Anything stopping me paying above limit

As the title suggests, is there anything stopping me paying a lump sum or monthly into my PRSA. I max out my limit with my employer but due to the tax free growth allowed within a pension I am considering putting some money into a seperate PRSA to avoid the 41% exit tax, cgt and dividend tax due on other types of investments. I have some seperate investment funds (etf’s) and company shares so I am not worried about all of my money being ‘tied up in a pension’. But I just want to make sure that I am not missing anything obvious here. TIA for any advise/thoughts

You can contribute more than your age related tax relief limit but you just won't get tax relief on the excess.
But it may not make sense long term to put money into a pension that has been taxed at up to 52% only to draw it down at retirement and possibly pay tax again on it. Even allowing for the tax free lump sum and tax free growth in the meantime.

wanttoretire said:

I am considering putting some money into a seperate PRSA to avoid the 41% exit tax, cgt and dividend tax due on other types of investments.

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If you invest €100 of your own money in shares directly, you will pay CGT and Income Tax on any gains or dividends.

If you put the €100 into a pension fund, while the fund will accumulate tax-free, you will pay Income Tax on the €100 and the Capital Gains and the Dividends when you draw down the pension.

Furthermore, given that pension reliefs could well change by the time you retire, it's just not a good idea.

Brendan Burgess said:

If you put the €100 into a pension fund, while the fund will accumulate tax-free, you will pay Income Tax on the €100 and the Capital Gains and the Dividends when you draw down the pension.

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It took me a second read to get what you meant but initially I read it as you would pay CGT and Dividends separate to the Income tax.
But of course you meant you would pay Income tax on the €100 and on any additional growth.

What's your estimated pension fund at normal retirement age?

Thank you for the replies.
If I continue to contribute as today, and with a conservative 5% return, my estimated pension fund currently is 2.7m. But to be honest, I plan to retire much earlier than 'normal' retirement age and have been thinking of ways to boost my retirement funds. I understand I will pay income tax on any drawdown, but I am still of the thought that this would still outweigh the tax that would be paid on any personal investments. Unless, of course, the 41% exit tax is abolished today!!! or perhaps the deemed disposal is removed and rate of tax is reduced!

wanttoretire said:

I understand I will pay income tax on any drawdown, but I am still of the thought that this would still outweigh the tax that would be paid on any personal investments.

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You might think that but can you illustrate it with worked figures?

Some workings done by someone else on a Reddit forum I came across this morning. Highlights the stark reality of deemed disposal!

wanttoretire said:

Some workings done by someone else on a Reddit forum I came across this morning. Highlights the stark reality of deemed disposal!

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I think there are a few problems with that comparison.

1. It compares the after tax value of the ETF with the before tax value of the pension.
2. It overestimates the rate of return and uses quite a long time horizon. If it was to use a more realistic return of say 7%, it would take 45-46 years to reach the levels of returns quoted, and this is just an unrealistic time horizon for most people.
3. There is no account of the lower fees associated with an EFTs as opposed to a typical pension product.

Just to demonstrate the point, let's take look at the other end of the scale in terms of timeline.

Say you invest €1000 in an ETF for 8 years at 7%. The value at the end is €1718 less tax at 41% (€294) is €1424.

Say you invest €1000 in your pension without any tax relief. The value after 8 years at 7% is €1718. You take the first 25% tax free and pay say 50% marginal rate income tax on the rest so you pay €644 tax so the result is €1074.

This is heavily simplified with lots of assumptions. And 8 years is too short a timeline. Even so, I think it is safe to say that the only time that paying into a pension without tax relief is better than other options is if you have a very long investment horizon (e.g. maybe in your 20's or 30's but even then you are probably better using your money getting on the property ladder) and/or if you expect to pay lower rate tax in retirement (and even in this case, it is a marginal call).

With your expected pension fund and your plans for early retirement, you don't meet either of these 2 conditions.

There was an interesting aside in Davys note on the sft report, I’ve not seen it reported elsewhere though or whether it’s being adopted.

In addition to the changes announced above, the report sets out a number of further significant recommendations, including;

• A removal of the annual age and earnings related limits that apply to personal pension contributions on a phased basis.

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Setforlife said:

There was an interesting aside in Davys note on the sft report, I’ve not seen it reported elsewhere though or whether it’s being adopted.

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This kind of makes sense. There is already an overriding constraint and it’s the SFT. So if I’ve had to neglect my pension funding over the years because of other commitments such as having kids or buying a house, why not let me stick a large amount into the fund to ‘catch up’ just like a company owner?

On the details of doing this PRSAs tend to be expensive relative to company schemes (e.g. Davy's is now 1% minimum). Over a longer time that would undo some of the advantage of there being no tax within the scheme.

If you've a employer scheme there's nothing as far as I know to stop you making any AVC you want into that scheme outside of the usual pay deducted payments - you just tranfer the cash to the pension company. (The PRSA may be a complication you don't need)

Seemingly some people with a lump sum above their limit tax relief limit will put it in into a pension and the tax relief can be carried forward over subsequent years. It gives you a limited way out if eventually having the money tied up becomes a problem or you regret the move. You could stop or reduce contributing for a few years - and still be getting the related tax relief paid back to you.