General Pension questions concerning the advantages of a pension

[homeowner]

This is my first time posting here so if these questions have already been answered I appologise!

I am confused as to the advantages of a pension. I find the jargon confusing (what does "marginal rate of tax" mean). Can someone explain in plain english, as to what is involved in a pension and how it is beneficial to me by answering the questions below.

I am over 30, self employed in a limited company and say for arguments sake I earn 50K per year.

If I decide to start a pension and put 10K into it :
1. I am charged 5% (or thereabouts) upfront?
2. In addition I am charged 1% (or thereabouts) of the amount of money in the pension each year as a management fee whether or not the pension fund actually increased that year?
3. I get a tax rebate at 42% on the total amount of money I put into the pension each year?
4. When I retire I can take a lump sum of 25% without paying tax on it?
5. After the lump sum I pay tax on any money I take out of the fund after I retire like any other normal person (ie 20% or 42% or whatever the rate will be when I retire)?
6. Does it make a difference if I put the money in from my own bank account or if my own company puts it in for me?
7. If my company puts in a contribution for me in addition to me putting some money in is it all treated the same as if i put it all in myself? ie do I get the same tax rebate? or are there tax advantages.

Sorry for all the qestions but it is very difficult to get a straight answer from the banks without all the confusing jargon.

 

[ClubMan]

Re: General Pension questions

(what does "marginal rate of tax" mean

The normal rate of income tax which you pay - 0%, 20% or 42%.

Can someone explain in plain english, as to what is involved in a pension and how it is beneficial to me by answering the questions below.

Have you read what the guide has to say about pensions?

1. I am charged 5% (or thereabouts) upfront?
2. In addition I am charged 1% (or thereabouts) of the amount of money in the pension each year as a management fee whether or not the pension fund actually increased that year?

5% on each contribution and 1% of the full value of the fund annual management charge are the maximum charges that can apply to a Standard PRSA for example. On any pension product there will generally be a percentage annual management charge which is charged regardless of performance. However the better the performance the more the fund manager gets so there is an incentive. If you don't trust the skills of active managers then you could invest in a passive index tracking fund where stock selection is driven by the markets themselves rather than a manager. As with any (financial) product you need to shop around for the most suitable pension product for your specific needs and the most beneficial charging structure.
e specific pension plan.

3. I get a tax rebate at 42% on the total amount of money I put into the pension each year?

Up to certain age related percentage of gross salary limits (see ) you get full tax relief at your marginal rate (0%, 20% or 42%) and full PRSI/health levy relief (4% PRSI + 2% health levy for PRSI Class A).

4. When I retire I can take a lump sum of 25% without paying tax on it?

Yes.

5. After the lump sum I pay tax on any money I take out of the fund after I retire like any other normal person (ie 20% or 42% or whatever the rate will be when I retire)?

If you buy an annuity which pays a regular income until death then that income will be assessable for income tax so you may pay tax on it. You can also roll some or all of your pension over into another investment (an Approved Retirement Fund/Approved Minimum Retirement Fund - ARF/AMRF) if you decide that you don't want to buy an annuity and take an income immediately (e.g. you have other means, can live comfortably on the state pension, decide to continue working beyond normal retirement age etc.).

6. Does it make a difference if I put the money in from my own bank account or if my own company puts it in for me?

Not sure about this. But if, as you seem to suggest, you are self employed then there may be other pension options open to you not open to PAYE workers.

7. If my company puts in a contribution for me in addition to me putting some money in is it all treated the same as if i put it all in myself? ie do I get the same tax rebate? or are there tax advantages.

Again I'm not sure about the specific self emloyed issues but normally when an employer makes contributions on behalf of the employee these are added to the employee's contributions (normal and AVC) when assessing the amount on which tax relief applies.

Sorry for all the qestions but it is very difficult to get a straight answer from the banks without all the confusing jargon.

Don't expect independent, objective advice from a financial institution who has a vested interest in selling only their own products. If in doubt get independent professional financial advice - especially if you are self employed. See the Pensions Board website for lots more info on pensions.

 

[asdfg]

Re: General Pension questions

marginal rate of tax

the rate of tax you pay 20% or 42%

3. I get a tax rebate at 42% on the total amount of money I put into the pension each year?

Plus Allowance for PRSI (Trickey to explain but will explain in more detail if required)

4. When I retire I can take a lump sum of 25% without paying tax on it?

4. My understanding is you can claim 1.5 times your salary as a lump sum

5. After the lump sum I pay tax on any money I take out of the fund after I retire like any other normal person (ie 20% or 42% or whatever the rate will be when I retire)?

5. Don't forget the tax credits. You will probably be earning less so a greater proporation will fall into the lower tax bracket

6. Does it make a difference if I put the money in from my own bank account or if my own company puts it in for me?

6. You can pay a lump sum against last years income prior to 31/10. Monthly/weekly regular contributions are better made through the Payroll as you get the benefits immediately. If you do it from your bank account you have to wait till the end of the year to claim back the refund.

7. If my company puts in a contribution for me in addition to me putting some money in is it all treated the same as if i put it all in myself? ie do I get the same tax rebate? or are there tax advantages.

7. You will only get a tax rebate bases on the contributions you make

Hope this makes sense

 

[asdfg]

Re: General Pension questions

Crossed with reply by Clubman

 

[homeowner]

Re: General Pension questions

Thanks for the detailed reply.

One more question, since I am class S PRSI (5% on all salary), do I still the get PRSI rebate? It doesnt specifically say so on the website. Also do I get a state pension (class S dont get health benefits which seems unfair!).

 

[ClubMan]

Re: General Pension questions

As I said I don't really know the specifics of pension options and tax treatment for self employed. I do know that PRSI Class S does not cover some of the PRSI benefits that other classes (such as Class A) does. I strongly urge you to seek independent, professional advice on the most suitable pension options available to you and your company.