Does higher rate at drawdown ruin a pension ?

Sarenco said:
Even with a pension pot as high as €2m, your effective rate on drawdown would be a lot lower than 52%.
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The marginal rate is relevant one, not the effective rate.

Suppose you are 55 and plan to retire at 65. You have €1.5m in your pension pot already so will be drawing down at the higher marginal rate and you can no longer take advantage of the tax-free lump sum which is capped..

You have €20k free gross earnings today to put into your pension pot or spend on a holiday. If you put it in your pension you will get 40% relief on the way in and then be taxed at 40% on the drawdown of whatever this €20k has grown to. If you spend it on the holiday it will have been taxed at 40% today. So it's a choice between being taxed at 40% today or at 40% on whatever the €20k has grown to by the time you retire.

The marginal rate on drawdown is always relevant for decisions at the margin.
 
coolaboola12 said:
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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You have a few things going on there so it would probably be best to do a money makeover post, as you could probably benefit from a more hollistic view of your situation. Looking at your pension in isolation and assuming some level of increase in the tax bands over the next 20 years to account for inflation, you're unlikely to be going too far into the upper marginal rate.

i dont want to be paying PRSI / USC twice
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Your alternatives are putting money on deposit and paying 33% DIRT on measly interest rates, or investing the money in equities/funds and paying 33%/41% tax on your gains. Don't let the perfect be the enemy of the good.
 
NoRegretsCoyote said:
The marginal rate is relevant one, not the effective rate.
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Ok, let's look at the marginal rate.

Assume the retiree is single, with no dependants and starts drawing down a €2m pension fund at 66.

25% of the drawdown is taxed at 20% (the element of the lump sum over and above the tax free element) and the marginal rate (including USC) on 4% of the balance drawn from an ARF (€60k) is 44.5% .

So, that's a blended marginal rate of 38.375%.

That's still lower than the 40% relieved on contributions and the funds are now in an account where returns can compound tax-free.
 
And, FWIW, the equivalent blended marginal rate when drawing from a €800k pension pot (using the same assumptions) is 18.375%.
 
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