the amount will be €400 pm just to get the same retirement fund as you aged 20.

Cost of delay and inadequate contributions are the real problems with retirement planning.

Marc Westlake CFP
CERTIFIED FINANCIAL PLANNER


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## aishling (8 Sep 2011)

Thanks for all the advise guys! I went ahead and transfered my pension to my new employers fund & went with 5% contributions. My salary has increase quite a bit so I dont really notice the difference at the moment.

I will certainly re-access if the government change the relief. Im building at the moment so have half a mortgage and no other debts, I would consider myself a saver rather than a spender. Maybe when Im paying a full mortgage Ill consider lovering pension and increasing mortgage repayments as suggested.

I know pension have taken a big hit over the past couple of years with the markets crashing but I guess Im trying to take a long term view on this, not retiring until 2050 apparently!!! Surely a fund manager has more hope of making a return than I can? If investing in shares directly Ill have to pay capital gains taxs etc, hold it in cash and have to pay DIRT, tax man gets his money either way, no?


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## Baracuda (8 Sep 2011)

Perhaps I missed something but I thought that reducing tax relief to 20% was a proposal that fina fail were going to bring in? It was my understanding that Fina Gael said that, instead of reducing the tax relief that they would bring in a temp pension levy for 4 years which they did (agree with or not as an alternative measure) Now I know all bets are off and all that, but has anyone heard that the proposal to lower tax relief to 20% is definately going ahead because I haven't? At the moment a person can get up to 41% tax relief and that a fact, therefore if affordable a person should continue to fund their pension until such time as there is a change, when that time comes sit down and review that pension again and then if need be, explore other ways to fund for retirement.

Ashling. You would expect that a fund manager would get a better return than you or I would and you expect that they would get a better return than the market as well. But the reality is that fund managers rarely beat the index that they are tracking over a rolling 10 year period. 

If you have a high risk to reward tolerance you would be best advised investing a portion of your pension in indexed funds. The advantage of this is that the charges are generally lower and you are getting the true market return. 

And yes to your other questions you will have to pay CGT on shares and dirt on deposits etc..


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## flossie (9 Sep 2011)

Hi Ashling,

I am 28 and have been paying into my pension since i moved back to Ireland last year. My employer currently pays 8% of my monthly salary into my pension pot(this includes any bonuses i may earn, my car allowance etc.) and i top up an additional 7% to utilise the 15% i can currently put into a pension given our age. 

I am relatively new to pensions, and to be honest i still don't understand it fully. However, i currently see it that for every €1 i put in it only costs me around €0.58 due to tax relief. This is a great deal, i feel. I am a bit peeved if tax relief cuts back, but unltimately we are still getting money into the plan that is costing us nothing.

We aren't going to be retiring for a while, and things will change so much in that period of time that i wouldn't worry about it too much. Perhaps in future when more of our salary is being contributed then we could look into reducing contributins depending on the situation at that time, but i think we should be holding steady.....


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## DerKaiser (10 Sep 2011)

Brendan Burgess said:


> Hi Aisling
> 
> You should save for your retirement.
> 
> ...



The removal of 41% relief on contributions is looking increasingly likely but not yet decided. 

I am curious as to why your advice is not to take advantage of tax relief whilst it still exists?


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## TrueBlue1150 (11 Sep 2011)

I had always thought that paying into a pension was a good way to reduce a tax bill. I own a rental property and if I have a net profit of approx €6,000 and I have to pay tax at 41% plus PRSI, USC, etc. surely it makes sense to pay €6,000 into a pension fund and not have to pay the tax? I agree with TheFatMan and if the tax relief is reduced, it might make more sense to spend the money on a holiday instead of paying into a pension fund. The only problem with this is that after paying the tax, there isn't much left for a family holiday!

As rental income has reduced considerably and taxes are going up, surely it makes sense to continue paying any spare cash into a pension fund especially if you are not on track for being taxed at the higher rate in retirement???

I like Baracuda's idea of tracking an index. Do you know if Zurich have any such PRSA funds?


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## Jim2007 (11 Sep 2011)

flossie said:


> Hi Ashling,
> 
> I am 28 and have been paying into my pension since i moved back to Ireland last year. My employer currently pays 8% of my monthly salary into my pension pot(this includes any bonuses i may earn, my car allowance etc.) and i top up an additional 7% to utilise the 15% i can currently put into a pension given our age.
> 
> ...



With the exception of Flossie's comments, I have to say I find the logic behind many of the comments as a bit strange!

Saving for retirement is a very long term goal and over such a long period you have to expect that there will be up and downs in the market, changes in the tax law, government levies and what not.  None of these things should distract you from the objective - accumulate as much cash as you can for retirement.

When it comes to taxation, you should not see a pension contribution as a means of reducing your tax bill, but as extra or free cash to be added to the fund.  Every year I put the amount I have saved on taxes as a result of my pension contributions  into a retirement savings account, because this puts me up 20% on day one (our tax relief is not so high).

Along similar lines, I don't see a down turn in the markets as a reason to stop or reduce my contributions, it just means that at the moment my contributions allows me to buy more stocks/bonds/funds or what ever than I could a few years ago.  The only word of caution here is to ensure that you have a well balanced portfolio.

As for government levies, it happens all over Europe, so why should Ireland be any different?  And in any case the amount involved is peanuts when compared to the amount you have already saved in taxes.  It certainly is no reason to stop contributing to your pension fund.

And when it comes to taxation on retirement, I've no idea what the tax rules will be then, but I know that I'd prefer to have the problem than not to have the pension, thank you very much!

Regards,

Jim2007


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## serotoninsid (11 Sep 2011)

Jim2007 said:


> As for government levies, it happens all over Europe, so why should Ireland be any different?


Wasn't aware of this.  What other euro countries have levied pensions?  I *think* that they tried this in Latvia but had to reverse it as it was deemed to be unconstitutional..


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## DerKaiser (12 Sep 2011)

Jim2007 said:


> Every year I put the amount I have saved on taxes as a result of my pension contributions  into a retirement savings account, because this puts me up 20% on day one (our tax relief is not so high).



Being honest, I wouldn't be at all confident that pensions savings is the right thing when you only get 20% tax relief (as a general rule as opposed to for specific cases).

If you're getting 41% tax relief and your contributions are relatively modest the tax relief is a very good bonus even if you end up paying some tax on your retirement income.

If you're only getting 20% relief then the levy (if extended beyond the 4 years) would erode a large chunk of this, and you could easily end up paying tax on your retirement proceeds.

At 20% relief you'd want to be nearish retirement, be absolutely sure you wouldn't need access to your money before retirement and be confident that your retirement proceeds are modest enough not to pay income tax in retirement.


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## Jim2007 (12 Sep 2011)

serotoninsid said:


> Wasn't aware of this.  What other euro countries have levied pensions?  I *think* that they tried this in Latvia but had to reverse it as it was deemed to be unconstitutional..



Government charges come in many kinds, but the most often is "one of" taxes on the results of the pension fund, except that it is become more frequent.  I know that the same has been done in Denmark, Sweden and Italy.

Then there was a while that employer contributions were being taxes as benefits in kind.

This kind of thing must be expected, but like I said, don't let it distract you from the goal.

Jim.


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## Jim2007 (14 Sep 2011)

DerKaiser said:


> Being honest, I wouldn't be at all confident that pensions savings is the right thing when you only get 20% tax relief (as a general rule as opposed to for specific cases).
> 
> If you're getting 41% tax relief and your contributions are relatively modest the tax relief is a very good bonus even if you end up paying some tax on your retirement income.
> 
> ...



Remember the objective.... collect as much cash as possible, if I pass on the 20% and get taxed on the savings income (which I don't in the pension fund), what to I do then, invest in higher risk asset classes to try and regain what I passed on???  

This is my reality!!!  It is what I have been doing for the last 25 years and what I will continue to do for the remaining 7 years - I plan to retire at 55.... now allowing for all the ups and downs over those years and factoring in a further hit of say 30%, my pension should still amount to about 83% of my current salary pa not including my state pension.  If I don't have to take the hit, then my pension could actually end being higher than the salary.  And I doubt anyone following your logic will be able to say the same.

Honestly the idea that people should get tax relief at 41% and then go on to pay no taxes on retirement, is crazy, no country could go on with the regime in the long term as people are beginning to learn.  I think there is a very big danger that people who see pensions as a tax saving device will do themselves a disservice and fail to adequately provide for themselves in retirement.

Jim (Switzerland)


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## joeysoap (16 Sep 2011)

Those not in the position of having gilt edged DB pensions need to have some incentive to pay into pension plans? 
I agree absolutely that we need to plan for retirement, but the fact is that if relief at the upper level is rescinded then it will result in a mass exit of contributions with people seeking alternative methods of funding their retirements.

Along with the 'temporary' levy, reducing the tax relief is a massive disincentive for those who are being responsible and trying to save for their future years.

Shouldnt the government make saving for retirement as attractive as possible so as to reduce the strain on the state in future years (we have a low level of over 65s at the moment (relative to other EU countries), but the cost of care will be increasing steadily as that proportion increases. 

Remember the pension fund (apart from lump sum) will be taxed on exit, so offering tax relief at the front end is / was a sound policy to get money flowing into pension funds. Reducing this along with the (in my opinion) ridiculous levy (to fund the very weak jobs initiative), has been very reactionary. The long term effects will be more costly as people will turn to equities (dare I say it, property at some stage in the future) and other means to try and fund their twilight years. Fact is many will just stop contributions and spend on holidays and other discretionaries, which is not a bad thing in the current environment, but the long term risk (from the governments side are high).

I'm afraid I agree with the majority of posters so far in this thread. If the relief at higher level is cut then one needs to look seriously at if contributions are matched and ones stage in life. 

Personally paying into a pension fund has lost its lustre (I'm 38 and have matched 4% along with AVC of 10%). I've only being paying in for 6 years, but perhaps its more prudent to use the money now to accelerate my mortgage payments (18 years remaining). Not a done deal, but doing the sums at the moment.


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## TRS30 (16 Sep 2011)

Maybe i am missing something however isn't a pension the only place you can invest gross income? Even if you only get 20% relief, you have a 20% return straight away. Every form of saving will have some sort of tax on exit and who know in 25/30 years what the levels of income, CGT, DIRT tax will be...


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## DerKaiser (16 Sep 2011)

TRS30 said:


> Maybe i am missing something however isn't a pension the only place you can invest gross income? Even if you only get 20% relief, you have a 20% return straight away.



20% relief is actually an immediate 25% return as you sacrifice 80 of net salary and get 100 into your pension fund.

Trouble is that you don't get it straight away, though, you have to wait until you retire. If a 25 year old is fortunate enough to retire at 60, the benefit represents a 0.6% p.a. uplift to their fund - a benefit that would be wiped out were the current levy to continue beyond the 4 years envisaged at the moment.

This doesn't even go into the very real drawbacks of have no access to that money (in the event of unemployment, mortgage arrears, etc) until you retire. 



TRS30 said:


> Every form of saving will have some sort of tax on exit and who know in 25/30 years what the levels of income, CGT, DIRT tax will be...



No one knows, but whatever proceeds you get from your pension are added to your income and taxed accordingly. So long as your retirement income does not breach the tax free allowances you'll have done well from the tax relief on the contribution and in avoiding DIRT on any gains. If, however, you are subject to income tax in retirement you'll pay that tax on both the gains _and _the capital.


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## DerKaiser (16 Sep 2011)

Jim2007 said:


> Remember the objective.... collect as much cash as possible, if I pass on the 20% and get taxed on the savings income (which I don't in the pension fund), what to I do then, invest in higher risk asset classes to try and regain what I passed on???



I agree that the discipline of saving is an important aspect, and any incentive (no matter how small) is worth taking if you would have otherwise simply invested the money in a similar way outside of the pensions framework.




Jim2007 said:


> my pension should still amount to about 83% of my current salary pa not including my state pension.



This would be my concern. If you add that % of your current salary to the state pension, you'll surely be liable to income tax in retirement - just be sure you factor this in.




Jim2007 said:


> Honestly the idea that people should get tax relief at 41% and then go on to pay no taxes on retirement, is crazy, no country could go on with the regime in the long term as people are beginning to learn



Again, I think people just don't think about the income tax in retirement implications.

If you provide for a private pension of up to €8k p.a. and have no other income (other than the state pension) you will probably pay no income tax in retirement. So roughly speaking you can put away about €200k over your lifetime pay no tax on that income in retirement. This €200k would be €120k out of your own pocket and an €80k tax subsidy at 41% relief.

Spread out over a lifetime of work this subsidy is no more than €2-3k p.a. and is open to any individual paying the higher rate of tax (which is pretty much everyone above the average wage).  In my opinion this is neither excessive nor exclusive to the super rich.


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## Jim2007 (16 Sep 2011)

The objective is *very simple* collect as much cash as you can for retirement - nothing else!!!




DerKaiser said:


> 20% relief is actually an immediate 25% return as you sacrifice 80 of net salary and get 100 into your pension fund.



I set out with the intention of saving €100 for my future retirement as a result I pick up a tax credit, which I then add to the €100 I was going to save anyways.  This then compounds at about 2% over the 30 years I've been saving.  Explain to me how you cover this without taking up the pension option and without taking on higher risk investments?



DerKaiser said:


> Trouble is that you don't get it straight away, though, you have to wait until you retire. If a 25 year old is fortunate enough to retire at 60, the benefit represents a 0.6% p.a. uplift to their fund - a benefit that would be wiped out were the current levy to continue beyond the 4 years envisaged at the moment.



Since I'm going to have to save for retirement in any case this does not make any since - If I gain a little from the tax man fine, if not that is fine too, because that was* not the objective*. 



DerKaiser said:


> This doesn't even go into the very real drawbacks of have no access to that money (in the event of unemployment, mortgage arrears, etc) until you retire.



Like I already said the objective is retirement, not drawing it down earlier - if fact I find this a very good thing! 



DerKaiser said:


> No one knows, but whatever proceeds you get from your pension are added to your income and taxed accordingly. So long as your retirement income does not breach the tax free allowances you'll have done well from avoiding DIRT on any gains. If, however, you are subject to income tax in retirement you'll pay that tax on both the gains _and _the capital.



As I already said, I'd rather have that problem, than not have the savings.

Regards,

Jim2007


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## DerKaiser (16 Sep 2011)

I see your point.

My point is that you can invest in the same way in the same funds through a savings product (e.g. a PIP) rather than a pension. From a tax perspective there are situations where the savings route might also be more advantageous (or less disadvantageous at least!). 

Finally, having access to that fund in case of emergencies or a deterioration in circumstances could be seen as an advantage (though others might prefer not to have that choice in order to discipline themselves).


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## TRS30 (18 Sep 2011)

DerKaiser said:


> 20% relief is actually an immediate 25% return as you sacrifice 80 of net salary and get 100 into your pension fund.
> 
> Trouble is that you don't get it straight away, though, you have to wait until you retire. If a 25 year old is fortunate enough to retire at 60, the benefit represents a 0.6% p.a. uplift to their fund - a benefit that would be wiped out were the current levy to continue beyond the 4 years envisaged at the moment.
> 
> This doesn't even go into the very real drawbacks of have no access to that money (in the event of unemployment, mortgage arrears, etc) until you retire.



Excuse my ignorance however its 25% (assuming no change) every year not spread over 35 years. 

Pensions should not be used in isolation as a retirement plan; other vehicles such as cash, property, direct share investment etc should form a retirement plan.


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## DerKaiser (18 Sep 2011)

TRS30 said:


> Excuse my ignorance however its 25% (assuming no change) every year not spread over 35 years.



Yeah, you can contribute each year and get relief on each year's contribution. 

I was making the point that the benefit of the relief to a 25 year old (on the standard rate of tax) who intends retiring at 60 on the first year's contribution is the equivalent of an additional investment return of 0.6% p.a on that money over the 35 years. 

If he puts in money at 40 the benefit would be 1.1% p.a. over the 20 years to retirement.

My point is that the younger you are, the less obvious it is you'll benefit over the long term, particularly as a result of the pensions levy and the fact that the annual charges will be higher for pensions than regular savings (driven by additional disclosure and regulatory requirements)



TRS30 said:


> Pensions should not be used in isolation as a retirement plan; other vehicles such as cash, property, direct share investment etc should form a retirement plan.



You can do all the above through a pension.


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## TRS30 (19 Sep 2011)

DerKaiser said:


> Yeah, you can contribute each year and get relief on each year's contribution.
> 
> I was making the point that the benefit of the relief to a 25 year old (on the standard rate of tax) who intends retiring at 60 on the first year's contribution is the equivalent of an additional investment return of 0.6% p.a on that money over the 35 years.
> 
> ...



The 25 year old also gets 35 years of potential growth on the extra 25%.

Yes, however as outlined previously this given limited access to the assets and usually would involve a complex SIPP; which usually comes with higher costs.


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