At 40, he definitely should not be contributing to a pension which attracts tax relief at only 20%.
It will be taxed on the way out. So it could well be taxed at 20% or more when he receives it.
The thing to do is to continue saving. If he earns income at the higher rate in the future, then he can contribute to a pension.
If he has a mortgage, he should pay it off.
If he is renting, he should look at buying a house.
Brendan
I was recently talking to a relative and asked him, "Have you thought about starting a pension?" He surprised me by answering, "I've looked into it and I don't see the point." His position, roughly, is this:
He is just over 40, self-employed and earns around 30,000, so pays a lower income tax rate.
The tax relief he would get on a pension would be relatively small and eaten into by charges etc.
When he retires at 68, a typical annuity would pay around 4pc- so he needs to live to 93 just to get his original investment back.
At 40, he definitely should not be contributing to a pension which attracts tax relief at only 20%.
It will be taxed on the way out. So it could well be taxed at 20% or more when he receives it.
I disagree pension returns earn between 3 to 4% before tax per annum (this ignores the tax break on your contributions). Unless your investment is returning a greater yeild than that then you are earning less on your investment than on your pension pot returns.
You get €100 income. 25% tax free. So you will pay 40% tax on 75% or 30% .
So you get €70 out - or less if you are paying whatever they will be calling PRSI/Income Levy/ USC at that stage.
So you put in €80 and get €70 out.
pay 8-10% direct tax
Cash saving for the long term seems daft in a world with near-zero interest rates.
Over 25 years equities generally deliver a better return.
This has nothing to do with pensions, the investment option you choose has (almost) nothing to do with wether its a pension investment or not.
I’m willing to go one further and say that for some people it’s worth paying into a pension even if you receive NO tax relief.
This takes up a whole chapter in my Irish Financial Planning book
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