With CGT and fund exit tax being so high now, I wondered if there is any merit in investing in a pension even when you are not entitled to tax relief on the contributions.
Say you have €10k to invest but you cannot get tax relief on it if you put it into a pension (eg no taxable income, exceeded the limit already etc)
Let’s assume 16 years to retirement age (because if simplifies my calculations)
If you put the €10k into your pension and it grows at (say 9% less charges of 1% = 8%) it will be worth €31,808. If we assume that you get 25% as part of your tax free lump sum on retirement and you pay say 26% income tax/PRSI/USC of the rest, you net €27,579.
By comparison, if you put the same €10k into an capitalising ETF and it grows at (say 9% less charges of 0.5% = 8.5%) it will be worth €25,255 net after all exit taxes (incl the deemed disposal) at the end of the 16 year term.
That’s quite a big difference and it would be more pronounced over a longer term.
Of course, we do not know what the future holds for exit tax rates and for pension levies and the like. And the major disadvantage is that in a pension, you are tied in for the long term.
But it’s still interesting…Has the high CGT and exit tax rates made pension contributions above the tax relief limits viable?
Say you have €10k to invest but you cannot get tax relief on it if you put it into a pension (eg no taxable income, exceeded the limit already etc)
Let’s assume 16 years to retirement age (because if simplifies my calculations)
If you put the €10k into your pension and it grows at (say 9% less charges of 1% = 8%) it will be worth €31,808. If we assume that you get 25% as part of your tax free lump sum on retirement and you pay say 26% income tax/PRSI/USC of the rest, you net €27,579.
By comparison, if you put the same €10k into an capitalising ETF and it grows at (say 9% less charges of 0.5% = 8.5%) it will be worth €25,255 net after all exit taxes (incl the deemed disposal) at the end of the 16 year term.
That’s quite a big difference and it would be more pronounced over a longer term.
Of course, we do not know what the future holds for exit tax rates and for pension levies and the like. And the major disadvantage is that in a pension, you are tied in for the long term.
But it’s still interesting…Has the high CGT and exit tax rates made pension contributions above the tax relief limits viable?
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