Can You Have Too Much Pension?

D

DeepThinker

Registered User
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Hi all and a happy new year.​

Looking for peoples’ insights into the scenario below:

I’m 55 and my partner is 58. Intention is to finish full time working at 60 for me (partner 63)
My combined pension funds are currently valued at €725,000.
Partner’s are €225,000.
I am making 20% pension contributions and partner 40%. I could afford to pay more (and I know the tax relief limits will permit me to) but we are trying to beef up my partner’s as I am likely to hit the €800k threshold soon and want to max the tax-free lump sum there too as best we can.
Mortgage-free and youngest will be finished College in four years.
No other loans.
€7,000 net income monthly.

We’ve €81k in savings outside a pension wrapper.
  • €28k cash as emergency fund
  • €25k in a Zurich Matrix bond
  • €18k in a diverse basket of 11 shares which I manage myself via DEGIRO and add €100 to it monthly
  • €10k in ETFs. I buy twice a year. €2,500 a time in Vanguard type accumulating funds. Fully understand the deemed disposal complexeties.
We are lucky and comfortable. Not living a particularly flathiúlach lifestyle. Saving circa €1.5k per month. Some into our emergency fund and some into ETFs as described above.

All going well my partner will have 40 years of prsi payments by then. I will have around 32 so might need to keep my hand in “work” to keep that up. Or, alternatively make voluntary prsi contributions to max my State Pension.

Ambition is to get off the 9-5/ Mon-Fri treadmill in 2027. Do a wee bit of consultancy myself to top up a drawdown of €40k from our savings for three years. I’m hoping the investments plus additional savings will be circa €120k by then. We can then start drawing my partner’s pensions and State entitlements when hitting 65/66 and then phase mine in as I hit that age.

With this in mind, are we mad saving €1.5k a month and not putting it into our pensions to avail of the tax relief and tax free growth ? My thinking is to diversify a little and also to have cash/reasonably liquid shares and ETFs outside of pensions in case we need it.

Anyone seeing any flaws with this plan?
Can you have too much pension?

DT
 
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DeepThinker said:
Can you have too much pension?
Click to expand...
Might be worth reviewing these threads:

Key Post - My pension pot has reached €800k - should I stop contributing ?

I am starting a new role in a company that does not have a pension scheme. They will offer a PRSA as they are legally obliged to do but they is no offer of contribution. I am aged 51 and I have other pensions that mean that all my future income will be at the higher rate of tax. Am I correct in...
www.askaboutmoney.com

Key Post - Should you contribute to a pension fund if you are in danger of breaching the €2m limit?

What is the Standard Fund Threshold? In summary, it's the €2m cap placed on the public or private sector pension benefits that an individual can accumulate in Ireland over his or her lifetime. If the individual breaches the SFT, at the point the offending pension benefits are retired, he or she...
www.askaboutmoney.com
 
I think you should be maximising your tax-relieved pension contributions.

This thread contains a useful explanation why it makes sense to continue contributing to a pension once it reaches €800k -

https://www.askaboutmoney.com/threads/my-pension-pot-has-reached-€800k-should-i-stop-contributing.211550/?amp=1

How is your pension invested? It doesn’t make sense to hold cash in your pension (which attracts charges) while simultaneously investing your after-tax savings in equity funds.

You are creating a real tax headache by investing in ETFs in that manner.

My suggestion would be to maintain a high allocation to equities in your pension fund and keep your after-tax savings in cash.
 
The thing that jumps out at me is that an €800k pension pot isn’t a huge amount.

It’s a €200k tax free lump sum and €24k a year from an ARF.

37 grand a year (i.e. ARF plus State Pension) isn’t exactly living the high life…especially coming from a world where you’re used to earning €84,000 a year net of tax (7 grand a month).
 
Thanks NoRegretsCoyote. I should have been clearer. We are a married couple. But your comment re: succession reminds me that we need to make a will.

DT
 
Thanks Gordon. It is a bit depressing to think €800k isn’t a whole lot of pension !! With my partner’s pension, 5 more years of contributions plus investment growth I was hoping that we might get to a combined €1.2m. We would pay into those until I get to 60 (and partner 63) and try to live off the savings we’ve built up (allowing them to continue to hopefully grow) before beginning to draw them at maturity.

I guess the nub is to ask is that a wise strategy?

DT
 
Sarenco said:
I think you should be maximising your tax-relieved pension contributions.

This thread contains a useful explanation why it makes sense to continue contributing to a pension once it reaches €800k -

https://www.askaboutmoney.com/threads/my-pension-pot-has-reached-€800k-should-i-stop-contributing.211550/?amp=1

How is your pension invested? It doesn’t make sense to hold cash in your pension (which attracts charges) while simultaneously investing your after-tax savings in equity funds.

You are creating a real tax headache by investing in ETFs in that manner.

My suggestion would be to maintain a high allocation to equities in your pension fund and keep your after-tax savings in cash.
Click to expand...
Thanks Sarenco. I will look at those threads again.

My main pension has a “life-styling” arrangement where it begins to de-risk into safer assets in the 10 years leading to retirement. My other one does not though.

DT
 
Thanks for your time too Mr Earl. I appreciate it. There does seem to be a consensus building that maxing our pensions is the route to go. While I understand that mathematically it makes sense to; can I just explain why I thought this was the right thing to do.

The idea is/was to basically build up a cash/ETF/shares/Zurich bond reserve of around €120k whilst still making decent contributions to pensions, albeit not maximizing in my case. In 5 years time to then draw €40k per annum from those savings to live on for three years, but critically, to leave our pensions alone in this period to continue growing. We would then draw them when we 65. It we scale back our savings and divert that money into pensions it means we may "only" have say €90k to live on for those 3 years as the pension monies are locked away. The only other option would be to start drawing down from some of our pensions a bit earlier and I am not sure that is the right thing to do?

That was the logic I was using. While mathematically I totally get it that the numbers will be higher in a pension this is also about generating income for the 3 year period in case.

Again I'd welcome feedback on this idea....

DT
 
A few things to consider if you haven't already (I'm not a financial advisor):
- Tax free lump sum is 200k, but you may be able to draw more taxed at 20%.
- If I understand correctly, for a few years you are drawing no income and living off of savings. Have you considered using your tax free allowances & standard rate tax band by drawing an income from your pension?
- I'd also try and keep equities within the pension wrapper to maximise the tax benefits, and keep the lower risk/lower return stuff in the tax free savings, however I'd also look to use the CGT allowance (every bit helps).
- Your net income is 7k, and your savings are 1.5k - is that correct? Do you have a path to get spending down to that 40k level?
 
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Hi,

I'm amazed that people are not focusing in more on the impact of inflation, on their future pension incomes.

It's an important factor to consider, not least during periods of high inflation, where the future purchasing power of your pension is being eroded.

Despite growth within a pension vehicle, you'll struggle to convince me that most funds achieve a net return, over the long term, that surpasses the impact of true inflation.

If we look at Gordon's post above, and his comment about the €37kpa - not only is he right, but that's based on today's cost of living, not alone what it might be, in 5-10-20 years time! Does anyone honestly think that the State will increase their future pension payments, to compensate for the true cost of inflation ?

If anything, I think the pension industry should be lobbying the Government hard, to have the various thresholds and allowances increased. The €200k tax free lump sum, for example, is worth a hell of a lot less now, than it was 3-5 years ago.
 
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Kilkenny06 said:
A few things to consider if you haven't already (I'm not a financial advisor):
- Tax free lump sum is 200k, but you may be able to draw more taxed at 20%.
- If I understand correctly, for a few years you are drawing no income and living off of savings. Have you considered using your tax free allowances & standard rate tax band by drawing an income from your pension?
- I'd also try and keep equities within the pension wrapper to maximise the tax benefits, and keep the lower risk/lower return stuff in the tax free savings, however I'd also look to use the CGT allowance (every bit helps).
- Your net income is 7k, and your savings are 1.5k - is that correct? Do you have a path to get spending down to that 40k level?
Click to expand...
Thanks Kilkenny06

I guess getting the 2 kids “off the payroll” will help a lot. By the time I hit 60 my youngest should be finished college. I know they never are off the payrollreally, but funding school and third level for two is pricey at present.

Can you explain what you mean re using our TFAs and SRTB as opposed to not to? I’m not clear on that. Again my thinking was to use our savings as a bridge to the beginning of retirement and leave our pension funds alone. Until 65. What would the benefit of your suggestion be?

Appreciate your inputs.

DT
 
DeepThinker said:
Can you explain what you mean re using our TFAs and SRTB as opposed to not to? I’m not clear on that. Again my thinking was to use our savings as a bridge to the beginning of retirement and leave our pension funds alone. Until 65. What would the benefit of your suggestion be?
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Pensions are taxed as income, so by (let's say) withdrawing c. 30k-40k p.a. from your pension you would be paying lower rate tax only on that income/withdrawal. It would seem a shame to me not to take advantage of that lower tax rate (and your tax free allowance).

If the plan is to live off of savings for 3 years, then switch to the pension, potentially you end up having to withdraw more from the pension once the savings are depleted which will end up taxed at the higher rate.

If it was me I would withdraw a sum from the pension at the lower rate tax rate (once you've decided to retire), and top it up if required with your savings.

Minimum withdrawal requirements might complicate this however.
 
I guess the issue here is whether invested cash outside a pension wrapper (and subject to tax) is better than availing of the tax advantages of pension BUT “only” getting 25% of what you put in back in cash plus an income from the rest.

I know the maths would say put it into the pension but I can see where the OP is coming from. I don’t know the answer.

g
 
ClubMan said:
The 75% or whatever that goes an ARF will hopefully also continue growing?
Click to expand...
That would be the plan, I was also thinking that instead of having a plan of saving outside of the pension, why not use one of the pension pots to provide that bridging income (or if they're not big enough, to supplement a lower amount in the less tax efficient savings lower).
 
DeepThinker said:

Hi all and a happy new year.​

Looking for peoples’ insights into the scenario below:

I’m 55 and my partner is 58. Intention is to finish full time working at 60 for me (partner 63)
My combined pension funds are currently valued at €725,000.
Partner’s are €225,000.
I am making 20% pension contributions and partner 40%. I could afford to pay more (and I know the tax relief limits will permit me to) but we are trying to beef up my partner’s as I am likely to hit the €800k threshold soon and want to max the tax-free lump sum there too as best we can.
Mortgage-free and youngest will be finished College in four years.
No other loans.
€7,000 net income monthly.

We’ve €81k in savings outside a pension wrapper.
  • €28k cash as emergency fund
  • €25k in a Zurich Matrix bond
  • €18k in a diverse basket of 11 shares which I manage myself via DEGIRO and add €100 to it monthly
  • €10k in ETFs. I buy twice a year. €2,500 a time in Vanguard type accumulating funds. Fully understand the deemed disposal complexeties.
We are lucky and comfortable. Not living a particularly flathiúlach lifestyle. Saving circa €1.5k per month. Some into our emergency fund and some into ETFs as described above.

All going well my partner will have 40 years of prsi payments by then. I will have around 32 so might need to keep my hand in “work” to keep that up. Or, alternatively make voluntary prsi contributions to max my State Pension.

Ambition is to get off the 9-5/ Mon-Fri treadmill in 2027. Do a wee bit of consultancy myself to top up a drawdown of €40k from our savings for three years. I’m hoping the investments plus additional savings will be circa €120k by then. We can then start drawing my partner’s pensions and State entitlements when hitting 65/66 and then phase mine in as I hit that age.

With this in mind, are we mad saving €1.5k a month and not putting it into our pensions to avail of the tax relief and tax free growth ? My thinking is to diversify a little and also to have cash/reasonably liquid shares and ETFs outside of pensions in case we need it.

Anyone seeing any flaws with this plan?
Can you have too much pension?

DT
Click to expand...
Don't forget that you pay tax on all pensions including state pension when you retire
 
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