25yr old-How much should I contribute to pension

[TrueBlue1150]

I had always thought that paying into a pension was a good way to reduce a tax bill. I own a rental property and if I have a net profit of approx €6,000 and I have to pay tax at 41% plus PRSI, USC, etc. surely it makes sense to pay €6,000 into a pension fund and not have to pay the tax? I agree with TheFatMan and if the tax relief is reduced, it might make more sense to spend the money on a holiday instead of paying into a pension fund. The only problem with this is that after paying the tax, there isn't much left for a family holiday!

As rental income has reduced considerably and taxes are going up, surely it makes sense to continue paying any spare cash into a pension fund especially if you are not on track for being taxed at the higher rate in retirement???

I like Baracuda's idea of tracking an index. Do you know if Zurich have any such PRSA funds?

 

[Jim2007]

Hi Ashling,

I am 28 and have been paying into my pension since i moved back to Ireland last year. My employer currently pays 8% of my monthly salary into my pension pot(this includes any bonuses i may earn, my car allowance etc.) and i top up an additional 7% to utilise the 15% i can currently put into a pension given our age.

I am relatively new to pensions, and to be honest i still don't understand it fully. However, i currently see it that for every €1 i put in it only costs me around €0.58 due to tax relief. This is a great deal, i feel. I am a bit peeved if tax relief cuts back, but unltimately we are still getting money into the plan that is costing us nothing.

We aren't going to be retiring for a while, and things will change so much in that period of time that i wouldn't worry about it too much. Perhaps in future when more of our salary is being contributed then we could look into reducing contributins depending on the situation at that time, but i think we should be holding steady.....

With the exception of Flossie's comments, I have to say I find the logic behind many of the comments as a bit strange!

Saving for retirement is a very long term goal and over such a long period you have to expect that there will be up and downs in the market, changes in the tax law, government levies and what not. None of these things should distract you from the objective - accumulate as much cash as you can for retirement.

When it comes to taxation, you should not see a pension contribution as a means of reducing your tax bill, but as extra or free cash to be added to the fund. Every year I put the amount I have saved on taxes as a result of my pension contributions into a retirement savings account, because this puts me up 20% on day one (our tax relief is not so high).

Along similar lines, I don't see a down turn in the markets as a reason to stop or reduce my contributions, it just means that at the moment my contributions allows me to buy more stocks/bonds/funds or what ever than I could a few years ago. The only word of caution here is to ensure that you have a well balanced portfolio.

As for government levies, it happens all over Europe, so why should Ireland be any different? And in any case the amount involved is peanuts when compared to the amount you have already saved in taxes. It certainly is no reason to stop contributing to your pension fund.

And when it comes to taxation on retirement, I've no idea what the tax rules will be then, but I know that I'd prefer to have the problem than not to have the pension, thank you very much!

Regards,

Jim2007

 

[serotoninsid]

As for government levies, it happens all over Europe, so why should Ireland be any different?

Wasn't aware of this. What other euro countries have levied pensions? I *think* that they tried this in Latvia but had to reverse it as it was deemed to be unconstitutional..

 

[DerKaiser]

Every year I put the amount I have saved on taxes as a result of my pension contributions into a retirement savings account, because this puts me up 20% on day one (our tax relief is not so high).

Being honest, I wouldn't be at all confident that pensions savings is the right thing when you only get 20% tax relief (as a general rule as opposed to for specific cases).

If you're getting 41% tax relief and your contributions are relatively modest the tax relief is a very good bonus even if you end up paying some tax on your retirement income.

If you're only getting 20% relief then the levy (if extended beyond the 4 years) would erode a large chunk of this, and you could easily end up paying tax on your retirement proceeds.

At 20% relief you'd want to be nearish retirement, be absolutely sure you wouldn't need access to your money before retirement and be confident that your retirement proceeds are modest enough not to pay income tax in retirement.

 

[Jim2007]

Wasn't aware of this. What other euro countries have levied pensions? I *think* that they tried this in Latvia but had to reverse it as it was deemed to be unconstitutional..

Government charges come in many kinds, but the most often is "one of" taxes on the results of the pension fund, except that it is become more frequent. I know that the same has been done in Denmark, Sweden and Italy.

Then there was a while that employer contributions were being taxes as benefits in kind.

This kind of thing must be expected, but like I said, don't let it distract you from the goal.

Jim.

 

[Jim2007]

Being honest, I wouldn't be at all confident that pensions savings is the right thing when you only get 20% tax relief (as a general rule as opposed to for specific cases).

If you're getting 41% tax relief and your contributions are relatively modest the tax relief is a very good bonus even if you end up paying some tax on your retirement income.

If you're only getting 20% relief then the levy (if extended beyond the 4 years) would erode a large chunk of this, and you could easily end up paying tax on your retirement proceeds.

At 20% relief you'd want to be nearish retirement, be absolutely sure you wouldn't need access to your money before retirement and be confident that your retirement proceeds are modest enough not to pay income tax in retirement.

Remember the objective.... collect as much cash as possible, if I pass on the 20% and get taxed on the savings income (which I don't in the pension fund), what to I do then, invest in higher risk asset classes to try and regain what I passed on???

This is my reality!!! It is what I have been doing for the last 25 years and what I will continue to do for the remaining 7 years - I plan to retire at 55.... now allowing for all the ups and downs over those years and factoring in a further hit of say 30%, my pension should still amount to about 83% of my current salary pa not including my state pension. If I don't have to take the hit, then my pension could actually end being higher than the salary. And I doubt anyone following your logic will be able to say the same.

Honestly the idea that people should get tax relief at 41% and then go on to pay no taxes on retirement, is crazy, no country could go on with the regime in the long term as people are beginning to learn. I think there is a very big danger that people who see pensions as a tax saving device will do themselves a disservice and fail to adequately provide for themselves in retirement.

Jim (Switzerland)

 

[joeysoap]

Those not in the position of having gilt edged DB pensions need to have some incentive to pay into pension plans?
I agree absolutely that we need to plan for retirement, but the fact is that if relief at the upper level is rescinded then it will result in a mass exit of contributions with people seeking alternative methods of funding their retirements.

Along with the 'temporary' levy, reducing the tax relief is a massive disincentive for those who are being responsible and trying to save for their future years.

Shouldnt the government make saving for retirement as attractive as possible so as to reduce the strain on the state in future years (we have a low level of over 65s at the moment (relative to other EU countries), but the cost of care will be increasing steadily as that proportion increases.

Remember the pension fund (apart from lump sum) will be taxed on exit, so offering tax relief at the front end is / was a sound policy to get money flowing into pension funds. Reducing this along with the (in my opinion) ridiculous levy (to fund the very weak jobs initiative), has been very reactionary. The long term effects will be more costly as people will turn to equities (dare I say it, property at some stage in the future) and other means to try and fund their twilight years. Fact is many will just stop contributions and spend on holidays and other discretionaries, which is not a bad thing in the current environment, but the long term risk (from the governments side are high).

I'm afraid I agree with the majority of posters so far in this thread. If the relief at higher level is cut then one needs to look seriously at if contributions are matched and ones stage in life.

Personally paying into a pension fund has lost its lustre (I'm 38 and have matched 4% along with AVC of 10%). I've only being paying in for 6 years, but perhaps its more prudent to use the money now to accelerate my mortgage payments (18 years remaining). Not a done deal, but doing the sums at the moment.

 

[TRS30]

Maybe i am missing something however isn't a pension the only place you can invest gross income? Even if you only get 20% relief, you have a 20% return straight away. Every form of saving will have some sort of tax on exit and who know in 25/30 years what the levels of income, CGT, DIRT tax will be...

 

[DerKaiser]

Maybe i am missing something however isn't a pension the only place you can invest gross income? Even if you only get 20% relief, you have a 20% return straight away.

20% relief is actually an immediate 25% return as you sacrifice 80 of net salary and get 100 into your pension fund.

Trouble is that you don't get it straight away, though, you have to wait until you retire. If a 25 year old is fortunate enough to retire at 60, the benefit represents a 0.6% p.a. uplift to their fund - a benefit that would be wiped out were the current levy to continue beyond the 4 years envisaged at the moment.

This doesn't even go into the very real drawbacks of have no access to that money (in the event of unemployment, mortgage arrears, etc) until you retire.

Every form of saving will have some sort of tax on exit and who know in 25/30 years what the levels of income, CGT, DIRT tax will be...

No one knows, but whatever proceeds you get from your pension are added to your income and taxed accordingly. So long as your retirement income does not breach the tax free allowances you'll have done well from the tax relief on the contribution and in avoiding DIRT on any gains. If, however, you are subject to income tax in retirement you'll pay that tax on both the gains and the capital.

 

[DerKaiser]

Remember the objective.... collect as much cash as possible, if I pass on the 20% and get taxed on the savings income (which I don't in the pension fund), what to I do then, invest in higher risk asset classes to try and regain what I passed on???

I agree that the discipline of saving is an important aspect, and any incentive (no matter how small) is worth taking if you would have otherwise simply invested the money in a similar way outside of the pensions framework.

my pension should still amount to about 83% of my current salary pa not including my state pension.

This would be my concern. If you add that % of your current salary to the state pension, you'll surely be liable to income tax in retirement - just be sure you factor this in.

Honestly the idea that people should get tax relief at 41% and then go on to pay no taxes on retirement, is crazy, no country could go on with the regime in the long term as people are beginning to learn

Again, I think people just don't think about the income tax in retirement implications.

If you provide for a private pension of up to €8k p.a. and have no other income (other than the state pension) you will probably pay no income tax in retirement. So roughly speaking you can put away about €200k over your lifetime pay no tax on that income in retirement. This €200k would be €120k out of your own pocket and an €80k tax subsidy at 41% relief.

Spread out over a lifetime of work this subsidy is no more than €2-3k p.a. and is open to any individual paying the higher rate of tax (which is pretty much everyone above the average wage). In my opinion this is neither excessive nor exclusive to the super rich.

 

[Jim2007]

The objective is very simple collect as much cash as you can for retirement - nothing else!!!

20% relief is actually an immediate 25% return as you sacrifice 80 of net salary and get 100 into your pension fund.

I set out with the intention of saving €100 for my future retirement as a result I pick up a tax credit, which I then add to the €100 I was going to save anyways. This then compounds at about 2% over the 30 years I've been saving. Explain to me how you cover this without taking up the pension option and without taking on higher risk investments?

Trouble is that you don't get it straight away, though, you have to wait until you retire. If a 25 year old is fortunate enough to retire at 60, the benefit represents a 0.6% p.a. uplift to their fund - a benefit that would be wiped out were the current levy to continue beyond the 4 years envisaged at the moment.

Since I'm going to have to save for retirement in any case this does not make any since - If I gain a little from the tax man fine, if not that is fine too, because that was not the objective.

This doesn't even go into the very real drawbacks of have no access to that money (in the event of unemployment, mortgage arrears, etc) until you retire.

Like I already said the objective is retirement, not drawing it down earlier - if fact I find this a very good thing!

No one knows, but whatever proceeds you get from your pension are added to your income and taxed accordingly. So long as your retirement income does not breach the tax free allowances you'll have done well from avoiding DIRT on any gains. If, however, you are subject to income tax in retirement you'll pay that tax on both the gains and the capital.

As I already said, I'd rather have that problem, than not have the savings.

Regards,

Jim2007

 

[DerKaiser]

I see your point.

My point is that you can invest in the same way in the same funds through a savings product (e.g. a PIP) rather than a pension. From a tax perspective there are situations where the savings route might also be more advantageous (or less disadvantageous at least!).

Finally, having access to that fund in case of emergencies or a deterioration in circumstances could be seen as an advantage (though others might prefer not to have that choice in order to discipline themselves).

 

[TRS30]

20% relief is actually an immediate 25% return as you sacrifice 80 of net salary and get 100 into your pension fund.

Trouble is that you don't get it straight away, though, you have to wait until you retire. If a 25 year old is fortunate enough to retire at 60, the benefit represents a 0.6% p.a. uplift to their fund - a benefit that would be wiped out were the current levy to continue beyond the 4 years envisaged at the moment.

This doesn't even go into the very real drawbacks of have no access to that money (in the event of unemployment, mortgage arrears, etc) until you retire.

Excuse my ignorance however its 25% (assuming no change) every year not spread over 35 years.

Pensions should not be used in isolation as a retirement plan; other vehicles such as cash, property, direct share investment etc should form a retirement plan.

 

[DerKaiser]

Excuse my ignorance however its 25% (assuming no change) every year not spread over 35 years.

Yeah, you can contribute each year and get relief on each year's contribution.

I was making the point that the benefit of the relief to a 25 year old (on the standard rate of tax) who intends retiring at 60 on the first year's contribution is the equivalent of an additional investment return of 0.6% p.a on that money over the 35 years.

If he puts in money at 40 the benefit would be 1.1% p.a. over the 20 years to retirement.

My point is that the younger you are, the less obvious it is you'll benefit over the long term, particularly as a result of the pensions levy and the fact that the annual charges will be higher for pensions than regular savings (driven by additional disclosure and regulatory requirements)

Pensions should not be used in isolation as a retirement plan; other vehicles such as cash, property, direct share investment etc should form a retirement plan.

You can do all the above through a pension.

 

[TRS30]

Yeah, you can contribute each year and get relief on each year's contribution.

I was making the point that the benefit of the relief to a 25 year old (on the standard rate of tax) who intends retiring at 60 on the first year's contribution is the equivalent of an additional investment return of 0.6% p.a on that money over the 35 years.

If he puts in money at 40 the benefit would be 1.1% p.a. over the 20 years to retirement.

My point is that the younger you are, the less obvious it is you'll benefit over the long term, particularly as a result of the pensions levy and the fact that the annual charges will be higher for pensions than regular savings (driven by additional disclosure and regulatory requirements)



You can do all the above through a pension.

The 25 year old also gets 35 years of potential growth on the extra 25%.

Yes, however as outlined previously this given limited access to the assets and usually would involve a complex SIPP; which usually comes with higher costs.