I’m working through some of this logic myself and at present I have some interesting working conclusions.
You don’t need to save up in a unit linked plan and then add to a pension later you can contribute to the pension now.
I take considerable issue with the assumption that it’s only worth paying into a pension if you get 40% tax relief.
My own analysis concludes that for some investors it may be worth contributing to a PRSA even without the expectation of ANY income tax relief on the contributions.
The reasons for this are
1) you obtain gross roll up of the capital without having to pay income tax, capital gains tax or exit tax.
This is in effect an interest free loan from Revenue and you will always have more money in the future compared to other forms of investment - all things being equal.
2) assuming you have taken a career break your own income in retirement will be lower and your entitlement to State pension may be reduced. Therefore your average rate of tax is likely to be lower than the current rate of exit tax and also possibly the current capital gains tax rate.
It therefore makes sense for some people to convert current capital into future income.
3) tax relief is available on contributions up to €1525 even if no net relevant earnings are available.
That’s €305 in tax relief available to all.
Some caveats to this
Declining capital values would provide a “tax free loss” - under these conditions, a capital gains tax investment could work out better due to the ability to offset losses against gains.
Pensions rules are always changing and you have no certainty about the rules in the future
If you are self employed you can’t access the pension until 60 whereas employees can access at 50. If you are self employed it would be worth taking a part time job to become an “employee”
The AmRF requirement is troublesome.
Having to put €63,500 into a separate account ties up a lot of money for small pensions and reduces flexibility considerably.
€84,667 gets you your AmRF and your first chunk of tax free cash.
The balance of a pension should be left in an unvested PRSA and chunks broken off as and when required.
This “phased retirement” strategy makes a lot more sense than retiring the whole pension fund in one go at retirement and is a considerable advantage of the PRSA rules (which are otherwise mostly bonkers and bureaucratic)
You don’t need to save up in a unit linked plan and then add to a pension later you can contribute to the pension now.
I take considerable issue with the assumption that it’s only worth paying into a pension if you get 40% tax relief.
My own analysis concludes that for some investors it may be worth contributing to a PRSA even without the expectation of ANY income tax relief on the contributions.
The reasons for this are
1) you obtain gross roll up of the capital without having to pay income tax, capital gains tax or exit tax.
This is in effect an interest free loan from Revenue and you will always have more money in the future compared to other forms of investment - all things being equal.
2) assuming you have taken a career break your own income in retirement will be lower and your entitlement to State pension may be reduced. Therefore your average rate of tax is likely to be lower than the current rate of exit tax and also possibly the current capital gains tax rate.
It therefore makes sense for some people to convert current capital into future income.
3) tax relief is available on contributions up to €1525 even if no net relevant earnings are available.
That’s €305 in tax relief available to all.
Some caveats to this
Declining capital values would provide a “tax free loss” - under these conditions, a capital gains tax investment could work out better due to the ability to offset losses against gains.
Pensions rules are always changing and you have no certainty about the rules in the future
If you are self employed you can’t access the pension until 60 whereas employees can access at 50. If you are self employed it would be worth taking a part time job to become an “employee”
The AmRF requirement is troublesome.
Having to put €63,500 into a separate account ties up a lot of money for small pensions and reduces flexibility considerably.
€84,667 gets you your AmRF and your first chunk of tax free cash.
The balance of a pension should be left in an unvested PRSA and chunks broken off as and when required.
This “phased retirement” strategy makes a lot more sense than retiring the whole pension fund in one go at retirement and is a considerable advantage of the PRSA rules (which are otherwise mostly bonkers and bureaucratic)
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