Does higher rate at drawdown ruin a pension ?

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coolaboola12

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If you get the higher rate of tax relief while paying contributions but also end up paying the higher rate at drawdown (lets say your fund did really well and pot was big), does this negate the tax benefit of pensions ? Is it correct in saying that you pay PRSI at contribution time and pay PRSI again at withdrawl ?
 
coolaboola12 said:
If you get the higher rate of tax relief while paying contributions but also end up paying the higher rate at drawdown (lets say your fund did really well and pot was big), does this negate the tax benefit of pensions ?
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Generally no.

There is the theoretical case of someone getting relief at the 20% rate on contributions and paying 41% on drawdown. This would be somewhat inefficient but I suspect it barely exists in reality as someone earning that little is unlikely to have a pension pot large enough to be taxed at 41% on drawdown. In any case capital gains within your pension fund are CGT-free which doesn't really exist with other investments.

Otherwise pension contribution is for many people doubly efficient in Ireland as most employees pay 41% marginal rate when in employment (and get relief at that) but most pay 20% in retirement due to lower income.
 
NoRegretsCoyote said:
Generally no.

There is the theoretical case of someone getting relief at the 20% rate on contributions and paying 41% on drawdown. This would be somewhat inefficient but I suspect it barely exists in reality as someone earning that little is unlikely to have a pension pot large enough to be taxed at 41% on drawdown. In any case capital gains within your pension fund are CGT-free which doesn't really exist with other investments.

Otherwise pension contribution is for many people doubly efficient in Ireland as most employees pay 41% marginal rate when in employment (and get relief at that) but most pay 20% in retirement due to lower income.
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ok thanks and at what level do you start paying the higher rate upon retirement ? Lets say a married person but assessed separately
 
coolaboola12 said:
Is it correct in saying that you pay PRSI at contribution time and pay PRSI again at withdrawl ?
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You pay prsi on your contributions. You will pay prsi on ARF drawdowns up to age 66.
There is no prsi charged on an annuity or occupational pension. You also pay USC on contributions and again on any pension income. If you were liable to USC at 8% you could be paying taxes of up to 52% on your pension.
 
S class said:
You pay prsi on your contributions. You will pay prsi on ARF drawdowns up to age 66.
There is no prsi charged on an annuity or occupational pension. You also pay USC on contributions and again on any pension income. If you were liable to USC at 8% you could be paying taxes of up to 52% on your pension.
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So you wouldn't recommend a pension ?
 
It could still be beneficial to pay into the pension because you get the gains in the pension tax free. It is just not as beneficial as being in the 20% income tax band at retirement. As you say if you get very large gains you might pay some of your pension at 40% but if this is the case you have benefited by large tax free investment gains.
 
Let’s say you amass a pension fund of €2m on retirement.

You take a lump sum of €500k (25% of €2m). The first €200k is tax free and the €300k balance is taxed @20%.

You transfer €1.5m to an ARF and start drawing it down @4% (€60k) per annum from 60.

If you’re single, total deductions (income tax, USC and PRSI) on €60k come to €16,797 as things stand. That’s an effective tax rate of 28% on the ARF drawdowns.

And PRSI falls away at 66.

In other words, pensions are highly efficient from a tax perspective if you are getting relief @40% right up to a pension fund of €2m, even if the tax efficiency starts to gradually diminish after €800k (because of the €200k cap on the tax free lump).

The important point is to look at the effective (or blended) rate of tax paid on drawdowns and not to focus on the fact that a portion of the drawdown is taxed at 40%+.

Hope that helps.
 
Sarenco said:
Let’s say you amass a pension fund of €2m on retirement.

You take a lump sum of €500k (25% of €2m). The first €200k is tax free and the €300k balance is taxed @20%.

You transfer €1.5m to an ARF and start drawing it down @4% (€60k) per annum from 60.

If you’re single, total deductions (income tax, USC and PRSI) on €60k come to €16,797 as things stand. That’s an effective tax rate of 28% on the ARF drawdowns.

And PRSI falls away at 66.

In other words, pensions are highly efficient from a tax perspective if you are getting relief @40% right up to a pension fund of €2m, even if the tax efficiency starts to gradually diminish after €800k (because of the €200k cap on the tax free lump).

The important point is to look at the effective (or blended) rate of tax paid on drawdowns and not to focus on the fact that a portion of the drawdown is taxed at 40%+.

Hope that helps.
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Awesome, thanks
 
coolaboola12 said:
If you retire at 60, can you get the lump sum then or can you only get that at 66
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It depends on the pension type.

For example, occupational pensions/PRBs can generally be retired @50, whereas private pensions can only be retired @60.

But in no case would you have to wait until 66.

However, bear in mind that from 60 deemed withdrawals from an ARF kick in, which may not suit if you are still working.
 
Sarenco said:
It depends on the pension type.

For example, occupational pensions/PRBs can generally be retired @50, whereas private pensions can only be retired @60.

But in no case would you have to wait until 66.

However, bear in mind that from 60 deemed withdrawals from an ARF kick in, which may not suit if you are still working.
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So it's best to finish work at 60 if possible ?
 
Steven Barrett said:
What are you going to live on in retirement? You need something. Pensions are a fairly efficient way of saving. You get tax relief on the way in, fund grows tax free (mainly).
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Yes I have a pension but a poster above said you might end up paying 52% on pension at retirement which would make them a poor choice
 
coolaboola12 said:
ok so it seems the poster above was wrong
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No, they weren't wrong. You could end up paying high rate tax, you could end up paying low rate tax, you could end up paying no tax. It entirely depends on your circumstances, your pension pot, how and when you draw it down etc. Without some indicative figures and outline plans it's impossible to be more specific in the general case. But, for the vast majority of people, once they have no high cost debts and own their own home (even with a mortgage), saving for retirement via a pension is usually the next most important financial decision and a no-brainer due to the significant tax advantages on contributions, growth, and drawdown.
 
coolaboola12 said:
ok so it seems the poster above was wrong
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You are just mixing up the difference between the marginal tax rate and the effective tax rate. They were right to say that a portion of your pension could be taxed at 52% in a worst case scenario. However Sarenco has nicely outlined that even in this scenario, the effective tax rate is really low.

If feels like you are trying to use an outlier hypothetical scenario to justify not contributing to your pension. Maybe if you explained your actual situation, people could help you with the maths and put you at ease.
 
interested21 said:
You are just mixing up the difference between the marginal tax rate and the effective tax rate. They were right to say that a portion of your pension could be taxed at 52% in a worst case scenario. However Sarenco has nicely outlined that even in this scenario, the effective tax rate is really low.

If feels like you are trying to use an outlier hypothetical scenario to justify not contributing to your pension. Maybe if you explained your actual situation, people could help you with the maths and put you at ease.
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ok thanks.

I already contribute but am deciding whether to max the contributions or not. I can afford it thankfully but i dont want to be paying PRSI / USC twice and then 42% on the drawdown

My circumstances are im 43 years old, earn 90k and currently have 110k in a pension. I know this is low but im torn between 10% avc and going the max. Im not a fan of the 4% method and then dying and leaving a pension pot of a few hundred k behind me, i dont see the point of that .

I have 100k on deposit but i like building cash each month and my anxiety disorder tells me to keep building cash so i can buy a house down the road if i end up divorcing. I know no one can predict the future but my anxiety makes me plan for the worst - it tries to protect me in a way. If i went the 10% avc then i could build cash also in the event of a disaster down the road but i also dont want to be leaving money on the table by not maxing out the AVC
 
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