# Starting new pension



## cavanMan (6 Aug 2019)

Thank you in advance.

Single 45 years old.
Self Employed.
Mortgage Free.
Some cash on deposit.
Old Irish Life consenous pension from previous employer from 10 years ago current value approx 50k.

Based on the above I would appreciated some advice on starting a new pension.

any further info you may need just ask.


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## kevhenry (6 Aug 2019)

If you’re mortgage free then you should definitely look to make the most of your tax incentives through a pension. 

You can see your options here. 

Kevin
www.thepensionstore.ie


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## kevhenry (6 Aug 2019)

Also, given that your older pension is 10 years old you would probably be able to get a better deal on charges with a new plan.

You say you are self employed.

If you're a sole trader have you ever considered trading as a limited company or is that an option you would consider?

Kevin
www.thepensionstore.ie


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## GSheehy (6 Aug 2019)

cavanMan,

You can do a PRSA or a Personal Pension (RAC).

Your next big decision is whether you want to go the 'advisory' route or the 'execution only' route.

That'll depend on your own knowledge of pensions/providers and how comfortable you are with selecting funds.


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## cavanMan (6 Aug 2019)

kevhenry said:


> If you’re mortgage free then you should definitely look to make the most of your tax incentives through a pension.
> 
> You can see your options here.
> 
> ...




Thanks Kevin.


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## cavanMan (6 Aug 2019)

GSheehy said:


> cavanMan,
> 
> You can do a PRSA or a Personal Pension (RAC).
> 
> ...



Thank you.....would'nt have a clue to be honest....if you could explain the two if would be great.


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## GSheehy (6 Aug 2019)

Brief description of both here and here but this is just one product provider. 

If you haven't a clue on what product to go for, what provider to select or what fund/s to invest in then you're probably better off engaging the services of a financial advisor/broker to guide you. There are subtle differences in the rules that govern both products, the funds available to invest in and the charging structures of them.  Just pay particular attention to the charges on both products. The higher they are,  the worse it is for the size of your pension pot at retirement age.


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## cavanMan (7 Aug 2019)

GSheehy said:


> Brief description of both here and here but this is just one product provider.
> 
> If you haven't a clue on what product to go for, what provider to select or what fund/s to invest in then you're probably better off engaging the services of a financial advisor/broker to guide you. There are subtle differences in the rules that govern both products, the funds available to invest in and the charging structures of them.  Just pay particular attention to the charges on both products. The higher they are,  the worse it is for the size of your pension pot at retirement age.



Thank you for your reply........can you clarify this for me.

Sorry if this sounds daft but If i was to put say 1k a month into a deposit account for the next 20 years would i not be 
better off then putting it into a pension where I could lose all or part of it ?


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## kevhenry (7 Aug 2019)

Look at it this way:

Deposit account: €1,000 x 12 x 20 = €240,000 x 0.5% interest per year = €241,143

Alternatively that same €1,000 would gross up to €1,667 after tax relief at the highest rate if it was going into a pension.

Pension: €1,667 x 12 x 20 = €400,000...and that's with 0% growth.

You can always invest into a cash fund if you're not looking to take any risk but that would not be a good investment decision for someone of your age.

Even if you get a net 3.75% p.a. return after charges you would end up with €580,463 after 20 years.

Remember, with a pension you get tax relief AND tax free growth.

Let the numbers be your guide 

Kevin
www.thepensionstore.ie


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## kevhenry (7 Aug 2019)

Also cavanMan, with a fund of €580,463 you would be able to take a retirement lump sum of €145,115.

This would leave you with a balance of €435,347 which could be used to buy an annuity, invest in an ARF or a combination of the two.

It's a good idea to take full advantage of tax inventives.

The difference in terms of 'Net Worth' alone is €339,320 (€580,463 - €241,143) just by using your money this way.

Yes, the 3.75% annual growth is an assumption but it's not a big one.

In 20 years time, in this scenario, you would have less liquid cash to the tune of €96,028 (€241,143 - €145,115) but you would have an additional asset of €435,347 to make up for it.

Kevin
www.thepensionstore.ie


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## kevhenry (7 Aug 2019)

A final point is to consider the effects of inflation on your money.

With a deposit account many people shop around on the basis of an extra tenth of a percent without considering the corrosive effect of inflation over time.

Deposit accounts don’t give you the opportunity to do any better than the rate on offer.

If we apply the standard assumption of 2.5% p.a. (which in itself can be considered conservative) in your savings scenario then the net inflation effect would reduce the ‘real’ value of your €241,143 deposit down to €147,164.

In other words, it’s purchasing power would have fallen by a whopping 39%.

The same, of course, would apply to your pension savings in that your €580,463 would have an equivalent real value in 20 years of €354,243.

Even a pension with no growth, ending up at €400,000, would have a net present value of €244,108.

That’s how big a deal inflation risk is.

So, let’s look at a comparison between your options and evaluate them in NPV terms.

In all cases you would be spending the same €240,000 (which we’ll keep in today’s value) so doing a comparison between this and the net present value of all 3 options would result in the following;

1) A real loss of €78,173 (€161,827 - €240,000) in the deposit account.​​2) A real gain of €4,108 (€244,108 - €240,000) in a pension with no growth.​​3) A real gain of €114,243 (€354,243 - €240,000) in a pension with net growth of 3.75% p.a.​
Investment returns are not a luxury if you are saving/investing in anything long term because you need to be beating inflation at a minimum to keep the value of your money real.

In a pension fund you have a multitude of options to do this notwithstanding the potential for downside risk.

Kevin
www.thepensionstore.ie


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## cavanMan (7 Aug 2019)

Thanks for your replies Kevin.......do you advise going through a middle man like a bank or go straight to a pension provider?


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## Sarenco (7 Aug 2019)

If I was a betting man, I would suspect that Kevin would advise going through a broker...


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## kevhenry (7 Aug 2019)

Neither.

As a broker, I would always espouse the benefits of using a broker because you get the choice of the market so you can have your investment priorities matched to the provider best suited to you.

To be clear, both of the options you mentioned above (i.e. going to a bank or straight to a pension provider) are one and the same thing.

Insurance companies use a 'tied agent' retail distribution model.

AIB, KBC, PTSB & Ulster Bank are all tied agents of Irish Life.

Bank of Ireland are a tied agent of New Ireland.

Both also have an army of individual tied agents and employed advisors i.e. which is how people deal 'direct' with the provider.

In reality, employed advisors and tied agents are just another retail distribution channel with fixed costs and overheads.

Therefore, in all the above cases, the agent in question is contractually tied to a set of fixed rates and product offerings.

And there's not much room for manoeuvre. 

So, depending on the product and contribution rates, there can be a significant financial benefit with the rates brokers can get because 'brokerage' is a separate distribution channel on its own with no fixed costs associated with them.

Therefore, brokers get the best rates and product offerings because there's no compliance risk to the insurance companies.

Besides, good brokers and advisors are running their own businesses so it's in their interests to maintain a good, long-term working relationship with their clients.

You just don't get that level of service with banks.

And you do need this ongoing advice in order to achieve the long term returns you're after.

So you can choose to deal with someone who gets to know you as the years go by rather than meeting a different bank advisor each year and starting the same conversation from scratch each time.

Kevin
www.thepensionstore.ie


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## ashambles (7 Aug 2019)

kevhenry said:


> Even if you get a net 3.75% p.a. return after charges you would end up with €835,427 after 20 years.


You're assuming the 400k is in there from year one rather than being built up over 20 years.

I think with a steady 3.75%, on monthly deposits of 1667 over 20 years, the figure should be around 592k.


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## kevhenry (7 Aug 2019)

Thanks ashambles.

Yes, you're right.

I will amend above figures now. Good spot!


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## coolaboola12 (25 Aug 2019)

ashambles said:


> You're assuming the 400k is in there from year one rather than being built up over 20 years.
> 
> I think with a steady 3.75%, on monthly deposits of 1667 over 20 years, the figure should be around 592k.



so the pension would return 580k and the cash deposit would return 592 based on 3.75%?

Why lock up the cash in a pension then


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## Gordon Gekko (25 Aug 2019)

coolaboola12 said:


> so the pension would return 580k and the cash deposit would return 592 based on 3.75%?
> 
> Why lock up the cash in a pension then



No. I think the use of the term “deposit” was misleading. He/She meant that X would be deposited monthly into a pension fund.


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## Conan (25 Aug 2019)

coolaboola12 said:


> so the pension would return 580k and the cash deposit would return 592 based on 3.75%?
> 
> Why lock up the cash in a pension then


Firstly,  you won't get 3.75% on any deposit,  now or for many years to come (Not to mind DIRT).
Second,  a return assumption 3.75% in a pension  is a conservative long term return (with no tax or DIRT on the growth), but it does require adopting a diverse investment strategy.


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## gnf_ireland (26 Aug 2019)

@cavanMan I think you will find mathematically that setting up a pension is a no brainer, if you are a high tax earner and likely to be a low tax earner duing retirement. This is primarily driven from the ability to pay into a pension gross, and pay marginal rate on drawdown. You also have the benefit of growing the funds tax free (as opposed to ~40% tax) while in the fund, and the tax free lump sum at the end. Depending on your type if pension, it can be drawn down from 50.

However, you need to consider a few things such as:
- charges - a pension costs money. You are likely to pay 1% a year in charges (roughly), so you need to be making this at least
- risk - unless you put the money in cash which will see the real value deteriorate, you need to accept a level of risk. At your age, similar to myself, you should consider being pretty risky with the funds and align to global equities. This may see a dip in value, but you have time to recover.

I started my pension when I returned to Ireland in 2006, and within 2 years the recession had kicked in. This was actually great for me, as I was lucky enough to maintain my pension contributions, so I bought pretty cheap for ~5 years. With the bounce back in global equities, this gave the pension a major boost. Its likely another would kick in at some stage soon, but this is to be expected and best not try and time the market, and just maintain it consistently. However, I would consider trying to increase my contributions if the market fell more than 20%, if I could afford it.

Regarding who to use - there is a separate thread on Zurich pensions which more or less say that you kind of need to go through a broker. My advise is to approach 3-5 and get quotes from each of them, getting it down to 2 pretty quickly. You are in effect running a bit of a competitive tender process across them. Good luck with it all !


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## kevhenry (26 Aug 2019)

Another point on drawdown is that when you reach age 65 your personal tax thresholds change.

A retiree with a financially dependant spouse can earn up to €36,000 a year before paying income tax i.e. they can earn €3,000 a month tax free.

Anything over that is then taxed at the marginal rate.

Given that the state pension is around €2,000 a month for a married person with a financially dependant spouse this leaves the potential to earn an additional €1,000 a month tax free.

A fund of €400,000 is a hugely tax efficient target to have because you get;

1) A Tax Free Lump Sum of €100,000 (25%)

2) 0% income tax on the remaining balance of €300,000 if annuitised at 4% giving (€300,000 x 4%) = €12,000 a year / €1,000 a month.

Total income = €2k from state + €1k private pension = €3k per month

This means that a pension investment;

Receives tax relief at your highest rate on all contributions (i.e. up to 40%)
Gets to grow tax free all the way along in that there is no exit tax, capital gains tax or DIRT tax applied (Of course, that's not to say that another government levy as per the 0.6% applied from 2011-2014 won't ever happen again)
Tax free lump sum at retirement - in this case €100k
Tax free income on the €300k balance

Kevin
www.thepensionstore.ie


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## gnf_ireland (26 Aug 2019)

kevhenry said:


> A retiree with a financially dependant spouse can earn up to €36,000 a year before paying income tax i.e. they can earn €3,000 a month.
> 
> Anything over that is then taxed at the marginal rate.
> 
> Given that the state pension is around €2,000 a month for a married person with a financially dependant spouse this leaves the potential to earn an additional €1,000 a month tax free.


Is this correct? Surely you mean they can earn up to 36k a year at the lower rate of income tax rather than the marginal rate


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## Protocol (26 Aug 2019)

Over 65s get three tax reliefs than under 65s don't get.

One of these is no tax if you earn under 18k / 36k.






__





						Exemption and marginal relief
					

This page overviews tax exemption and marginal relief




					revenue.ie


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## kevhenry (26 Aug 2019)

gnf_ireland said:


> Is this correct? Surely you mean they can earn up to 36k a year at the lower rate of income tax rather than the marginal rate


There's no lower rate of income tax once you turn 65. It's tax free up to the threshold and then marginal rate on the excess.

Kevin
www.thepensionstore.ie


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## gnf_ireland (26 Aug 2019)

Protocol said:


> Over 65s get three tax reliefs than under 65s don't get.
> 
> One of these is no tax if you earn under 18k / 36k.



Sorry I had absolutely no idea that the over 65's were entitled to that level of income tax free - not something I had to personally worry about. That is one serious benefit ! 
I would really question the need for (and equality of) this exemption. Surely a couple in their 30's earning 36k are equally in need of having the income tax free than someone in their late 60's !

Somehow, I would not guarantee on that still being in place in 20 years time when the OP is due to retire !!


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## kevhenry (26 Aug 2019)

Yes, it's a huge benefit and one that the vast majority of people aren't aware of.

On your other point, a couple in their 30's are likely more in need of this exemption than a retired couple but the reasoning is that the now retired couple have 'paid their dues' and are now entitled to benefit from a more favourable tax regime given the assumption that they will not be working. 

And, No, it's not guaranteed to be there in 20 years but I personally can't see it being changed too much if you take what happened with the medical card debacle a few years ago.

Kevin
www.thepensionstore.ie


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