# Pension contribution advice needed



## maddies (5 Nov 2012)

Hi everyone,
Hoping someone can help me here with a question I have about pension contributions. Here goes:
I am self employed and on the advice of my accountant I started a pension about 4 years ago in order to reduce my tax bill.
I have not contributed to my pension in the last two years due to the uncertainty in the pension market. Current pension value is only 10k as a result.
This year (for the tax year 2011) I have been advised by my accountant that my liability for 2011 is either 16K with no pension contribution, or 20k which would include a pension contribution of 9k.
My question here is given the current state of the pension market would this 9k pension contribution be worthwhile doing? Or is it a waste of time in the long run? Would I be better off paying the 16k to revenue and investing the 4k in some form of bonds?
Any advice appreciated. Am finding it difficult to get advice on this as any broker I've spoken to are not unbiased iykwim.
Thanks,
Maddies


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## leroy67 (5 Nov 2012)

Hi Maddies,

tax reliefs are a huge incentive, hard to get a upfront 41% return on your monies anywhere. You can always invest in secure funds. New Ireland have a 5% Gross Fund 4% net after annual management charge of 1% per annum over the next five years. Find an independent broker and haggle over allocation rates etc


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## Gervan (5 Nov 2012)

If you are paying prelim 2012 tax at 100% 2011 rate, doesn't that mean you'd have to fork out 32K now. None of which you will see a return on.
You say 20K includes 9K pension, plus 11K for 2012 is 31K but you should get some return on your pension. 
Pay the pension, but pick wisely where to put it.


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## Jim2007 (5 Nov 2012)

A couple of different observations:

- The value of all types of investment fluctuate from time to time.  Bonds tend to do will during a recession and equities at other times....

- Uncertainty is part and parcel of saving for a pension, Irish people seem to have this crazy idea that money invested in pension funds should only go up! Think about it - if you buy a Pepsi share, you know it can go down in value as well as up, so you would expect the same share bought by a pension fund to only go up!!!

- Starting with 9K is always better than 4K, even allowing for fees and levies , you can afford to lose a lot and still have 4K left!

- When it comes to the pension fund itself, make sure you understand the charges involved and that you're getting the best value.  Secondly make sure that it is investing in asset classes that are appropriate to your situation in life and that it is a reasonable well diversified portfolio.

At the end of the day, you are the best person to manage your money, but you are going to have to work at it to keep it under control.


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## marathonic (5 Nov 2012)

I've just watched that program on RTE - 'Too Broke To Retire". If you ended up in their position (one man was a self-employed business owner), every €10 per week makes a big difference. If you consider a 5% annuity rate, every €10 would require a total fund of €10,400.

One thing that struck me about that show and everyone should bear this in mind - with the current state pension of €230, if you ended up with a private pension of €57.50, I wouldn't look at this as only a 25% increase. Pensioners, like everyone else, have bills. Therefore, if your bills are €130 and your pension is €230, your disposable income has actually increase by 57% with this €57.50 private pension.

Add to this the tax advantages and, to me, it's a no brainer. In fact, I'd try to over-contribute to get the fund as big as possible as soon as possible. That way, you can switch to a very low-fee product.


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## leroy67 (5 Nov 2012)

Excellent post Marathonic


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## marathonic (5 Nov 2012)

leroy67 said:


> Excellent post Marathonic



Thanks Leroy. Although, I have to admit, I'm a big fan of pensions. I also like to take the opposite view of the herd. I'm 30 now and, as the stockmarkets fell, I increased my personal contributions on two occasions - bringing me up to the max allowable contributions. 

I'm actually happy to see the value of my pension fall, as long as that fall isn't the result of excessive charges - as this means that any further contributions are buying more units in my chosen funds. I won't be seeing the money for 25-35 years anyway so the more I buy now, the better it is for me. Falls closer to retirement (less than 10 years) are more worrying - but with 10 years left to retirement, most people should be gradually switching away from the more risky investments in their pension.

In my opinion, people spend too much time overthinking it. There are too many posts revolving around:


Am I too young to start?
Am I too old to start?
What should I invest in?

You're never too young as, the longer your in, the more time your fund has time to increase in value.

You're also never too old as, when you're older, you're still getting the tax relief going in and you're much closer to getting 25% of that back tax-free (in addition to paying a lower tax rate on money coming out than what you have saved in tax on the money going in).

I may get stick over this one but if it's the choice of investment that's causing you to put off investing in a pension, just invest in anything - shares, bonds, property funds, etc. In the beginning, it's the contribution levels that make the big difference, not the investment returns. Anyone asking this question should start with anything and, only then, start investigating whether they would be better off switching to a different asset class/fund type.


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## DerKaiser (6 Nov 2012)

marathonic said:


> I'm actually happy to see the value of my pension fall, as long as that fall isn't the result of excessive charges - as this means that any further contributions are buying more units in my chosen funds. I won't be seeing the money for 25-35 years anyway so the more I buy now, the better it is for me.


 
I agree with your direction other than the point above. 

Cheap units are a myth. You are implicitly expecting that there is some ultimate pre-determined value to each unit purchased that is fixed at your particular retirement date.

As an example, if you owned €10k of AIB shares in 2002 there was a genuine prospect they were worth €10k. Now, they are worthless. The fall in value did not represent an opportunity for better future investment returns, but rather a mismanagement of existing shareholder investment.


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## ashambles (6 Nov 2012)

> Cheap units are a myth. You are implicitly expecting that there is some ultimate pre-determined value to each unit purchased that is fixed at your particular retirement date.


There’s a difference between buying units in individual companies and buying units in a fund or index tracker. A company can go bust, however you’d expect that over time most reasonably balanced funds to at least keep growing along with inflation. 

If you’re committed to investing in pension funds and you see that unit prices are say 20% “cheaper” than they were previously, then it makes sense to try to increase purchasing at this new lower level. 

I’m only talking about well balanced funds, it’s quite possible that a highly specific fund such as in Irish property, or a particular commodity could drop and never recover to previous levels.


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## orka (6 Nov 2012)

ashambles said:


> If you’re committed to investing in pension funds and you see that unit prices are say 20% “cheaper” than they were previously, then it makes sense to try to increase purchasing at this new lower level.


This is only true if you felt that they were fair value at the higher price and so now represent very good value. If they were previously over-priced, they may now only represent fair value - and they could still be over-priced (it's like saying houses are now cheap/good value because prices have fallen value so much...)

I bought some pension units at a high price in 2006-2008 and my pension continues to buy lower-priced units. I am unhappy that my higher priced units fell so much but I am indifferent to the current units being purchased - I don't look on them as cheap or good value.


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## marathonic (6 Nov 2012)

orka said:


> This is only true if you felt that they were fair value at the higher price and so now represent very good value.


 
Whilst your point is valid (obviously, technology stocks were overvalued 13 years ago and, after a 20% drop, were still overvalued), the point I’m trying to make is that, if you are prone to changing contribution levels, you should be increasing them on the way down and decreasing them on the way up as opposed the opposite – which is what the majority are inclined to do. 

There are many posts on various forums when the markets have plummeted and, as a result, people are posting about their plans on stopping contributions or, worse again, pulling all funds out of the market and remaining in cash. 

Whilst pulling out may be prudent for someone approaching retirement who, in reality, should have already pulled a lot of their stock investments out and redirected them to more stable investments, it simply doesn’t make sense for someone with 10+ years left to retirement.


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## DerKaiser (6 Nov 2012)

marathonic said:


> There are many posts on various forums when the markets have plummeted and, as a result, people are posting about their plans on stopping contributions or, worse again, pulling all funds out of the market and remaining in cash.


 
I agree that people place too much empahsis on recent historic returns in deciding whether to invest for longer terms.


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## DerKaiser (6 Nov 2012)

ashambles said:


> If you’re committed to investing in pension funds and you see that unit prices are say 20% “cheaper” than they were previously, then it makes sense to try to increase purchasing at this new lower level.


 
Unless you understand the underlying reason for the fall, you cannot make any inferences as to whether further investment is a good idea e.g. if the possibility eurozone breakup has caused your fund to fall 20%, then loading more money into the fund would be a successful strategy only if the fears of break-up subsided.


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## kennyb3 (6 Nov 2012)

Some good points above. However the problem for me with pension funds at this point in time is two fold:

1. The uncertainty in relation to the pension levy - currently 0.6%, could easily end up being 1% and more 10 years down the line. Does anyone really think it will be revoked in a few years time given we are running a 14bn deficit just to the end of October? This plus charges of at least 1% mean 2% of your fund is eaten each and every year.

Coupled to this you are buying in based on current legislation, legislation that may change in time, given the pension crisis facing the country around 2020, i've no doubt by the time I retire there'll be no TFLS - making pensions decidedly less attractive now.

2. Add in that tax relief may be reduced to 30% or even 20% in the next couple of years. If that happened I would doubt i'd want to contribute further - meaning my fund is effectively left to float for the next 30 years. The expense and time gone into setting it up may be a waste. The money is locked away until i'm 60 and I have to make 2% per annum just to break even. Circa 4% if we assume inflation is 2% (which I believe is a fair assumption)

To me there are just too many unknowns at this current point in time.

The government need to take a long term view and develop a policy in relation to pensions because at present there is no certainty and how can you plan for 30 years time with so much up in the air?


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## marathonic (6 Nov 2012)

DerKaiser said:


> Unless you understand the underlying reason for the fall, you cannot make any inferences as to whether further investment is a good idea e.g. if the possibility eurozone breakup has caused your fund to fall 20%, then loading more money into the fund would be a successful strategy only if the fears of break-up subsided.


 

And that’s exactly where the problem lies. The timescale for investing for retirement should be the whole of ones working life - which could last 40+ years. There is likely to be many issues with the economy over that 40+ years and they’re almost impossible to predict. For that reason, you’re better to just contribute as much as possible for as long as possible and ignore the “background noise” which, over a 40+ year timescale, is likely to be what the stockmarket movement over the past few years is going to be seen as (I’ll be called out on this one too J).

Under current rules, a 20-year old could invest nothing, live their lifes and expect to retire at 68 (although this is likely to increase with increasing life expectancy).

The state pension, to me, is designed such that you work until old age means you are no longer able to do so and then you get a payment of enough to survive until death. Under auto-enrollment, the government will have more scope to reduce the payment levels of the state pension – because people can afford some of the costs of survival under the pension they’ve built up under the system.

For this reason, at the age of 30, I’m assuming NO state pension will be available and planning accordingly. If it’s there, it’ll be a bonus for me. By contributing to a private pension, the retirement age can potentially be reduced, under current rules, from 68 to 50. That’s a lot more time available to spend with grandchildren J 

Of course, you could invest outside the pension but that’s outside the scope of this thread, offers no tax advantages and you’re more likely to dip into the investments over your working career.


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## mtk (6 Nov 2012)

Auto enrolment is in uk not Ireland marsthonic isn't it


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## marathonic (6 Nov 2012)

mtk said:


> Auto enrolment is in uk not Ireland marsthonic isn't it


 
Sorry, my mistake. 

I'm living in the Republic but working in Northern Ireland. I try to make my posts applicable to the Republic but slip up every now and again.

There are other UK specific things applicable to me, like Pension Salary Sacrifice, that I do not discuss on this forum as it is irrelevant.


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## orka (7 Nov 2012)

leroy67 said:


> tax reliefs are a huge incentive, hard to get a upfront 41% return on your monies anywhere.


The tax relief is not free money - it is deferred taxation.  And you can be doubly taxed - USC now and then tax and more USC when the pension is drawn down.  You need to consider your tax position now and in retirement before deciding that a pension is the best way to save for your retirement.  I personally am never putting another cent of my own money into a pension again (the pension contributions referred to above are from my employer and I'm going to ask for this to be paid to me as salary instead from next year).  Even on the current tax regime, there's not much incentive to invest in a pension.  Take away some or all of the tax-free lump sum, increase marginal tax rates, prolong the pension levy ~ and the incentives disappear completely and the pension will be a worse investment than saving net cash.  Pension are too tempting a target for the government - lots of locked away cash that the owners can do nothing about rescuing from the likes of the pension levy.  The tax-free lump sum has to be an easy target too - I can't see the 25% rate surviving until I retire.





marathonic said:


> if you are prone to changing contribution levels, you should be increasing them on the way down and decreasing them on the way up


If you could confidently predict the ups and downs of the market, I think you would be rich enough to not have to worry about pension savings...


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## marathonic (7 Nov 2012)

orka said:


> If you could confidently predict the ups and downs of the market, I think you would be rich enough to not have to worry about pension savings...


 
I think you're misunderstanding my, "if you are prone to changing contribution levels, you should be increasing them on the way down and decreasing them on the way up" quote. I'm not talking about changing contributions based upon future performance of the stockmarket. I'm talking about changing them based on recent, past performance of the stockmarket.



orka said:


> Even on the current tax regime, there's not much incentive to invest in a pension. Take away some or all of the tax-free lump sum, increase marginal tax rates, prolong the pension levy ~ and the incentives disappear completely and the pension will be a worse investment than saving net cash


 
That's a lot of things that need to happen before the incentives are gone - and does this, or any future, government want to disincenticise providing for our own retirement?

Another question you need to ask yourself is 'what would happen if I decided to invest in cash alone up until the recent crisis and the governments DIDN'T bail out the banks or provide any kind of deposit guarantee?

In my opinion, the riskiest asset is cash - all of the above are speculations, inflation is a guarantee!


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## kennyb3 (7 Nov 2012)

marathonic said:


> That's a lot of things that need to happen before the incentives are gone - and does this, or any future, government want to *disincenticise providing for our own retirement*?



Have they not done this already - see the pension levy. Have they not reduced the maximum amount of relief available? Have they not signed up to an EU/IMF program to reduce pension tax relief further? Are income taxes not increasing in the form of the USC, lower credit etc? (what planet have you been living on?)

Do you really think the lower rate wont be 30% or more in 20/30 years time? As Orka said tax relief isn't the free money its cracked up to be.The problem is your locking in your money until age 60 with so many taxation unknowns.

The government don't have a long term policy for pensions - they are running a 14bn + deficit - so it's about getting cash from every available source - pension funds are an easy target. Most governments only worry as far as the next election and won't be too worried about 30 years time (unfortunately)


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## ashambles (7 Nov 2012)

> The tax relief is not free money - it is deferred taxation. And you can be doubly taxed - USC now and then tax and more USC when the pension is drawn down.


In reality it will be impossible for normal earners to save enough to cause them the problem of being taxed at the highest rate on the way out. Most people should be able to put in money at what is now 41% relief, and in time take it out at close to 0% taxation. I don’t think it’ll be worth putting money in at only 20-30% tax relief, but we don’t have to cross that bridge just yet.

The latest kite flying suggests that the 41% tax relief will remain, and instead a lower maximum pension pot will be allowed.


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## kennyb3 (7 Nov 2012)

ashambles said:


> *time take it out at close to 0% taxation.*






I think you need to look at current legislation (which no doubt will only get more prohibitive given the deficit).

You still have to pay tax at 20% once you are over the exemption limit (which again will no doubt be reduced over time), which no doubt you will if you have any sort of reasonable pension (when coupled with the state pension). This 20% could easily become 25% by the time you retire. Then there is the USC to consider.

So you may be getting taxed at around 30%. You're also paying a 0.6% levy for at least 4 years - I think we can ll guess it will be more.


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## ashambles (7 Nov 2012)

I’d agree completely with marathonic. My view is there’s a couple main ways to approach pensions.

1) You believe despite pension companies costs and taxes that a combination of inflation and economic growth should see that most well diversified funds increase over a long period of time
2) You don’t believe that funds will grow – charges/taxes too high, global economic disasters etc.

If you fall into the first camp then buying into a dip is a logical consequence, the only thing you know in a dip is the unit price is relatively cheaper (just cheaper, not cheap, not good value) than before. You’re buying more units than you were at an earlier point. If you were able to justify buying those earlier units you’ve a stronger case to buy the cheaper ones. If you can’t justify the earlier purchases you’ve moved to the second camp.

Fair value doesn’t come into the equation with complex funds – all you know is relative value – what the price is now versus what it was before. Nobody can hope to measure the fair value of a fund which might have several thousand components. 

If you fall into the second camp and don’t think funds will grow, then you shouldn’t be investing via funds, let alone buying into a pension dip.

If you decide to go with a pension (and there’s plenty of valid reasons not to) for it to have any chance of paying off you need to commit to it. You don’t want to become a pension investor who throws in as much as they can in during the years the fund is growing and scales back every time it looks bad – that’s a variation of buying high and selling low – and is a guaranteed way to get poor performance.


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## marathonic (7 Nov 2012)

kennyb3 said:


> Have they not done this already - see the pension levy. Have they not reduced the maximum amount of relief available? Have they not signed up to an EU/IMF program to reduce pension tax relief further? Are income taxes not increasing in the form of the USC, lower credit etc? (what planet have you been living on?)


 
I totally agree with you and I think I worded my previous post wrongly. What I'm trying to get at is that the government would be very stupid (and they possibly are) to make it "not worthwhile" saving for your own retirement (at the moment, it still is).



kennyb3 said:


> Do you really think the lower rate wont be 30% or more in 20/30 years time? As Orka said tax relief isn't the free money its cracked up to be.The problem is your locking in your money until age 60 with so many taxation unknowns.


 
What are the alternatives? 

Don't save at all and hope that the government provides for you? My first post on this thread.

Save in cash for retirement? Have you considered the impact of inflation over the next 20-30 years?

Invest directly in the stockmarket? Just as the government has hit pension funds with a levy, it has increased capital gains tax on the sales of shares over the past number of years.

Everything has risk and nothing is a certainty. Personally, I'm gambling that any changes to future pension policy will not have an impact so negative that my income in retirement will be worse than the income in retirement of anyone that chose some other option to fund their retirement.

(It's worth noting at this point that my retirement plans are a personal pension and one BTL property - together with a bonus of a state pension if they still exist. With BTL, there's the second house charge, the reduction in rent payable to social welfare tenants, the cap on the max rent if you're renting to social welfare tenants - you see what I mean, nothing is safe and you just have to make your own mind up which retirement plans you feel most comfortable with)


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## kennyb3 (7 Nov 2012)

marathonic said:


> Save in cash for retirement? Have you considered the impact of inflation over the next 20-30 years?



This imho! But that is a personal choice.

I can't get away from the uncertainty in pension legislation, the increasing tax burden, the pension levy, investment uncertainty, the fact your money is tied away until your 60.

I have spreadsheets galore comparing various outcomes (implied groeth rates, inflation etc), to me the upside to pension tax relief is far outweighed by the above.

My opinion may change as deposit rates lower, pension fund charges reduce, long term pension policy planning is introduced.

But as long as I can get 3.5% (after DIRT,5% gross) guaranteed for my cash, beating inflation by 1.5%, and can take 100% of this tax free on retirement at age 50/55/60 (whatever I chose) i'm happy to continue to invest this way.

I admit i'm risk adverse and crave certainty.


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## marathonic (7 Nov 2012)

kennyb3 said:


> This imho! But that is a personal choice.


 
Whilst I disagree with your choice, I do agree that everyones attitude to risk is different.

In Northern Ireland, they have the further option of ISA's - an alternative to which, unfortunately, is not available here. 

With my own personal circumstances, I'm treated under UK rules for pension purposes and, should they change negatively too much, I've always got the option of transferring it back to Ireland. This has a little influence with my feelings towards pensions. Obviously, this doesn't apply to most on the forum.


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## leroy67 (7 Nov 2012)

Kennyb3

Where are you getting this kind of return on a regular montly contribution or are you saving into state saving certs ? Spill the beans


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## kennyb3 (7 Nov 2012)

leroy67 said:


> Kennyb3
> 
> Where are you getting this kind of return on a regular montly contribution or are you saving into state saving certs ? Spill the beans



Read again, never said it was monthly contributions


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## leroy67 (7 Nov 2012)

Was only asking the question as the majority of people saving into pensions are doing so via a regular monthly premium so trying to compare like with like. If you contributed €20k into a pension fund and were entitled to relief on all of it at 41% in essence it has cost you €11,800 to get €20k away for your retirement. Place your investment in any of the numerous cash funds (some paying 5% less 1% amc, maybe you could better if you were to haggle) and secure your return for the next 5 years or so. Appreciate your point re access etc but imho we will see increases in DIRT as the Govt want people to spend monies, not keep it on deposit.


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## kennyb3 (7 Nov 2012)

leroy67 said:


> Was only asking the question as the majority of people saving into pensions are doing so via a regular monthly premium so trying to compare like with like. If you contributed €20k into a pension fund and were entitled to relief on all of it at 41% in essence it has cost you €11,800 to get €20k away for your retirement. Place your investment in any of the numerous cash funds (some paying 5% less 1% amc, maybe you could better if you were to haggle) and secure your return for the next 5 years or so. Appreciate your point re access etc but imho we will see increases in DIRT as the Govt want people to spend monies, not keep it on deposit.



Firstly your confusing cash with deposit - they are different. Cash funds pay less than 1%. So i'm guessing your talking about deposit.

I've spent a lot of time looking into this and when you get into the nitty gritty you realise when comparing like with like:

- Apart from the EBS deposit account with standard Life paying 5% the others available aren't that great. (most are actually around 3.5%). You get 5% with An Post saving certs.
- They generally require a lump sum investment, they are fixed term accounts not regular monthly savers (so it is like with like)
- You need a minimum of €5k (and €20k in a lot of cases) so you can't start from nil
- Then you are left with what you do in 5 years time if standard life don't offfer deposits anymore or the providers are offering crap rates.
- Unless you know what you are doing an go execution only, 5% of your contributions will be gone, so again it doesn't cost €11.8k to get €20k - you ll only get 19k.
- You've minimum 1% charges, minimum of a 0.6% levy, so that 5% is really 3.4%. The levy can go up at a whim - and you cant do a thing to move your funds

And again add in (as stated above):

- Risk of pension company going bust
- EBS riskier than An post saving certs (see here [broken link removed] - to get 5% your not protected by guarantee scheme)
- The 41% tax relief is a bit of a red herring as pointed out, you ll get taxed on a good portion on the way out. So it may only be approx 20% real relief or less. Declining with each budget.
- Government ability to pilfer your tied up money at a whim
- Can't retire until at least 60 (in reality). How many posts have we seen with people need access to their cash before this due to unforseen events.

Is the tax relief really worth it? I'm happy to pay a premium/have a smaller pot for certainty. That way I can plan for my retirement with clear certainty (or in so far as is possible).

Edit:

I should add, this is just my risk profile and a direct response to the post above. If other wish to put forward equities, diversified portfolio's with a long term holding approach I fully accept these could be viable solutions - just not for me.


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## ashambles (7 Nov 2012)

> Is the tax relief really worth it? I'm happy to pay a premium/have a smaller pot for certainty. That way I can plan for my retirement with clear certainty (or in so far as is possible).


If you’re in a company pension scheme it’s likely that you’ll not be paying entry fees so if you invest 100 euro, you should see 100 euro added to your fund. You might even see more if you’ve a company matching your contribution.

As an example someone with a 200,000 fund now, let’s say they’ve contributed 15% and their company 5%. Maybe there’s 10% growth in the fund over 10 years. Until recently contributions were at full tax relief. How much did that 200k fund really cost? 

Take out the growth it’s 180,000. 
Take out the company contribution it’s 135,000.
Take out the tax relief at ~50%, the cost was 67,000 euro. This is a 200% return over 10 years. If the savings had gone to a deposit account they might be worth 80k?

Now with pension relief at 41%, I think that 200k would cost closer to 84,000, if there’s no company contribution & 41% relief it’d cost maybe 111,600. 

When there’s a company contribution involved despite reservations on what the government might do it’s very hard to not go the pension route.


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## kennyb3 (8 Nov 2012)

ashambles said:


> If you’re in a company pension scheme it’s likely that you’ll not be paying entry fees so if you invest 100 euro, you should see 100 euro added to your fund. You might even see more if you’ve a company matching your contribution.
> 
> As an example someone with a 200,000 fund now, let’s say they’ve contributed 15% and their company 5%. Maybe there’s 10% growth in the fund over 10 years. Until recently contributions were at full tax relief. How much did that 200k fund really cost?
> 
> ...



Where to start with this - its like junior cert maths.

Firstly forget the past, those who have a pension have already made a decision, this should be about going forward. So the tax relief is 41% not 50% (or any other figure).

Now to your figures:

1. To get from 180k to 200k - thats 11.11% growth not 10% as stated.

2. Please take out 1% charges per annum. (this is a very significant figure over 10 years). In the final year at the €200k it will €2k for example.

3. Please take out a pension levy for at least 2 years (2 more years left at least).

4. Do you think the company contribution is just free? I.e. not part of an overall salary package? You need to include approx 50% of it (you'd get a higher gross and then net salary if it wasn;t made) to any like for like comparison.

5. Your growth figures are low if anything, if you compound 3.5% for 10 years thats 92.2% growth.

6. You've left out inflation.


I have the spreadsheets - there is no doubt you'll end up with more money with a pension:

1. *If *you can get at least the same retrun as the best available savings account. You may lose money like so many if you try beat this return

2. *If* tax relief stays at 41%

3. *If* the pension levy doesn't increase


You then have to worry if the TFLS will be taken away, what rate your taxed at when you take your pension, what annuity rates will be available at that time, and then you'll have to wait till your 60.

The difference in monetary terms isn't as big as people would like to think.


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## ashambles (8 Nov 2012)

> thats 11.11% growth not 10% as stated


10% is an approximation. But thanks for correcting the approximation to 11.11%. Incidentally that “1” is a recurring decimal in case someone needs that precision.




> Please take out 1% charges per annum… Please take out a pension levy for at least 2 years


Why? There’s no need to take out charges or levies – I gave a low but real world growth for the last 10 years after all deductions. 




> Your growth figures are low if anything, if you compound 3.5% for 10 years thats 92.2% growth.


So now I've to increase the figure? Again that’s not been the real world outcome for the last 10 years for equity funds. I’d guess no one has seen 92% growth in their equity pension funds over the last 10 years. Somewhere between around 0%-20% would be more typical.

My point is even with the extremely low growth in funds it has in the immediate past made sense to invest in a pension. Many people do not fully understand how valuable the tax relief is. Turning 67,000 into 200,000 in 10 years can be surprising.

What happens in the future with pension returns and tax relief -I don’t know – I’m in a pension so I’ve little choice but to plough ahead until they make it not worth my while. For someone without a pension, they probably should wait and see.


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## kennyb3 (8 Nov 2012)

My point is you've plucked figures out of the sky. (10% growth after charges & levy, no account of inflation)

It's not €67k to €200k.

It's (€80k + €45k employer contribution)= €125k contributed.

If you put €80k + 22.5k (allowing for tax of 50% on the higher salary) = €102.5k in a deposit account at 3.5% (after DIRT) for 10 years you'd get €140k.

Obviously that's €60k less, but you ve still to be taxed on the €200k coiming out of your pension fund.

This could easily be at 25% or more therefore your €200k is now €150k.
(Or 162.5k if you get 25% tax free lump sum)

The difference for all the uncertainty, increasing tax rates etc. that I've repeated previously. Is it really worth it? That's up to you.

My point is to to do the real figures - not make them up.

So many people are disappointed by their pots because they don't realise

- They are based on 6% growth
- Continually increasing contributions
- Headline charges of 1% don't include transaction and custodial charges

Also one of the most difficult decisions is when to get out of equities - when they are going up people get greedy and when they are going down people want to recoup losses.

As long as people make an educated decision and don't come whinging or looking for a handout when things go wrong.


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## orka (8 Nov 2012)

Pensions are undoubtedly good value for many people but they are not always good value and it is misleading to imply that.  Pension tax treatment and the general taxation regime could change a lot in the next 10, 20, 30, 40 years so that’s a risk for anyone deciding to invest in a pension – or indeed for anyone deciding NOT to invest in a pension as things could improve (50% tax-free lump sum, lower general tax rates than expected).  For many people, pensions do make sense but I would suggest the following people in particular should make sure they run the numbers before investing in a pension:
·         Those who expect to be high rate tax payers in retirement
·         Those who expect the tax treatment of pensions to be worse than now – e.g. reduction of % that can be taken as a tax-free lump sum, increase in % or number of years for the pension levy, increased taxes generally, increased taxes for pensioners (eg move to charge full PRSI and USC) etc.
I fall into both categories so I won’t be investing in a pension again even though I have more than 20 years to retirement.  Even on current tax rates/treatment and assuming the same net growth rates after charges, I reckon the pension would only give about an extra 10% fund value for me.  The loss of flexibility until retirement and at retirement combined with pension funds being sitting ducks for further government raids (who could argue that reducing the tax-free lump sum from 25% to 15% doesn’t look reasonably – sure didn’t you get huge tax relief on the way in...) means that the _possibility_ of an extra 10% isn’t worth it.
And then there are the charges...  0.75% is about as low as you will get 'down here' but that is taken every year.  And that really adds up.  On a €1,000 investment earning 5% gross, a 0.75% charge will extract €240 over 20 years, €458 over 30 years and €787 over 40 years.  Contrast that with investing directly and holding: you’ll probably pay 1.5%-2.5% to buy the shares/bonds and the same to sell – resulting (at the same 5% growth) in the direct investment being worth 10-13% more after 20 years, 20% more after 30 years and 30% more after 40 years.  Higher annual charges are not uncommon and make the direct investment look even better (eg a 1.5% annual fee makes the direct investment worth 73% more after 40 years).  There will be some capital gains tax to pay but overall, it’s not a foregone conclusion that a pension investment is always best. 
In the short term, I have an offset mortgage so I’m ‘investing’ my money there which effectively gives me a 4% tax-free return with no charges.  When I have enough saved, I will buy shares/bonds to hold until retirement.


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## Alexmartin (11 Nov 2012)

This whole pension thing has me gone crazy.  The pension levy really sickened me.  I went about stopping the payments a while ago, and thought I had, but life got in the way and I never got round to it.

The calculations are impossible.  I'm definitely going to just stop paying into a pension if the government touch the tax relief again, but I cant figure out how much i'll end up with based on what I have.

Can anybody do the sums for me, or is there a formula?

I'm 40 now.  Current pension fund value is €110,000.
If I just stopped paying now how much would this grow to by the time i'm 60 and 65.  No way am I waiting til 68 to retire.

My wife has a massive pension pot already an i'm positive we'll be on the high tax rate when we retire.

Am I right to just stop now?

And I would have thought that stability was the most important think for planning for your future, but the government modelling have made the whole pension situation volatile.  Nobody knows what stupid scheme they are going to come up with next.  How on earth can you plan for retirement in that environment.


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## DerKaiser (11 Nov 2012)

Alexmartin said:


> Can anybody do the sums for me, or is there a formula?



The best simple advice I can offer is that you should pay in to a pension up to the point where you have a retirement income of €40k between you, in addition to the old age pension. This would require a pension pot of about €1m. 

An important consideration is whether you expect to have income other than from the old age pension or your private pension. For example if you have rental properties that generate €15k per annum then you should only be targeting €25k from the pension.


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## Alexmartin (11 Nov 2012)

DerKaiser said:


> The best simple advice I can offer is that you should pay in to a pension up to the point where you have a retirement income of €40k between you, in addition to the old age pension. This would require a pension pot of about €1m.
> 
> An important consideration is whether you expect to have income other than from the old age pension or your private pension. For example if you have rental properties that generate €15k per annum then you should only be targeting €25k from the pension.



Her pension advisor told her she had a pot big enough now for a pension of €30k if she retires at 55 - i think.  Must check again with her.
How do I know what size of pot I need to get €10K

Then hopefully we should both have state pensions at 68 too.

Or what if they means test the state pension.  Then by looking after yourself you are costing yourself even more money.

This not knowing where the goalposts are going is the killer.


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## DerKaiser (11 Nov 2012)

Alexmartin said:


> This not knowing where the goalposts are going is the killer.


Absolutely right - I hope the government are getting this message and finish their tinkering. If they leave the 41% relief intact and don't renew the 0.6% levy that would be a good start.

To answer your other question, as a very broad rule of thumb you'd need €250k in the pot to provide a €10k per annum pension. This will vary though according to retirement age.


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## mtk (12 Nov 2012)

DerKaiser said:


> Absolutely right - I hope the government are getting this message and finish their tinkering. If they leave the 41% relief intact and don't renew the 0.6% levy that would be a good start.
> 
> To answer your other question, as a very broad rule of thumb you'd need €250k in the pot to provide a €10k per annum pension. This will vary though according to retirement age.


This is my view exactly


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## Alexmartin (14 Nov 2012)

Looks like the consensus from the papers today is that the 41% relief on pension contributions is for the chop.  To be lowered to 20 or 30%.
Well thats it for me.  I'm stopping.  I'm not getting relief of 30% on the way in and then paying 41% plus USC etc on the way out.  Not a chance.

So the question is.  Invest in funds, foreign property or just go on more holidays.
Even thinking of just upping sticks and moving the family abroad now.

We as a couple are paying about €50k income tax.  Never mind all the other stealth taxes.  And now more stealth and property taxes on the way.  This is getting too much.


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## Dave Vanian (14 Nov 2012)

Alexmartin said:


> Looks like the consensus from the papers today is that the 41% relief on pension contributions is for the chop. To be lowered to 20 or 30%.


 
And if you looked at the papers from this time last year you'd see the same speculation was doing the rounds then too.  It didn't happen.  This sort of speculation is great for selling newspapers but until the minister reads his speech, very few people actually know what's in it.


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## mandelbrot (14 Nov 2012)

Alexmartin said:


> Looks like the consensus from the papers today is that the 41% relief on pension contributions is for the chop.  To be lowered to 20 or 30%.
> Well thats it for me.  I'm stopping.  I'm not getting relief of 30% on the way in and then paying 41% plus USC etc on the way out.  Not a chance.
> 
> So the question is.  Invest in funds, foreign property or just go on more holidays.
> ...



My heart bleeds! To pay 41% (or whatever the marginal income rate in the future is) on the way out you'll be in quite a comfortable position.

Surely the aim of tax relief on pensions should be to incentivise people who would otherwise be poor in old age to contribute, not to further feather the nests of those who are already wealthy and have the means to provide for their future income one way or another anyway.


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## DerKaiser (15 Nov 2012)

mandelbrot said:


> My heart bleeds!


 
I wouldn't phrase it as bluntly as mandelbrot, but I'd question why you are putting money into a pension at all if you think you'll be paying higher rate tax in retirement.

Here are some simple sums, I'm assuming the money is invested for 15 years and there is 0% real growth i.e. inflation and charges cancel out fund growth:

*Neutral (optimistic) scenario - No future changes in tax*
Invest €100k in a pension, net cost €59k after tax.
Gross proceeds after 15 years = €100k
€25k tax free, €75k ultimately taxed at 52% (41% tax, 7% USC, 4% PRSI)
Net proceeds = €61k
Total gain over 15 years = €2k on €59k or 0.2% p.a.
0.2% p.a. is pretty measley for locking up money for 15 years

*Plausible scenario - Tax free lump sum removed, 0.6% levy continues indefinitely*
Invest €100k in a pension, net cost €59k after tax.
Gross proceeds after 15 years = €91k net of levy
€91k ultimately taxed at 52% (41% tax, 7% USC, 4% PRSI)
Net proceeds = €44k

*Conclusion?*
Under current taxation rules people who are already expecting to pay higher rate of tax in retirement do not benefit. Even relatively minor tweaks to the levy and allowable tax free lump sums would erode what little benefits there are.


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## Alexmartin (15 Nov 2012)

You're right.
The problem is that you dont know how much you are going to get taxed on your pension and you could end up actually losing money with all the tinkering going on.


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## LDFerguson (15 Nov 2012)

I think that there's a misconception out there that people will be taxed at 41% on their pensions. For the avoidance of doubt*: Pensions are taxed as income and you will only pay tax on your pension at 41% if your total taxable income in retirement is sufficiently large to put you in the higher rate bracket. *

To take an example, at present a singe person can earn up to €32,800 per year in retirement before entering the 41% band. State Pension ~€12,000. Can therefore have a private pension of €20,000 per year and stay below the 41% rate. Pension fund could be up to €693,000. 

(€693,000 fund; 25% tax-free lump sum €173,000; €120,000 into an AMRF; balance €400,000 into an ARF; 5% annual withdrawal €20,000)

So a single person can accumulate a pension fund of almost €700,000 before the resulting pension will be taxable at 41%. A married couple can accumulate even more. This is, of course, based on current tax rates and bands.


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## kennyb3 (16 Nov 2012)

LDFerguson said:


> This is, of course, based on current tax rates and bands.



That there is the problem though - how can anyone start a pension with no long term pension policy in place - 20/30 years away is a long time. There could easily be no TFLS, lower bands, less credits etc etc The list goes on and on.

And anyway even the standard rate is heading north of 25% already when you account for the USC.


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## marathonic (16 Nov 2012)

kennyb3 said:


> That there is the problem though - how can anyone start a pension with no long term pension policy in place - 20/30 years away is a long time. There could easily be no TFLS, lower bands, less credits etc etc The list goes on and on.
> 
> And anyway even the standard rate is heading north of 25% already when you account for the USC.


 
And what if they tax pensions/remove reliefs to the extent you're predicting and can't tax anymore.. then they decide to introduce the Wealth Tax that some politicians are spouting about and tax the life out of your private savings?

Investing for your future is a risky business - but it's a risk you have to take if you believe the state pension, in it's current form, will not last much longer (which most do). The only other option is to spend everything and hope for the best - something I'm not willing to do.

True, you could move abroad with your private savings - but you can also transfer your pension abroad.


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## kennyb3 (16 Nov 2012)

marathonic said:


> And what if they tax pensions/remove reliefs to the extent you're predicting and can't tax anymore.. then they decide to introduce the Wealth Tax that some politicians are spouting about and tax the life out of your private savings?



Pensions are an easy target as shown by the levy. Your money is locked away. Moving it abroad is more difficult than transferring savings abroad.

Have you read the agreement with the Troika and what the proposed reduction of relief?

Politicians introducing a wealth tax on themselves? I laughed.



marathonic said:


> Investing for your future is a risky business - but it's a risk you have to take if you believe the state pension, in it's current form, will not last much longer (which most do). The only other option is to spend everything and hope for the best - something I'm not willing to do.



Or you could save/invest in a another form outside of a pension - no? 

Why does it have to be risky? I get that nothing is 100% safe, but you can definitely get more safe.

Pensions aren't the be all, your points above address non of the concerns raised.


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