# How big a  pension fund do I need to retire on?



## Maybrick

Hi all,

I am just starting to investigate the pensions issue and must admit I feel quite intimidated by how complicated it is. I was wondering if anybody could answer a very basic question just to get me started. How big a pension fund would I need at retirement age to guarantee an annual income of 30,000? 

Any help gratefully received - thanks.


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## Gordon Gekko

About €1.2m given where annuity rates are.

If you go the ARF route, about €1m; €250k paid out to you as your 25% lump sum (net €240k) and then €750k where you take out 4% a year to give €30k. But you need the fund to be invested wisely.


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## Maybrick

Thanks Gordon, much appreciated. I should have clarified, I will be entitled to the state pension of around 12K so would be happy with 18K on top of that. Does that mean I only need 450K after taking my lump sum? Also, what if I forego the lump sum? I'm hopeful that I won't need it, just the annual income.


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## LDFerguson

Given that the lump sum is tax-free but the ongoing income is taxable, in most cases it's advisable to take the lump sum.  Even if you just put it in the bank and make a monthly withdrawal to top up your pension income.  

And yes, if you're looking to privately fund an annual income of €18,000 per year then €450,000 would be the correct target figure assuming you draw down at 4% per year.  As Gordon mentions, the investment of the fund post-retirement is an important aspect of this.  If you invest and get a return of 4% after charges per year, while taking a 4% income, then your original pension fund will be perpetual and will still be €450,000 when you die.  If you get an investment return of, say, 2% per year after charges and are taking an income of €18,000 per year, then the value of the fund will be eroding slowly over time.


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## Jim2007

It entirely depends on the rate of return you expect.  I think 4% to be over optimistic and would go with 2.5% to 3%, so between say €600k and €750k or so.


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## Sarenco

Maybrick said:


> I should have clarified, I will be entitled to the state pension of around 12K so would be happy with 18K on top of that. Does that mean I only need 450K after taking my lump sum?


Yes, that's about right.  

At current rates, €450k would buy a 66 year old male an annuity of around €18 per annum.

An annuity buys you a guaranteed income for life.  In essence, the life assurance company that sells you the annuity takes all the investment risk and guarantees to pay you an income for life, regardless of how long you live.  The downside is that the annuity dies with you.

The alternative is to transfer the pot to an ARF/AMRF and then gradually draw-down an income from the pot over time.  If you die before exhausting the pot, the balance will form part of your estate.  The downside with this option is that you take all the investment and longevity risk (the risk that you outlive your savings).

In either case, you are nearly always better off taking the maximum tax-free lump sum before buying an annuity/starting an ARF/AMRF.


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## Gordon Gekko

For what it’s worth, my personal preference is the 25% lump sum/ARF/AMRF route; I like the idea of having something to pass on to the next generation.


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## LDFerguson

Gordon Gekko said:


> For what it’s worth, my personal preference is the 25% lump sum/ARF/AMRF route; I like the idea of having something to pass on to the next generation.



Mine too.  I also like the ability to vary income according to your needs, take occasional ad-hoc withdrawals etc.


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## Sarenco

Of course you could partly annuitise your pension pot to guarantee a "base" level of income and then invest the balance in an ARMF/ARF.  

Or you could wait to annuitise until you are further into retirement  (at which time you would get buy a lot more income for a much smaller outlay).

There are a lot of individual variables at play - different life expectancies, different desires to leave a legacy, different pension pot sizes, other income streams, etc.  

The best advice is probably to try and amass the biggest pension pot possible, while maintaining a reasonable lifestyle during your working life.


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## Duke of Marmalade

IMHO annuities are terrible value just at the moment. QE has led to quite unbelievably low interest rates  even negative at the shorter end.  If guaranteed pension is what suits your psyche wait for rates to improve.  Ok you are foregoing the insurance against living long but by definition this risk does not suddenly hit you overnight, so it can safely be postponed.

I agree with other posters on the order of money’s needed to answer OP though I note inflation is being ignored.


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## Gordon Gekko

Sarenco said:


> The best advice is probably to try and amass the biggest pension pot possible, while maintaining a reasonable lifestyle during your working life.



So true.

Sadly, I know a lot of people who are neglecting their retirement planning whilst simultaneously blowing money on extraneous rubbish.

And the same people will be moaning about penury when they can no longer work.


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## Cervelo

Anyone like to hazzard a guess as to how much money a person would have the contribute to there pension to have a fund worth a million after 30 years ??


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## fistophobia

Relying on the state pension being 12K, is a dangerous assumption to make. I am planning for it to be much lower, or non existent, or only offered after age 70. If you pessimistic, you never be disappointed.


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## Jim2007

Cervelo said:


> Anyone like to hazzard a guess as to how much money a person would have the contribute to there pension to have a fund worth a million after 30 years ??



Probably around 500K - 600K depending on the expected rate of return you forecast.


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## Gordon Gekko

Cervelo said:


> Anyone like to hazzard a guess as to how much money a person would have the contribute to there pension to have a fund worth a million after 30 years ??



About €16,500 a year (which is €495,000 in total).

That’s based on an average return of 4.5% a year (which is what I use when doing my own planning).


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## MrEarl

Maybrick said:


> ....I will be entitled to the state pension of around 12K.....





fistophobia said:


> Relying on the state pension being 12K, is a dangerous assumption to make..



Hello,

I could not agree more with fistophobia on the point about the state pension.


The population is aging, so there will be more people drawing on the state pension in the future
Average life expectancy is getting longer, so those who draw on the state pension will draw on it for longer periods
Successive governments continue to make no meaningful arrangements to provide for future obligations under state pensions

Notwithstanding the moral obligation that the state may have to pay pensions in the future to those who have contributed into the system for many years, financially I don't see the state being able to afford to do so.  As such, sooner or later, the government of the day is going to have to break the bad news to the population and make some radical changes. Obviously, governments don't want to grasp this nettle given the fear of them then being penalised in subsequent elections, but tinkering with the state pension (by pushing our the age before payments commence for example) can only continue for so long.




Duke of Marmalade said:


> IMHO annuities are terrible value just at the moment. QE has led to quite unbelievably low interest rates  even negative at the shorter end.  If guaranteed pension is what suits your psyche wait for rates to improve.  Ok you are foregoing the insurance against living long but by definition this risk does not suddenly hit you overnight, so it can safely be postponed.
> 
> I agree with other posters on the order of money’s needed to answer OP though I note inflation is being ignored.



Hello Duke,

While I appreciate that it's all relative, wouldn't it be correct to say that annuities have been poor for several years now (rather than "just at the moment") ?

Also, with QE likely to continue for another few years (at least in terms of a low interest rate environment, if not with ongoing Bond purchasing by the EU), isn't it most likely that annuity rates will continue to be terrible for at least another 3-5 years, if not longer ?   Obviously, I appreciate that none of us can predict the future, but I'm working on what we know to be true at this time.

Your point about inflation is very well made btw.  Notwithstanding the fact that official inflation rates have been very low in recent years, true inflation in terms of the cost of living and buying every day goods and services is on the up, at a higher rate than a weighted basket of goods might suggest to those releasing official inflation figures.


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## LDFerguson

MrEarl said:


> Hello,
> 
> I could not agree more with fistophobia on the point about the state pension.
> 
> 
> The population is aging, so there will be more people drawing on the state pension in the future
> Average life expectancy is getting longer, so those who draw on the state pension will draw on it for longer periods
> Successive governments continue to make no meaningful arrangements to provide for future obligations under state pensions
> 
> Notwithstanding the moral obligation that the state may have to pay pensions in the future to those who have contributed into the system for many years, financially I don't see the state being able to afford to do so.  As such, sooner or later, the government of the day is going to have to break the bad news to the population and make some radical changes. Obviously, governments don't want to grasp this nettle given the fear of them then being penalised in subsequent elections, but tinkering with the state pension (by pushing our the age before payments commence for example) can only continue for so long.



Hello MrEarl, 

I agree wholeheartedly about the State Pension.  I think many in Government are terrified of mobilising the "grey vote" again, as happened some years ago.  In the most recent document this Government published about future plans for all Irish pension systems, it was stated that the plan is to index-link the State pension.  I think this is a missed opportunity.  It would be relatively painless to effectively reduce the State Pension over time by simply NOT index-linking it.


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## garbanzo

Maybrick said:


> Hi all,
> 
> I am just starting to investigate the pensions issue and must admit I feel quite intimidated by how complicated it is. I was wondering if anybody could answer a very basic question just to get me started. How big a pension fund would I need at retirement age to guarantee an annual income of 30,000?
> 
> Any help gratefully received - thanks.



Hey Maybrick

Can i ask a stupid question? Are you single or is there a Mr or Mrs Maybrick who you will be supporting in this retirement scenario. I ask as it isn’t clear and a significant other will probably double the amount you will need to have to support in retirement.

Cheers

garbanzo


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## Sarenco

garbanzo said:


> I ask as it isn’t clear and a significant other will probably double the amount you will need to have to support in retirement.


Not really - one TV licence, one ESB bill, one gas bill, one LPT bill, etc.

I would estimate that a retired couple would require around 1.5 times the income of a single retiree.


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## garbanzo

Fair points Sarenco. That makes sense when I think about it.   I will sleep easier tonight knowing that.


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## Gordon Gekko

People also need to look at the tax position;

The 20% rate band for a two income household is circa €70,000.

PRSI falls away at age 66.

There are lower rates of USC for over 70s with income below €60,000.

There are those income exemptions for over 65s (€18,000 for a single person, €36,000 for a married couple).

It surprising how one’s needs (even for a pretty comfortable lifestyle) are far less than one might expect when mortgage costs, education costs, childcare costs, pension funding costs, and getting to work/working costs are stripped away.


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## Maybrick

Hi Garbanzo,

Not a stupid question at all, I should have given more detail. Yes, there is a Mrs Maybrick. We are 51 and 42 and neither of us has a pension. On the positive side, we expect to be mortgage free in a couple of years with savings of roughly 200K. We also expect to inherit money at some point, perhaps another 200K. We should be able to survive post-retirement on roughly 26K per annum between us plus the state pension. We have no children so are not particularly concerned about what we leave behind, if anything.

To be honest, at our age I am not sure whether it is worth the hassle of starting a pension or whether we would be better off just maximising our savings. Am I being delusional?

As always, any help gratefully received - thanks.


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## Marc

.


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## Slim

Marc said:


> Hi,
> In fact, there’s a reasonable argument to be made for each of you making a contribution of €100k right away from your savings.


Curious Marc. How could either make a contribution of €100k to a pension fund, based on a 30% limit? This may be of great relevance to me!


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## Marc

.


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## Slim

Marc said:


> .... plus you still pick up all the income tax relief against future earned income which has the effect of increasing your take home pay.


Much obliged. I get it now. One more thing, could you clarify the comment above? I am interested in the 'future earned income' piece.

My wife has a PRSA. She will retire this year and has been contributing the max. 30%(incl. occupational pension contribs). Is there a way she can load her PRSA before retirement and claim the tax relief against her occupational pension in future years? She will take her occupational pension this year but could leave her PRSA for 5 years(she will be 55 this year). Thanks, Slim.


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## bappelbe

An added complication for the OP is inflation.
If an income of 30k is in terms of 30-40 years time then inflation should be taken into account
if inflation is 2% (what the ECB wants) then the non state part of the pension would need to be significantly higher to compensate for that.


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## mtk

Marc said:


> The percentage of net relevant earnings only relates to the amount of tax relief allowed in any one year. Any excess over that is carried forward and allowed indefinitely against future income.
> 
> The key advantage being that the whole capital sum is sheltered from personal taxes immediately ( no Dirt, income tax or capital gains tax) on future investment profits.
> 
> Assuming a 5%pa return that adds about 2%pa to your investment returns on all your capital compared to say an insurance company investment plus you still pick up all the income tax relief against future earned income which has the effect of increasing your take home pay.
> 
> With tax breaks so limited it never ceases to amaze me why more people don’t consider this.


I see three risks 
Your future earnings do not materialise or are lower than expected and are taxed at standard rate 
Tax relief rules change in  future 
You need access and cannot get it (if "young" )


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## fistophobia

I agree with the sums quoted by the original poster.
Believe it or not, there are people on this site who have modest incomes.
450K is a huge amount to try and squirrel away, for most Irish people.
I know people your age - they have no pension or savings.
Its all down to the property / mortgage question. If you have found a way to clear it earlier, then you can smash it with the retirement fund.

If you are up around this figure already, I would be asking myself the opposite question - whats the minimum I need to retire on?

Work is over-rated anyway.


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## Gordon Gekko

fistophobia said:


> Believe it or not, there are people on this site who have modest incomes.
> 450K is a huge amount to try and squirrel away, for most Irish people



With respect, it’s not a huge amount to try to squirrel away by any stretch of the imagination.

€370 invested in a pension each month starting at age 35 and retiring at age 65 with a growth rate of 4.5% per year would create a fund of €450,000.

I challenge anyone to argue that €85 a week from age 35 is a big ask in the context of funding one’s retirement.


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## elacsaplau

Gordon Gekko said:


> I challenge anyone to argue that €85 a week from age 35 is a big ask in the context of funding one’s retirement.



Frightfully middle class perspective, Gordon.

Also, very misleading - we are talking about €450,000 in today's money terms - pretty massive difference in the sums!


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## MrEarl

Gordon Gekko said:


> With respect, it’s not a huge amount to try to squirrel away by any stretch of the imagination.
> 
> €370 invested in a pension each month starting at age 35 and retiring at age 65 with a growth rate of 4.5% per year would create a fund of €450,000.
> 
> I challenge anyone to argue that €85 a week from age 35 is a big ask in the context of funding one’s retirement.



Hello Mr. Gekko,

Just out of curiosity, I did a quick search online.  It looks like the average wage for a full time worker in Ireland was running at circa €46k gross, about 18 months ago (that's not to be confused with the average industrial wage, which would be lower).  While I imagine it has increased a little since then, the point remains the same - when you allow for payment of tax, accommodation and other basic living costs (particularly if it's a one income household and there may be children to support), then I can see how some people might struggle to pay €85pw gross into a pension.  Obviously, that does not mean they could not afford to make some form of smaller regular contribution however.

Personally, I think the tax treatment for pension contributions needs to be changed radically, to give notably more benefit to people who can only afford to make lower levels of contributions.  If the incentive is big enough, more people will contribute into a private fund (no matter how small their contributions) and ultimately, this country needs everyone to be making private arrangements for their retirement.

The sooner the better we get a government that has "a pair" and is willing to tackle the retirement problem for our population head on.  I'm taking about dealing with everything here, from overly generous pensions for state employees, to how pension contributions are taxed and who benefits the most from incentives, to stopping new entrants from being entitled to avail of the state pension as we currently know it (with those people instead being assisted with funding their private pensions through tax breaks etc.).  It's a massive task, but also a massive problem and the longer we let the current arrangements continue, the bigger the problem is going to be in the years to come !


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## Sarenco

elacsaplau said:


> Also, very misleading - we are talking about €450,000 in today's money terms - pretty massive difference in the sums!


True but the monthly contribution in Gordon's example (€370) is similarly unadjusted for inflation.

Also, 4.5% real return on equities over a 30-year period wouldn't be unusual by historical standards.


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## Sarenco

MrEarl said:


> It looks like the average wage for a full time worker in Ireland was running at circa €46k gross, about 18 months ago (that's not to be confused with the average industrial wage, which would be lower).


Gordon's example of €370pm works out at less than 10% of €46k.

Surely an average earner should be putting away at least 15% of their gross income to save for their retirement.  Bear in mind that contributions at that level would all be relieved of income tax at the higher rate.

What's the alternative?  Rely on State hand-outs?  Live on cat food?


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## Gordon Gekko

I genuinely don’t think that €85 a week is a lot to ask in terms of planning for one’s retirement. That’s from age 35, giving the individual quite of bit of time to get himself/herself established during which time no contributions are made. And it’s often forgotten that for lower earners, the State Pension is probably enough.

I would be surprised if €85 a week can’t be found for most people earning at a level of (say) €36k upwards. And if sacrifices have to be made, well so be it. I know people who spend that on lunch and coffees during the week; making sandwiches themselves and buying Nespresso pods could give them a €500,000 pension pot!


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## elacsaplau

Sarenco said:


> 4.5% real return on equities over a 30-year period wouldn't be unusual by historical standards.



Broadly the assumption used in return seeking assets of DB plans (i.e. not the entirety of the fund) - and note how employers are queuing up to fund such arrangements!!

The example I baulked at was crude - it can be "argued" but overall I believe it was misleading.

We were talking about €450,000 in current money terms. For someone to achieve this (I haven't checked the sums) - they would
- have had to contribute €85 a week for each week for the last 30 years
- received an average return on these investments of 4.5% after charges

€85 a week 30 years ago was a lot a lot of money - not an easy peasy, forego a few lattes sum.

Chances are also that individuals got completely milked by industry charges back in the day - even more so than now.


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## bappelbe

Gordon,
on your calculations, I put it into a calculator: calculatorsoup future-value-calculator.php - google it as I can't post links
and get 280K after 30 years - not 450K  - inputting 0 starting value 30 periods(years), 4.5 growth, 370 Payment amount, 0 payment growth and 12 payments per period.

am I doing something wrong?


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## Sarenco

bappelbe said:


> Gordon,
> on your calculations, I put it into a calculator: calculatorsoup future-value-calculator.php - google it as I can't post links
> and get 280K after 30 years - not 450K  - inputting 0 starting value 30 periods(years), 4.5 growth, 370 Payment amount, 0 payment growth and 12 payments per period.
> 
> am I doing something wrong?


Your calculation looks right to me.


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## bappelbe

bappelbe said:


> Gordon,
> on your calculations, I put it into a calculator: calculatorsoup future-value-calculator.php - google it as I can't post links
> and get 280K after 30 years - not 450K  - inputting 0 starting value 30 periods(years), 4.5 growth, 370 Payment amount, 0 payment growth and 12 payments per period.
> 
> am I doing something wrong?



Playing with it a bit - if you put the payments increasing at 4%pa then you get 450K
(note in that calculator put 4440 per payment(1 annual payment), 1 payment per period and then 4 for growth per payment)


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## MrEarl

Sarenco said:


> Gordon's example of €370pm works out at less than 10% of €46k.
> 
> Surely an average earner should be putting away at least 15% of their gross income to save for their retirement.  Bear in mind that contributions at that level would all be relieved of income tax at the higher rate.
> 
> What's the alternative?  Rely on State hand-outs?  Live on cat food?



Please, don't get me wrong here...

I am 100% of the view that everyone needs to be making regular contributions into a private fund.

However, a family of say 2 adults and 2 kids living on something close to €46k gross pa won't be able / prepared to release €45 - €50pw (after tax) on an ongoing basis.

Your question about what they will do alternatively is more than just, but the fact that so many people are not correctly educated on financial matters (to include retirement planning), and the government is doing no where near enough to change that, means most people won't even think about the answer to your questions and instead, just stick their heads in the sand or plead ignorance.

If it were up to me, I'd have basic finance as a module for all secondary school pupils, teach them about how to manage their finances, retirement planning etc. It could easily be introduced into the curriculum for 4th year for example and would bring some important life lessons into the class room.


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## Sarenco

MrEarl said:


> Your question about what they will do alternatively is more than just, but the fact that so many people are not correctly educated on financial matters (to include retirement planning), and the government is doing no where near enough to change that, means most people won't even think about the answer to your questions and instead, just stick their heads in the sand or plead ignorance.


Hopefully auto-enrolment, which is due to be introduced in 2022, will force all workers to think about saving for retirement.  The experience so far in the UK seems to be largely positive - opt-out rates are running at ~10%.


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## joe sod

MrEarl said:


> Just out of curiosity, I did a quick search online. It looks like the average wage for a full time worker in Ireland was running at circa €46k gross, about 18 months ago (that's not to be confused with the average industrial wage, which would be lower).



I think the actual wages earned by the majority of workers in ireland is much lower than this only about 30k , the median wage in 2016 was 28500 euros, in other words in 2016 half of the working population earned less than this amount. The "average industrial wage" is also not a proper statistic because alot of workers are not included, i think agency workers and some contractors. I think the "average industrial wage" is used as a benchmark by the public sector in order to use it as the lowest benchmark for their pay . Therefore there is a vested interest in not including workers that are much lower paid in order not to lower this statistic. The cso is a public sector organisation so it is in their interest that this statistic be as high as possible, but not really the truth


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## MrEarl

Hello,

I did a quick search online, read a couple or links and ultimately took my figure on the average wage from an article in the Irish Examiner.

Where are you getting your figures for pay from please ?


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## Protocol

joe sod said:


> I think the actual wages earned by the majority of workers in ireland is much lower than this only about 30k , the median wage in 2016 was 28500 euros, in other words in 2016 half of the working population earned less than this amount. The "average industrial wage" is also not a proper statistic because alot of workers are not included, i think agency workers and some contractors. I think the "average industrial wage" is used as a benchmark by the public sector in order to use it as the lowest benchmark for their pay . Therefore there is a vested interest in not including workers that are much lower paid in order not to lower this statistic. The cso is a public sector organisation so it is in their interest that this statistic be as high as possible, but not really the truth



That median wage figure was published in the IT without any evidence.

The actual median earnings is close to 40,000.

Average industrial wage is no longer published.


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## Protocol

Here is real data:

http://www.cso.ie/en/statistics/earnings/earningsandlabourcosts/

http://www.cso.ie/en/releasesandpublications/er/elca/earningsandlabourcostsannualdata2016/

*2016 data*

earnings incl overtime

average earnings = 36,919

average FT earnings = 45,611

average earnings in industry = 44,821


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## stanman

Marc said:


> The percentage of net relevant earnings only relates to the amount of tax relief allowed in any one year. Any excess over that is carried forward and allowed indefinitely against future income.



I'd like to understand this better. Could we elaborate with an example?

If the pension contribution is capped at 25% of 115K for someone in their forties, this would mean a contribution of 28,750 to get max tax relief. So what would happen if a pension contribution of 50K were made instead? Do you get tax relief on 28,750 this year and 21,250 next year?

Thanks
Stan


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## Conan

stanman said:


> I'd like to understand this better. Could we elaborate with an example?
> 
> If the pension contribution is capped at 25% of 115K for someone in their forties, this would mean a contribution of 28,750 to get max tax relief. So what would happen if a pension contribution of 50K were made instead? Do you get tax relief on 28,750 this year and 21,250 next year?
> 
> Thanks
> Stan



Yes. Any excess contribution can be carried forward for tax relief purposes , and perhaps spread over a couple of years.


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## Gordon Gekko

In theory, one could make a big contribution in the event of a massive market correction.

e.g. markets fall by 40%, and someone takes the opportunity to contribute (say) €200,000.


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## joe sod

"According to Revenue, an increase of the top rate of tax by 1 per cent will raise €225 million in a full year. But of the 433,600 people who pay the top rate, only 30 per cent earn €100,000 or more. So a lot less than €225 million will be raised by a high earners’ levy. I reckon about €130 million at most. If we are to talk serious money eye-watering increases in taxes for high earners will have to be implemented." 

This is an extract from a 2016 irish times article critiquing sinn feins policy of heavily taxing those on incomes greater than 100,000. The key statistic from this is that only 433,600 people paid tax at the high rate in 2016 out of a circa 1.8 million total workforce then. There is probably greater proportion of people paying the higher tax rate now with the improving economy but hardly dramatically different. Therefore in 2016 less than 1 in 4 workers paid the high rate of tax , therefore the vast majority of workers over 3/4 of workforce earned less than 33k then . Therefore I do not believe the statistics by the cso on average wage in ireland because they are obviously excluding much of the workforce. They are obviously using very restrictive definitions of a full time worker and in my opinion the statistic is useless if much of the workforce is not included in the statistic. Therefore the only way to get realistic figure is to use the raw tax data from the revenue , that cannot be manipulated


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## MrEarl

Gordon Gekko said:


> In theory, one could make a big contribution in the event of a massive market correction.
> 
> e.g. markets fall by 40%, and someone takes the opportunity to contribute (say) €200,000.




That's true Gordon.

But few would have €200k cash on standby. 

There's a discipline to amounting that sort of cash, not alone a confidence required to be ready to put it into a market that looks like it could fall further etc.

I'm all for trying to buy a bargain, but I think the long term drip feed approach is far better suited to most who are investing long term for retirement.  They'll get average prices over time, and it keeps the discipline of contributing regularly.  If markets drop significantly, then there's always the option to throw an extra few bob in via AVCs and put it into equities at that point.


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## Gordon Gekko

MrEarl said:


> That's true Gordon.
> 
> But few would have €200k cash on standby.
> 
> There's a discipline to amounting that sort of cash, not alone a confidence required to be ready to put it into a market that looks like it could fall further etc.
> 
> I'm all for trying to buy a bargain, but I think the long term drip feed approach is far better suited to most who are investing long term for retirement.  They'll get average prices over time, and it keeps the discipline of contributing regularly.  If markets appear to be down, AVCs can be useful to try and buy equities at discounts.



Hi Mr Earl,

How are things?

You’re absolutely right. I only know one person who had the means and the cojones to do this; he inherited money and stuck €250k into a PRSA.

Personally, I like making AVCs on a monthly basis as it becomes like a bill in that you forget about it and stop missing the money. Plus there’s the averaging etc.

All the best,

Gordon


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## nest egg

Conan said:


> Yes. Any excess contribution can be carried forward for tax relief purposes , and perhaps spread over a couple of years.



Over how many years, do you know?  
If I never maxed out my contributions, could I use the combined excess from when I first started working to make a bumper contribution one year?


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## Sarenco

Excess contributions can be carried forward - not backwards.  

I'm afraid it's a case of use it or lose it.


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## Bob2018

I am approaching retirement and trying to plan what to do with my pension fund. I am currently with Irish Life. People tell me that pensions are very bad at the moment because of interest rates. I've been told that the best option is to take the lump sum and invest the rest in an ARF Retirement Fund. My fear is that I don't want to be worried about big drops in the fund when I retire. Someone else told me that the ARF Retirement Fund could run out of money. How much can I draw from the ARF Retirement Fund each year to be sure that I don't run out of money? Is there anything else I should be asking. Hope this makes sense. Thank you. Let me know if I've left anything out.


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## Gordon Gekko

Hello Bob2018,

What’s the current value of your pension fund?

How much income do you think you need in retirement?

Are you married?

How old are you?

How’s your health?

What other income do you have?


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## Bob2018

Thank you Gordon. I knew I was probably forgetting stuff.
I am 65 and my wife is 60. We are both in good health thankfully. My wife is a light smoker but I'm not sure if that matters for pensions. I will qualify for the state pension next year and that means I will also get a "spouse's pension" also. The last statement I got said that my fund was worth €380000. To be honest, we dont have much else in the way of savings but we do have a house and the mortgage is long paid. In theory, we could sell up but this is our home and we wouldn't like to leave. When the day of reckoning comes, it would be nice to pass this on the daughter. That's the rough plan anyway. It would be great if we could have about €30000 a year from the state and Irish Life. That's after we take the lump sum from Irish Life. I plan to keep working until 66 but it's heavy work so I wouldn't really want to keep going after that. My income will cover living costs between now and retirement but not a whole lot more than that. When I say €30000 a year it would be great if that keeps pace with inflation. Im old enough to remember inflation.


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## Sarenco

Bob2018 said:


> It would be great if we could have about €30000 a year from the state and Irish Life. That's after we take the lump sum from Irish Life.


That looks like a reasonable plan.

The State pension should give you and your wife just over €20 per annum (assuming you have made enough PRSI contributions) so you need to generate an additional €10k or so.

Assuming your pension pot is still worth €380k on retirement, you can take a tax free lump sum of €95k, which leaves you with €285k to either buy an annuity or an ARF/AMRF.

A joint life annuity bought for €285k, even at today's low rates, should give you a guaranteed income for life of around €10k per annum, with 50% of that amount payable to your wife should you pre-decease her (with a small annual uplift).

The alternative is to buy an ARF/AMRF and gradually draw it down over time (4% of the fund per annum until the year you hit 71, 5% per annum thereafter).  At that rate of draw-down it is unlikely - but not impossible - that you would exhaust your savings during your lifetime.  The advantage of this option is that anything left over will form part of your estate (so you can leave it to your wife, your daughter, your favourite charity, etc).

From what you have told us, I suspect the guaranteed lifetime income provided by a joint life annuity might be the better option in your circumstances.  But ultimately the choice is yours.

Incidentally, it would be worth checking what Irish Life fund you are invested in.  You don't want your fund to take a big tumble in value just before you retire so at this stage you should be invested in something fairly conservative (primarily bonds and cash - not too much in equities or property).

Finally, you don't have buy an annuity from Irish Life (if you decide that is the better option) - shop around!

Hope that helps and that you enjoy a long and happy retirement.


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## Bob2018

Thank you very much Sarenco
Normally my head gets fried when it comes to pensions but this is really clear. Thank you. I'm really happy with this. There was another thread the other day where someone was saying that putting all your money in equities and property was the best option. I nearly couldn't sleep. I know what you mean about which Irish Life fund so I'll check that out with them tomorrow. I know you probably have better things to doing than answering my questions but I have two more if that's ok when you get a chance.
If I do go down the ARF route, do I have to take 4% a year? Could I just take 3% instead? I know it says that you must take 4% or else you will be taxed as if you take 4% but our total income will be below the tax free amount so do I really need to take 4%. Does this make sense what I'm asking? The official term is imputed distribution.
Will we really get €10000 a year annuity? The reason for asking is that a good friend told me that he checked it out on his computer and that the annuity was just over €7000 when he allowed for a rise each year of 2%. Sorry for double checking but it's quite a big difference. Thanks again.


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## Conan

If you go for the ARF, then you must draw down a minimum of 4% pa up to age 70, and a minimum of 5% thereafter. As part of the ARF you would need to decide how the fund would be invested, what level of tick you are comfortable with etc. allowing for say a 1% pa management charge, in effect your fund will reduce by circa 5% pa. Therefore the level of investment return may or may not match this 5%. But I would not focus on trying to match the 5%. It’s ok if the fund gradually falls in value as it should not necessarily be an objective to maintain the value as you get older. But the ARF does involve a degree of investment risk with which you may not feel comfortable.
The advantage of the Annuity route is that you have a guaranteed income for life ( no investment risk issues). With circa €285k you can buy a variety of Annuities:
- one just payable on your life ( gives the highest annuity)
- a joint life annuity reducing say to 50% on your death ( if your spouse is still alive). This will be a lower starting level.
- as above with a built in level of indexation (say increases of 2% pa).
There are a very limited number of Annuity providers (Irish Life, New Ireland, and perhaps Aviva and Standard Life). The €285k would give you an Single Life Annuity (first above) of circa €12,000, a joint life Annuity (second option) of circa €10,000. If you want an indexed Annuity, then it will be circa €7,000 . If you ask Irish Life they will quote you more exact figures.

Deciding between an ARF and an Annuity mainly depends on whether you want income certainty or are prepared to take some investment risk in return for greater flexibility. Also your state of health is important. If you are in poor health then an ARF may be best but if you health is good and family history is good, then an Annuity may be the safer route.


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## Bob2018

I am new to this site but must say that I am very impressed by the willingness of people to take the time to offer help and advice. Thank you Conan. It takes time to write such a detailed response. I am sorry if I am asking silly questions but when you say that I must draw 4% I'd like to understand what that means. My understanding is that I have to withdraw 4% or else I have to pay tax as if I drew 4%. But if I did draw 4%, I wouldn't have to pay tax because my total income would be below the tax exemption amount. So my question is do I really have to draw 4%? Otherwise, its like saying you dont have to pay tax on your level of income but actually you do have to pay tax.
I thought the government was trying to encourage people to save for their retirement so I dont understand why they are forcing me to take too much from my fund. I feel that in my case taking 3% from my fund would be a good compromise because I would be taking out about €9000 a year instead of the €7000 that I'd be getting from an annuity. In my head, I was thinking if I let the fund grow and take out a lowish amount like 3% then I'd be reducing the risk of running out of money. Whereas if I take out what the government wants me to take out then I would be increasing the chances of running out of money. I get easily confused by these things but it just sounds to me that the 4% requirement is going against what the government say that they are trying to do if that makes sense.
I have one other question which will probably seem very basic but I just dont understand what you mean by "the level of tick that you are comfortable with". I apologise but this must be another one of those pension technical terms that I havent come across before. Thanks again and apologies for all the questions. For most of my life, pensions were for old fellas so Im trying to catch up for my disinterest down the years.


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## Sarenco

A couple of quick points:-

You can put €63,500 into an AMRF - there are no imputted distributions from an AMRF until you hit 75.  That's a pretty significant buffer.  Also, bear in mind that you still have your tax-free lump sum in reserve;
Perhaps more importantly, you don't have to actually spend anything you draw from your ARF!  You can just keep it on deposit for as long as you like or use it to buy (tax-free) State savings certificates.
Ultimately, what you do with your pension pot comes down to a question of how much risk (longevity, inflation, etc.) you are are willing and able to bear. 

Only you can make that decision but remember:- (a) you own the house you live in outright; and (b) it is highly, highly unlikely that the State pension will ever be cut to a point that you won't be able to provide yourself with the basics (food, heat, etc.).


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## Bob2018

Again great information, Sarenco. Thank you. I know I run the risk of driving you crazy with all my questions which is not at all my intention but is it ok to keep money in an AMRF like you suggest when my money from the state is greater than the €12700?
The idea about taking 4% out but only spending 3% makes so much sense. It seems like the perfect way around the governments rules. I can set up a separate account with the additional 1%. I know I am cautious when it comes to risk but I understand that being too cautious has its own risks. But if I follow what you suggest I can get a good bit better return than an annuity and by having a separate savings account with the additional 1%, I'd have a much lower chance of not running out of money. Does this make sense to you? Again thanks so much.


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## Sarenco

Bob2018 said:


> ... is it ok to keep money in an AMRF like you suggest when my money from the state is greater than the €12700?


Yup, no problem there (at least until you hit 75).

There's really not a world of difference between 3% of €285k and 4% of €221.5k (€285k - €63.5k).

Bear in mind that you can always decide to annuitise all or a portion of your retirement savings at a later stage. The older you get, frankly, the cheaper the annuity!

It's always a trade off between risk and return.  No way around it I'm afraid.


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## Gordon Gekko

Hi Bob2018,

Thanks for providing the further information; you’ve received good advice from Sarenco and others.

My sense is that you would not be obliged to set up an AMRF (i.e. the €63,500 ancillary fund) because your State pension income would exceed €12,700. I helped an uncle of mine a while back who wanted to access his AMRF and the Qualifying Fund Manager (i.e. the ARF/AMRF administrator) included the increased pension for a spouse in the guaranteed specified income calculation.

In terms of your overall position, you’re in decent nick. One further question though, what type of pension is it? Personal Pension, PRSA, or occupational pension scheme set up by an employer?

Your fund is worth €380k, so you get €95k tax-free, with €285k into your ARF. You’re then forced to take out 4% a year, rising to 5% at age 71. 4% is €11,400, which is more than you need, and the whole €31,400 is tax-free due to the age exemption. Your plan to save some of it is rock solid in my view. Sarenco’s more of an investment person, but I’d be looking at a medium risk option in the Zurich Prisma/Pathway, Standard Life MyFolio or Irish Life MAPS suites of funds with as cheap an annual charge as I can get. I’d use some of my tax-free lump sum to keep five years’ worth of supplementary income in cash (say €50k), I’d blow around €25k of it on a nice holiday plus a few home improvements etc, and then I’d put the other €20k plus my future savings in a similar investment strategy.

Best of luck,

Gordon


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## Bob2018

Thanks again everybody. I have been looking at this again and had a good chat with the boss about all this last night so what I might do is to summarise my plan later and my reasons so that at least we will be going into this with our eyes wide open. Before I summarise everything, I read somewhere that when your guaranteed income exceeds €12,700 the ARF automatically converts into an ARF. Is this true or not? I'm confused about this because Sarenco seems to be saying the opposite if I understand correctly.
Also, just to take an extreme example, say I had €300,000 in an ARF and I did not draw out anything one year, I would be taxed on €12,000 because of the "imputed distribution". Where does this tax go? Is it paid automatically from the insurance company to the revenue? What I'm really trying to figure out is can I reclaim this tax given that our total level of income is below the "tax free" amount or is it effectively a tax for not drawing enough out (and this money is just lost)?


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## moneymakeover

Bob,

http://www.aviva.ie/media-library/ARF_AMRF_Withdrawing_Information.pdf

*Imputed Distributions on an ARF* 
You do not have to make withdrawals from your ARF; however, we must deduct a minimum amount of tax from your ARF each year as if you had taken a minimum withdrawal.  This is commonly referred to as an “imputed distribution”.  The minimum income tax we must deduct is the amount you would have paid had you withdrawn a percentage of the total fund value from your ARFs and vested PRSAs on 30 November.  Vested PRSAs are PRSAs from which retirement benefits have commenced to be taken, usually in the form of a tax-free retirement lump sum of up to 25% of the value of the PRSA (with the remaining balance staying invested in the PRSA).


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## Conan

Bob,
If you have to invest in an AMRF at retirement because at that stage you do not have a guaranteed pension income of €12,700, the AMRF converts to an ARF on the earlier of reaching age 75 or your guaranteed pension income exceeding €12,700.
If you had an ARF of €300,000 you are required at a minimum to pay the tax based on an assumed drawdown of 4% (€12,000). If you actually draw down the €12,000 gross, the ARF provider must deduct marginal tax at source and pay you the net. It is always better to draw down the 4% gross than just pay the tax, as otherwise you are simply only reducing the ARF fund by the tax and thus requiring a  higher drawdown next time and thus paying more tax.
Any tax deducted at source is paid to Revenue. If however your total taxable income is such that you are not liable to tax (or only liable at the lower 20% rate) then you can make a tax return at the end of the tax year and claim a tax refund.
The 4% minimum drawdown requirement was introduced to force ARF holders to prevent people from never (or rarely) drawing down income and thus paying no tax on a product that is an alternative to an Annuity where there would potentially be a tax liability.


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