€10K PRSA example, doesn't sound all that great a deal

J

jimmij

Registered User
Messages
28
I was trying to work out the pros and cons
It's all from the p.o.v of a higher rate taxpayer who'll also be a higher rate pensioner
as it's less complicated than considering other scenarios, to my mind at least.

Scenario 1: you don't do it and pocket the €4,800.

Scenario 2: You put 10K into a prsa at age 64 and it will mature in a year.
Right away your net income will drop by €4,800 plus the €1,200 you need to pay in PRSI and USC on the 10k so an income drop of €6000 for the year.

At age 65 you take a quarter of the 10k as a lump sum.
The other 7.5K you use to purchase an annuity that will rise in line with inflation.
This page ( https://www.retirementline.co.uk/annuities/annuity-rates/#best-annuity-rates ) gives the rate of such an annuity as being 4.72296%
This will give you an income of €354.22 pa (ie 7500 * 0.0472296) which after tax and usc will be €184.19 p.a.
19 years of such payments will amount to €3,500* and only at that point at age 85 will you begin to be at an advantage
over taking the €4,800 twenty years earlier.

If that's what it amounts to, it doesn't sound like all that attractive a deal to me

The 3500 plus the 2500 lump sum now equal the income drop in the year you took out the prsa
 
jimmij said:
This page ( https://www.retirementline.co.uk/annuities/annuity-rates/#best-annuity-rates ) gives the rate of such an annuity as being 4.72296%
Click to expand...
That's a UK site and irrelevant here in Ireland/the Euro zone where we have different interest and annuity rates.

With a pension you call also roll it over into an ARF or maybe a vested PRSA instead of purchasing an annuity.
This will give you an income of €354.22 pa (ie 7500 * 0.0472296) which after tax and usc will be €184.19 p.a.
Click to expand...
This looks wrong. Such a small amount would be exempt from tax unless there is other income.

Starting a pension one year before retirement is probably an edge case from which no general conclusions can or should be arrived at. On the other hand many people do exactly this in order to boost their total pension pot and avail of tax relief that would otherwise go unused.
 
Last edited:
ClubMan said:
That's a UK site and irrelevant here in Ireland/the Euro zone where we have different interest and annuity rates.

With a pension you call also roll it over into an ARF or maybe a vested PRSA instead of purchasing an annuity.
Click to expand...
Thanks, I don't know anything about ARFs or vested PRSAs I'll look into them.
I knew it was a UK site but it's the best I could come up with and I figured our interest rates wouldn't be
a million miles away.
It was the arithmetic of the thing I was trying to get to grips with really and if I got that right then
it's fairly crap imo. If you'd not taken a lump sum aged 65 and put it all into a pension you'd be nearly 90 before
you'd be at parity with just taking the after tax income at age 64.
 
jimmij said:
Thanks, I don't know anything about ARFs or vested PRSAs I'll look into them.
Click to expand...
You should probably review the information on the Pensions Authority website so:

Benefits payable on retirement - pensionsauthority

On retirement from a private pension arrangement you will have a number of options available to you. The decisions you take at this point will have a significant bearing on your financial security and that of your dependants. You should consider taking advice when deciding upon your retirement...
pensionsauthority.ie
jimmij said:
I knew it was a UK site but it's the best I could come up with and I figured our interest rates wouldn't be
a million miles away.
Click to expand...
They are. UK 5%, ECB 3.65%.
But most people start a pension longer that one year before retirement and benefit from tax free growth on their fund and aren't just looking at drawing down their contributions only. So your example is a bit artificial and arguably not really representative of a real life situation. Plus, the ARF option offers the opportunity of tax free growth on the 75% into retirement.
 
A few points here.

  • You're assuming that your pension will be taxed at 52% for your lifetime. That's the highest rate of Income Tax, PRSI and USC. PRSI and USC fall away over time in retirement so nobody pays 52% for all their retirement years.
  • You'll only be paying Income Tax at 40% in retirement if your total pensions exceed €42,000 per year. If you have a spouse you could have higher pension and still be on the 20% rate. Let's say you're single. State Contributory pension is around €14,000 per year so your private pension income would need to be €28,000 or more per year. If it's a private sector pension, you'd need a fund of perhaps €750,000 or more (allowing for tax-free lump sums) to have a pension of this size.
  • A majority of people won't have pension funds this size. A majority of people will get 40% tax relief on the contribution going in and will pay zero or 20% tax on their pensions.
  • There's a thread here on Askaboutmoney which debates this general point - if you're fortunate enough to have accumulated a large pension fund so that your pension will be taxed at the high rate, does it make sense to continue contributing? The principle applies also if you are fortunate enough to have a public sector pension that's big enough to be taxed at the higher rate. See https://www.askaboutmoney.com/threa...ched-€800k-should-i-stop-contributing.211550/
 
When you take 2.5k tax free you can also immediately take the 7.5k at your marginal tax rate. If you wait until you are over 66 and receiving your contributory pension you won't pay prsi on the 7.5 k
 
@ClubMan, it's fair to say it's not a scenario that's likely to crop up, I was just trying to make a simple example in order to get my head around it.

@Dave Vanian Lot's of good points there. I didn't know there were pension exemptions from USC. I followed your link to that other very interesting thread which mostly I didn't understand unfortunately.
On that thread Sarenco said
there is no USC payable on social welfare payments (including the contributory State pension)
I then went to this page ( https://www.citizensinformation.ie/en/money-and-tax/tax/income-tax/universal-social-charge/ ) which seems to confirm that.

Pensions​

Occupational pensions are subject to the Universal Social Charge, but Department of Social Protection pensions or similar pensions from abroad are not. The USC is only payable on lump-sum pension payments on the portion over €500,000.
Click to expand...
This is a really nice bonus if it definitely applies to the contributory pension and not jus the means tested one. Is that correct?
I wish it specifically mentioned the word contributory!!!
(Incidentally it seems to imply that people with UK state pensions will be exempt from USC also)

Can someone please tell me how you work out USC when you have both an exempt and a non exempt pension?
Say you have state pension of 11K and a private pension of 14K
For the purposes of USC is that the person's total income is 14K and they are therefore liable on USC
of 0.5% on €12012 plus 2% on (€14000-€12012), ie €99.82 in total or some other way?
 
S class said:
When you take 2.5k tax free you can also immediately take the 7.5k at your marginal tax rate. If you wait until you are over 66 and receiving your contributory pension you won't pay prsi on the 7.5 k
Click to expand...
Thanks S class I didn't know you could do that.
You take the €10,000 in income at age 65: net €4,800

Or

You put it in a prsa for a year until age 66
you get back €2,500 plus €7,500 * 52/100 (assumes 40% tax and 8% USC for simplicity)
€2,500 + €3,900 = €6,400.
€6,400 is €1600 more than €4,800 but didn't you also have to pay 12% in PRSI and USC up front, on top of the €10,000 you put in?
So the net gain is €400 which is not bad but not earth shattering either or am I understanding this all wrong?

(I know this is again an unlikely scenario)
 
What's not clear about this?
Occupational pensions are subject to the Universal Social Charge, but Department of Social Protection pensions or similar pensions from abroad are not.
Click to expand...
 
To me "Department of Social Protection pensions", without further qualification, implicitly means any/all such pensions - e.g. non-contributory, contributory, invalidity pension etc.
jimmij said:
Perhaps you suffer from the curse of knowledge?
Click to expand...
No - just using common sense here.
 
ClubMan said:
To me "Department of Social Protection pensions", without further qualification, implicitly means any/all such pensions - e.g. non-contributory, contributory, invalidity pension etc.

No - just using common sense here.
Click to expand...
My wife is Irish, she has hundreds more contributions that I do but on account of having worked here in the eighties before emigrating she will end up with a smaller pension than I will.
Please don't tell me that common sense applies.
 
Last edited:
jimmij said:
My wife is Irish, she has hundreds more contributions that I do but on account of having worked here in the eighties before emigrating she will end up with a smaller pension than I will.
Please don't tell me that common sense applies.
Click to expand...
I don't know what you're talking about.
Social welfare benefits and contributory pension depend on PRSI contributions and, in some cases, credits.
The rules are set out on the relevant sites.
I don't know what this has to do with what was being discussed above though.

The phrase "Department of Social Protection pensions" obviously refers to any/all such pensions - e.g. non-contributory, contributory, invalidity pension etc. There's no ambiguity there as far as I can see.
 
S class said:
The 1200 euro Prsi + USC has already been paid regardless of what you do with your 10000 euro.
So you should not count this when you are calculating your potential gain by starting a PRSA.
Click to expand...
Thanks S Class.
If I understand you right then when you say you're putting €10,000 into a PRSA, is what ACTUALLY goes in is €10,000 less the PRSI and USC?
Sorry for being a bit dull about it.
 
jimmij said:
Thanks S Class.
If I understand you right then when you say you're putting €10,000 into a PRSA, is what ACTUALLY goes in is €10,000 less the PRSI and USC?
Sorry for being a bit dull about it.
Click to expand...
Basically if you have 10000 euro in your pocket. You have already paid usc and prsi before you got this from your earnings.
If you put this into a PRSA you get a tax refund of 4000 euro.
If you bought a car with it you get no tax refund.
Either way you have paid usc and prsi, so there is no way to avoid these.
 
You must log in or register to reply here.
Menu
Log in
Register