# Reducing my Pension AVC's



## Daddy (21 Jun 2011)

I pay in 5% of my salary to my scheme and employer matches that.
For past 3 years I have been paying in additional 5% AVC per year.
With all this talk of levies and reduction of allowances from 41% to whatever over time I'm wondering whether to cap my contribution to 5% and take home the other 5% of my income less the taxes.  I was alarmed to hear Eddie Hobbs on Hook's show last week saying 'that I would not put a penny into a pension'.  Now I do not know whether he was referring to contributions full stop or AVC's.   But it is an alarming statement.  Did anyone else hear him say this ?  Is anyone else considering reducing or stopping altogether their AVC's and for what reasons other than necessity.


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## TheFatMan (21 Jun 2011)

Hi Daddy,

its still a little unclear to me if the 41% relief will actually be reduced. I though the pension levy was to be taken and the decision to reduce the reliefs was potentially going to be reversed. 

Eddie might be cutting off his nose here a bit. As long as the reliefs in place warrent it a contribution to pension is still a good bet. But now that this government has broken the sacred seal and can levy saving funds at will (and ones that are immobile) there is nothing to stop them dipping in here again and again as they see fit. 

So for the next 4 years I'm not going to contribute as much to pension as I have done in the past 10 years, I'm going to take the hit in taxes and invest the money in property, which is cheap as chips at the moment!


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## Daddy (21 Jun 2011)

Thanks for that reply.

I was thinking of doing something similar but all those second property taxes are offputting.

Property is as you say cheap as chips and probably will go cheaper but the raids on pension monies (together with the poor returns) is I think disastrous for the Pensions industry.

If they do indeed start to cut the reliefs god only kniows the outcome of it all.


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## Jim2007 (21 Jun 2011)

TheFatMan said:


> So for the next 4 years I'm not going to contribute as much to pension as I have done in the past 10 years, I'm going to take the hit in taxes and invest the money in property, which is cheap as chips at the moment!



Where do you get the idea that property is "cheap as chips"???  It's just not as high as it was during the bubble period that is all... there is no active market, so at best valuations are guess work!  And what catalyst do you see in the future that will drive prices up?

Going forward there are 3 things that are fairly certain: ECB rates will rise, Irish Banks will have to comply with Basle III requirements and there will be much tighter coordination of the Eurozone budgets.  All this means that Irish credit practices will have to converge with those of the rest of the zone and for mortgages, European norms tend to be:

  - 20% to 25% of income being spend on Rent/Repayments
  - Periods normally less than 25 years
  - Min Deposit in cash 25% - 30%
  - Max loan 2.5 times the main income earner
  - No other major loans...

I believe financial institutions will have to start moving in this line if they expect to be able to raise money in international markets to finance mortgages going forward.  The alternative would be to try raise deposit levels through higher interest rates which would also make cheap financing unavailable!

And then there is Basle III capital requirements which of course will have an impact on lending policies was well.  T1 capital requirements will mean that banks have to raise more capital, not a chance for Irish banks I expect, or cut back on their loan book - more likely in the Irish context I expect.

And then of course there is the 41% tax break you've pass up on - your going to have to recover that before you even start to make some money...

If you are going to do it at least consider some kind of broad portfolio of assets as there is less risk involved a better chance of a positive outcome.

Jim.


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## Jim2007 (21 Jun 2011)

Daddy said:


> I pay in 5% of my salary to my scheme and employer matches that.
> For past 3 years I have been paying in additional 5% AVC per year.
> With all this talk of levies and reduction of allowances from 41% to whatever over time I'm wondering whether to cap my contribution to 5% and take home the other 5% of my income less the taxes.  I was alarmed to hear Eddie Hobbs on Hook's show last week saying 'that I would not put a penny into a pension'.  Now I do not know whether he was referring to contributions full stop or AVC's.   But it is an alarming statement.  Did anyone else hear him say this ?  Is anyone else considering reducing or stopping altogether their AVC's and for what reasons other than necessity.



I think the first thing to to is to stop listening to the talking heads, they are economic celebrities and they need to attract viewers, so headline grabbing is the name of the game.  That does not mean that they are right or wrong, but it is just not the way to manage your money.  In stead look at the numbers:

In the first place, you should be aware the taxes and levies on pensions are common place, so it should not be a surprise that they are applied in Ireland as well.  The real question is how much can you afford to see wiped out be these levies before you are really loosing money!  That really means how much "free money" are you passing up by withdrawing from the scheme, because in reality you can afford to loose it all and still be no worse than you were before!  If for example tax breaks and employers contributions comes to €35 per €100, you can loose a lot before it becomes painful

Next you have to consider how to recover the €35 you passed up at the start.  For example if the €135 is invested in a German bond at say 3%, you're going to have to find an asset that will gain you the lost €35 and still return you 3% pa... which means a more risk asset than the bond.

Then there is the tax situation, if the fund has a more favourable position that you, then you'll also need to come up with an edge to deal with that as well - for instance what taxes does the fund have to pay on income and gains in comparison to your own situation.

And of course there is the human factor, it is easier to save if the money is taken out of your salary before it hits your account - there is always a good reason for not saving the extra money this month...

Another factor to think about is the pension fund itself, is a defined contribution or defined benefit type.  If it is a defined benefit type how well is it funded?  Is there a chance it will not be able to realise the benefits in the end?  Also of course how is invested, what are the major asset classes and so on...

I can't tell you the right answer for you, but what I hope to show you is that there are a lot of factors you need to consider than simply acting on a gut reaction or what some taking head said on TV.

Good luck in your decision,

Jim.


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## Daddy (21 Jun 2011)

Jim  thanks for your long and detailed posting.   It is appreciated and food for thought.


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## -Gal1 (23 Jun 2011)

Along the same lines - Pay slip issued today and PRSI up 3 fold - I presume this is related to the AVC's that I am paying into.  Is this extra hit today inclusive of a calwback for 2011 (Jan-June) or will it be this bad going forward ?
Thanks
-Gal1


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