22 year old starting pension

[Brendan Burgess]

At the end Maura has paid in only 6% more than Mike, but she has a fund that is 12% bigger.

This is the wrong way to look at it.

Mike may well have managed to buy a house 10 years earlier than Maura and may be far richer as a result.

Most people selling pensions compare contributing to a pension from the age of 22 with burning the money. Of course, you would be better contributing to a pension than burning the money.

But you would be better off saving it outside a pension fund .

Or, as Sarenco says, you might be better off enjoying it.

Brendan

 

[NoRegretsCoyote]

Mike may well have managed to buy a house 10 years earlier than Maura and may be far richer as a result.

€50 a month in saving isn't going to advance the point at which you can buy a house by ten years! Maybe by a few months even.

Then you are making the heroic assumption that property returns more than equities over the long run. Where is the evidence for that?




I am a happy owner occupier. There are plenty of good reason to buy a house that you intend to live in. Mainly because there's little risk of eviction and the returns are tax free. But it is highly unlikely that your house will return more than equities over half a lifetime.

 

[Steven Barrett]

You're forgetting a key factor - time. How early you start makes a difference!




Only to a point. Assume a 3% real return:

1. Mike puts in €500 month from age 40 to 68.
2. Maura puts in €50 a month from 22 to 39, then €500 a month from 40 to 68.

At the end Maura has paid in only 6% more than Mike, but she has a fund that is 12% bigger.

Of course she does. But that's not the point I am making.

If you are on a low income and it is likely to stay low, a pension isn't much good to you. The tax relief is 20% if you get that at all and no access to the money until age 60. Better off saving the money. The State pension will make up a higher percentage of income than for a higher earner so you can probably live off that. Of course, the extension of the pension age to 68 makes it more complicated.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[NoRegretsCoyote]

If you are on a low income and it is likely to stay low, a pension isn't much good to you

I've never met anyone who wanted less money........

 

[Brendan Burgess]

€50 a month in saving isn't going to advance the point at which you can buy a house by ten years! Maybe by a few months even.

Hi NRC

If she has no savings, she will not be able to buy a house.

She is not trying to accumulate the price of the house, just the deposit.

The sooner she starts, the sooner she will have the deposit together.

Of course, if my proposal that FTBs can borrower the deposit from their pension fund, then it might be right to put the money in a pension, but only if she is getting tax relief at the top rate.

Brendan

 

[Sunny]

Of course she does. But that's not the point I am making.

If you are on a low income and it is likely to stay low, a pension isn't much good to you. The tax relief is 20% if you get that at all and no access to the money until age 60. Better off saving the money. The State pension will make up a higher percentage of income than for a higher earner so you can probably live off that. Of course, the extension of the pension age to 68 makes it more complicated.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

So what are we basically saying here about low earners who can only contribute 50-100 euro a month to a pension? Don't bother? Because you only get 20% relief if even that and you pension pot will be tiny? Meanwhile high earners are told to fill their boots to get the maximum allowed relief. You have just made the Government's argument for pension reform right there.

 

[Brendan Burgess]

Hi Sunny

At 22 on basic tax, she should not be contributing to a pension.

She should be saving it outside a pension scheme.

Then, when her earnings increase and she is on the top rate of tax, she can start contributing to a pension. She can even dump her savings into a pension if she wants.

That is a separate argument from what government policy should be.

That is a separate argument from whether she should contribute to a pension fund or save up to buy a house.

Brendan

 

[Steven Barrett]

So what are we basically saying here about low earners who can only contribute 50-100 euro a month to a pension? Don't bother? Because you only get 20% relief if even that and you pension pot will be tiny? Meanwhile high earners are told to fill their boots to get the maximum allowed relief. You have just made the Government's argument for pension reform right there.

It's not a black or white issue. The benefits to saving €50 a month into a pension are a lot less beneficial than to someone who can save more.

Everyone should save as it is a good habit to have and living below your income is always good practice. But you should start by building up your emergency fund first. If you are on a low income, it is not as easily to absorb the costs of an unexpected bill or you may need to access the money at some stage in the 40 years of savings.

Savings can also be used at any time to supplement income in later life. Under current legislation, after the tax free lump sum is deducted, the first €63,500 is put in am AMRF with only access to 4% until she receives the OAP or reaches age 75. This is a huge disincentive to people with small pension pots who should be able to draw down the value of their pot in a tax efficient manner over a number of years.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)