Figuring out best strategy with different types of pensions

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hadrian

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If a person will get a public sector pension (and potentially AVCs related to same in future) and they operate as a sole trader as well so could avail of a PRSA (and in addition they have a small legacy pension from a previous employment etc but that's a minor consideration)...how do they go about figuring out the best pension investment strategy......I'm finding it complicated to calculate and make decisions.

Is there a way to try figure out or estimate what the max rate of contributions across all pension options should be to take maximum advantage of tax relief at the higher rate?

There's not much point contributing so much that you get taxed at the high rate on drawdown when the main point of contributing in the first place was to get tax relief at the high rate....(as thing stand I don't have dependants, now that might change but for simplicity Id like to just do the sums as if I was a single person with no dependants etc - I am aware you could get up to 200k of a lump sum tax free and the next 300k is taxed at 20%?? so there is still potential benefit in accumulating beyond the 200k lump sum etc, its really just a steer or starting point on how to do the calculations if I was to retire at 50, 55, 60, 65 and how multiple pensions interact/detract or can supplement each other etc)

I know I have no way of knowing what the tax rates, rules and regulations will be in 40/30/20 years time but assuming things remained fairly static re: rules what's the max income you could take to be tax efficient or should you do it by total pension pot ....if it is via the total pot.....then how do you value the public sector pension to calculate what you should contribute to other pensions?

In addition I think I could pay into a pension related to the sole trader activity and start drawing from the age of
50 and still continue working so would wonder how to go about calculating the benefit of something like that and how it would interact with the other pension.

I presume for some high net worth individuals they get to point where it makes more sense to retire for tax reasons than keep on working?? Apologies, there are a lot of questions in this but its hard to know where to start.....
 
There is a lot to unpack in your question, and it would be helpful to take each pension step by step, and gather any statements available showing current values or projected pension and lump sum details.
Say- pension A (public service) - statement should indicate lump sum based on scheme salary and tenure
then pension B (previous employment) - if a DC scheme, statement will show current value- 25% available as lump sum

200k is the max tax free lump sum from all pension, provided other conditions are met. Very rough calculation to determine what you need to invest in your PRSA to extract the biggest tax free lump sum would be 200k less lump sum from pension A and B above. Then multiply the answer by 4 to give fund required.

not clear from your post how many years you will be a sole trader before you want to retire at 50, but be aware of terms and conditions of whatever PRSA you set up. Most have an exit penalty if accessed before 5 years, some won’t allow you to access until 60 if self employed Etc
 
Thank you, that helps give me a starting point.....ill do some digging and come back with some numbers

what kind of annual income could you take in total across all pensions to avoid getting taxed at higher rate?
 
Avoiding getting taxed at the higher rate is a red herring.

The main benefit of pensions isn’t the tax relief itself. It’s the free use of the tax relief to invest in a tax-free environment over time.

e.g. I invest €28,750 in my pension this year. €17,250 is funded by me and €11,500 is funded by Michael McGrath. I invest in global equities and I’ve 25 years to go until retirement. Anything can happen in investment markets, but it wouldn’t be wild for the €28,750 to be worth €172,500 after 25 years based on a return of 7% per annum.

Let’s assume that €172,500 tops-up my pensions beyond €800,000 and that I ‘ARF’ and liquidate that part of my ARF immediately (which nobody would do in practice so the position is even better in reality). I get 25% out at 20% tax, so €34,500 net. Assuming a 4.5% USC rate and no PRSI (if 66), I get €71,803 net of tax from my ARF.

So for my initial €17,250, in the above scenario I get €106,303 net of tax.

But “I don’t believe in pensions” / “It’s not worth contributing to a pension if you’re going to be taxed at the higher rate in retirement”…
 
hadrian said:
If a person will get a public sector pension (and potentially AVCs related to same in future) and they operate as a sole trader as well so could avail of a PRSA (and in addition they have a small legacy pension from a previous employment etc but that's a minor consideration)...how do they go about figuring out the best pension investment strategy......I'm finding it complicated to calculate and make decisions.

Is there a way to try figure out or estimate what the max rate of contributions across all pension options should be to take maximum advantage of tax relief at the higher rate?
Click to expand...
As a member of a pension scheme, you must max out your pension contributions to the public service scheme through making AVC's. After you have done that, you can make contributions in relation to the sole trader income.

If your public service income is over €115,000, you have reached the tax relievable cap and therefore cannot claim tax relief on any income made into the sole trader pension. The typical example here is hospital consultants who have public and private income. They must make AVCs to max out of their hospital income first. As their hospital salary is over €115,000, they cannot make contributions in relation to their private practice income. If their hospital income was say, €100,000, they could make contributions in relation to €15,000 of their private income.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Useful clarification, Steven. Am I correct in thinking, however, that if the sole trader can incorporate the business, the company may make pension contributions that are not limited by either the age-related percentage or the €115k?
 
Right Winger said:
Useful clarification, Steven. Am I correct in thinking, however, that if the sole trader can incorporate the business, the company may make pension contributions that are not limited by either the age-related percentage or the €115k?
Click to expand...
Yes, if the sole trader can incorporate, the contributions can be made as employer contributions and the public service pension does not have to be maxed out with AVCs
 
Thank you Steven, very useful and Gordon, thank you I take your point.

By way of explanation, I put off contributing to a private pension in order to purchase a house. I wanted to try have as much of a deposit as possible and minimise the mortgage. It shouldn't be the case perhaps but fear of unsustainable mortgage payments drove that decision but I suppose I get paid back with a certain amount of peace of mind now as opposed to a healthy private pension.

What is the best way to do the sums for retiring early regarding the max you could build up, age related percentage up to a maximum of 115k across all combined?

And if you haven't been maxing out AVCs up to this point do you have to make up for lost contributions or just max out going forward?
 
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