How big a pension fund do I need to retire on?

MrEarl said:
Your question about what they will do alternatively is more than just, but the fact that so many people are not correctly educated on financial matters (to include retirement planning), and the government is doing no where near enough to change that, means most people won't even think about the answer to your questions and instead, just stick their heads in the sand or plead ignorance.
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Hopefully auto-enrolment, which is due to be introduced in 2022, will force all workers to think about saving for retirement. The experience so far in the UK seems to be largely positive - opt-out rates are running at ~10%.
 
MrEarl said:
Just out of curiosity, I did a quick search online. It looks like the average wage for a full time worker in Ireland was running at circa €46k gross, about 18 months ago (that's not to be confused with the average industrial wage, which would be lower).
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I think the actual wages earned by the majority of workers in ireland is much lower than this only about 30k , the median wage in 2016 was 28500 euros, in other words in 2016 half of the working population earned less than this amount. The "average industrial wage" is also not a proper statistic because alot of workers are not included, i think agency workers and some contractors. I think the "average industrial wage" is used as a benchmark by the public sector in order to use it as the lowest benchmark for their pay . Therefore there is a vested interest in not including workers that are much lower paid in order not to lower this statistic. The cso is a public sector organisation so it is in their interest that this statistic be as high as possible, but not really the truth
 
Hello,

I did a quick search online, read a couple or links and ultimately took my figure on the average wage from an article in the Irish Examiner.

Where are you getting your figures for pay from please ?
 
joe sod said:
I think the actual wages earned by the majority of workers in ireland is much lower than this only about 30k , the median wage in 2016 was 28500 euros, in other words in 2016 half of the working population earned less than this amount. The "average industrial wage" is also not a proper statistic because alot of workers are not included, i think agency workers and some contractors. I think the "average industrial wage" is used as a benchmark by the public sector in order to use it as the lowest benchmark for their pay . Therefore there is a vested interest in not including workers that are much lower paid in order not to lower this statistic. The cso is a public sector organisation so it is in their interest that this statistic be as high as possible, but not really the truth
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That median wage figure was published in the IT without any evidence.

The actual median earnings is close to 40,000.

Average industrial wage is no longer published.
 
Marc said:
The percentage of net relevant earnings only relates to the amount of tax relief allowed in any one year. Any excess over that is carried forward and allowed indefinitely against future income.
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I'd like to understand this better. Could we elaborate with an example?

If the pension contribution is capped at 25% of 115K for someone in their forties, this would mean a contribution of 28,750 to get max tax relief. So what would happen if a pension contribution of 50K were made instead? Do you get tax relief on 28,750 this year and 21,250 next year?

Thanks
Stan
 
stanman said:
I'd like to understand this better. Could we elaborate with an example?

If the pension contribution is capped at 25% of 115K for someone in their forties, this would mean a contribution of 28,750 to get max tax relief. So what would happen if a pension contribution of 50K were made instead? Do you get tax relief on 28,750 this year and 21,250 next year?

Thanks
Stan
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Yes. Any excess contribution can be carried forward for tax relief purposes , and perhaps spread over a couple of years.
 
In theory, one could make a big contribution in the event of a massive market correction.

e.g. markets fall by 40%, and someone takes the opportunity to contribute (say) €200,000.
 
"According to Revenue, an increase of the top rate of tax by 1 per cent will raise €225 million in a full year. But of the 433,600 people who pay the top rate, only 30 per cent earn €100,000 or more. So a lot less than €225 million will be raised by a high earners’ levy. I reckon about €130 million at most. If we are to talk serious money eye-watering increases in taxes for high earners will have to be implemented."

This is an extract from a 2016 irish times article critiquing sinn feins policy of heavily taxing those on incomes greater than 100,000. The key statistic from this is that only 433,600 people paid tax at the high rate in 2016 out of a circa 1.8 million total workforce then. There is probably greater proportion of people paying the higher tax rate now with the improving economy but hardly dramatically different. Therefore in 2016 less than 1 in 4 workers paid the high rate of tax , therefore the vast majority of workers over 3/4 of workforce earned less than 33k then . Therefore I do not believe the statistics by the cso on average wage in ireland because they are obviously excluding much of the workforce. They are obviously using very restrictive definitions of a full time worker and in my opinion the statistic is useless if much of the workforce is not included in the statistic. Therefore the only way to get realistic figure is to use the raw tax data from the revenue , that cannot be manipulated
 
Gordon Gekko said:
In theory, one could make a big contribution in the event of a massive market correction.

e.g. markets fall by 40%, and someone takes the opportunity to contribute (say) €200,000.
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That's true Gordon.

But few would have €200k cash on standby.

There's a discipline to amounting that sort of cash, not alone a confidence required to be ready to put it into a market that looks like it could fall further etc.

I'm all for trying to buy a bargain, but I think the long term drip feed approach is far better suited to most who are investing long term for retirement. They'll get average prices over time, and it keeps the discipline of contributing regularly. If markets drop significantly, then there's always the option to throw an extra few bob in via AVCs and put it into equities at that point.
 
MrEarl said:
That's true Gordon.

But few would have €200k cash on standby.

There's a discipline to amounting that sort of cash, not alone a confidence required to be ready to put it into a market that looks like it could fall further etc.

I'm all for trying to buy a bargain, but I think the long term drip feed approach is far better suited to most who are investing long term for retirement. They'll get average prices over time, and it keeps the discipline of contributing regularly. If markets appear to be down, AVCs can be useful to try and buy equities at discounts.
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Hi Mr Earl,

How are things?

You’re absolutely right. I only know one person who had the means and the cojones to do this; he inherited money and stuck €250k into a PRSA.

Personally, I like making AVCs on a monthly basis as it becomes like a bill in that you forget about it and stop missing the money. Plus there’s the averaging etc.

All the best,

Gordon
 
Conan said:
Yes. Any excess contribution can be carried forward for tax relief purposes , and perhaps spread over a couple of years.
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Over how many years, do you know?
If I never maxed out my contributions, could I use the combined excess from when I first started working to make a bumper contribution one year?
 
Excess contributions can be carried forward - not backwards.

I'm afraid it's a case of use it or lose it.
 
I am approaching retirement and trying to plan what to do with my pension fund. I am currently with Irish Life. People tell me that pensions are very bad at the moment because of interest rates. I've been told that the best option is to take the lump sum and invest the rest in an ARF Retirement Fund. My fear is that I don't want to be worried about big drops in the fund when I retire. Someone else told me that the ARF Retirement Fund could run out of money. How much can I draw from the ARF Retirement Fund each year to be sure that I don't run out of money? Is there anything else I should be asking. Hope this makes sense. Thank you. Let me know if I've left anything out.
 
Hello Bob2018,

What’s the current value of your pension fund?

How much income do you think you need in retirement?

Are you married?

How old are you?

How’s your health?

What other income do you have?
 
Thank you Gordon. I knew I was probably forgetting stuff.
I am 65 and my wife is 60. We are both in good health thankfully. My wife is a light smoker but I'm not sure if that matters for pensions. I will qualify for the state pension next year and that means I will also get a "spouse's pension" also. The last statement I got said that my fund was worth €380000. To be honest, we dont have much else in the way of savings but we do have a house and the mortgage is long paid. In theory, we could sell up but this is our home and we wouldn't like to leave. When the day of reckoning comes, it would be nice to pass this on the daughter. That's the rough plan anyway. It would be great if we could have about €30000 a year from the state and Irish Life. That's after we take the lump sum from Irish Life. I plan to keep working until 66 but it's heavy work so I wouldn't really want to keep going after that. My income will cover living costs between now and retirement but not a whole lot more than that. When I say €30000 a year it would be great if that keeps pace with inflation. Im old enough to remember inflation.
 
Bob2018 said:
It would be great if we could have about €30000 a year from the state and Irish Life. That's after we take the lump sum from Irish Life.
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That looks like a reasonable plan.

The State pension should give you and your wife just over €20 per annum (assuming you have made enough PRSI contributions) so you need to generate an additional €10k or so.

Assuming your pension pot is still worth €380k on retirement, you can take a tax free lump sum of €95k, which leaves you with €285k to either buy an annuity or an ARF/AMRF.

A joint life annuity bought for €285k, even at today's low rates, should give you a guaranteed income for life of around €10k per annum, with 50% of that amount payable to your wife should you pre-decease her (with a small annual uplift).

The alternative is to buy an ARF/AMRF and gradually draw it down over time (4% of the fund per annum until the year you hit 71, 5% per annum thereafter). At that rate of draw-down it is unlikely - but not impossible - that you would exhaust your savings during your lifetime. The advantage of this option is that anything left over will form part of your estate (so you can leave it to your wife, your daughter, your favourite charity, etc).

From what you have told us, I suspect the guaranteed lifetime income provided by a joint life annuity might be the better option in your circumstances. But ultimately the choice is yours.

Incidentally, it would be worth checking what Irish Life fund you are invested in. You don't want your fund to take a big tumble in value just before you retire so at this stage you should be invested in something fairly conservative (primarily bonds and cash - not too much in equities or property).

Finally, you don't have buy an annuity from Irish Life (if you decide that is the better option) - shop around!

Hope that helps and that you enjoy a long and happy retirement.
 
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Thank you very much Sarenco
Normally my head gets fried when it comes to pensions but this is really clear. Thank you. I'm really happy with this. There was another thread the other day where someone was saying that putting all your money in equities and property was the best option. I nearly couldn't sleep. I know what you mean about which Irish Life fund so I'll check that out with them tomorrow. I know you probably have better things to doing than answering my questions but I have two more if that's ok when you get a chance.
If I do go down the ARF route, do I have to take 4% a year? Could I just take 3% instead? I know it says that you must take 4% or else you will be taxed as if you take 4% but our total income will be below the tax free amount so do I really need to take 4%. Does this make sense what I'm asking? The official term is imputed distribution.
Will we really get €10000 a year annuity? The reason for asking is that a good friend told me that he checked it out on his computer and that the annuity was just over €7000 when he allowed for a rise each year of 2%. Sorry for double checking but it's quite a big difference. Thanks again.
 
If you go for the ARF, then you must draw down a minimum of 4% pa up to age 70, and a minimum of 5% thereafter. As part of the ARF you would need to decide how the fund would be invested, what level of tick you are comfortable with etc. allowing for say a 1% pa management charge, in effect your fund will reduce by circa 5% pa. Therefore the level of investment return may or may not match this 5%. But I would not focus on trying to match the 5%. It’s ok if the fund gradually falls in value as it should not necessarily be an objective to maintain the value as you get older. But the ARF does involve a degree of investment risk with which you may not feel comfortable.
The advantage of the Annuity route is that you have a guaranteed income for life ( no investment risk issues). With circa €285k you can buy a variety of Annuities:
- one just payable on your life ( gives the highest annuity)
- a joint life annuity reducing say to 50% on your death ( if your spouse is still alive). This will be a lower starting level.
- as above with a built in level of indexation (say increases of 2% pa).
There are a very limited number of Annuity providers (Irish Life, New Ireland, and perhaps Aviva and Standard Life). The €285k would give you an Single Life Annuity (first above) of circa €12,000, a joint life Annuity (second option) of circa €10,000. If you want an indexed Annuity, then it will be circa €7,000 . If you ask Irish Life they will quote you more exact figures.

Deciding between an ARF and an Annuity mainly depends on whether you want income certainty or are prepared to take some investment risk in return for greater flexibility. Also your state of health is important. If you are in poor health then an ARF may be best but if you health is good and family history is good, then an Annuity may be the safer route.
 
I am new to this site but must say that I am very impressed by the willingness of people to take the time to offer help and advice. Thank you Conan. It takes time to write such a detailed response. I am sorry if I am asking silly questions but when you say that I must draw 4% I'd like to understand what that means. My understanding is that I have to withdraw 4% or else I have to pay tax as if I drew 4%. But if I did draw 4%, I wouldn't have to pay tax because my total income would be below the tax exemption amount. So my question is do I really have to draw 4%? Otherwise, its like saying you dont have to pay tax on your level of income but actually you do have to pay tax.
I thought the government was trying to encourage people to save for their retirement so I dont understand why they are forcing me to take too much from my fund. I feel that in my case taking 3% from my fund would be a good compromise because I would be taking out about €9000 a year instead of the €7000 that I'd be getting from an annuity. In my head, I was thinking if I let the fund grow and take out a lowish amount like 3% then I'd be reducing the risk of running out of money. Whereas if I take out what the government wants me to take out then I would be increasing the chances of running out of money. I get easily confused by these things but it just sounds to me that the 4% requirement is going against what the government say that they are trying to do if that makes sense.
I have one other question which will probably seem very basic but I just dont understand what you mean by "the level of tick that you are comfortable with". I apologise but this must be another one of those pension technical terms that I havent come across before. Thanks again and apologies for all the questions. For most of my life, pensions were for old fellas so Im trying to catch up for my disinterest down the years.
 
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