Key Post Is there a good Beginner's guide to self-employed pensions anywhere?

[Brendan Burgess]

This is for self-employed people only. It is not for employees. It is not for directors of limited companies who consider themselves self-employed. Different regimes apply to them.


I had a look for this to send to a friend but couldn't find it.

I want to say :
Take out a PRSA or a Retirement Annuity contract
Here is the fund you should buy - it is 100% equities and has the following low charges
Take it out Execution only via x , y or z

Is there a good one available anywhere. Is the following roughly correct?

Quick recommendation for investing at least €500 per month or €10,000 single premium
You should invest 100% in equities.
The lowest charges available are with Retirement Annuity Contracts.
I recommend www.prsa.ie (which despite their name also offers Retirement Annuity Contracts)
or https://www.labrokers.ie/prsas-irel...gs-account-pension-plan/zurich-low-cost-prsa/

Select this fund https://www.zurich.ie/funds/fund-products/equity-funds/global-equity-funds/indexed-global-equity/
The total charges on this would be 0.76% per annum (0.75% AMC and 0.01% other fund charges.)

Should I start a pension?

No, If you don't have a house - that is a higher priority
No, if you have an uncomfortably high mortgage, getting it down to a comfortable level is a priority
No, if you are not paying 40% tax. Wait until you can get 40% tax deductions.

Yes, if you have a comfortable mortgage and are paying 40% tax.

Even if you have an uncomfortably mortgage, it might be right to start a pension if you are older as you might be limited in what you can contribute later.

The tax benefits are huge
You get 40% tax relief on your pension contributions.
The fund grows tax free.
On retirement, you will probably get 25% tax free.
The balance will be subject to tax at your top rate - which might be only 20% in retirement.

How much can you contribute?
Depending on your age
<30 : 15% of your income
30-39: 20% of your income
40-49: 25% of your income
And more if you are older...

What are the options?

1) A Personal Pension also called a Retirement Annuity Contract

2) A PRSA

What are the advantages of each?

The PRSAs have a limited number of funds in which you can invest.

How do I choose a fund?
You should be 100% invested in equities as it's a long-term investment.

A cash or gilts fund is much riskier in the long-term due to the threat of inflation.

How do I minimise charges?

Decide what you want and go to an execution-only pensions broker

e.g. www.LABrokers.ie

Execution-only brokers are not allowed to give you advice. They just set up the policy for you.

An ordinary broker will sell you the same product and will have much higher charges.

Can you recommend a financial advisor?

You do not need a financial advisor. If you go to a financial advisor, you will probably end up in a full cost product, with double the charges which you would pay in an execution-only fund.

You might think that the difference between 0.75% and 2% is quite small, but over the 20 to 30 year life of the pension fund, it really matters.

Can I make a contribution for last year?
Yes. If you make a contribution by the 31 October this year, you can claim it against your income for last year and reduce last year's tax bill.

 

[Brendan Burgess]

Why keeping charges low is important.

The fund recommended above has a total charge of 0.76% a year.

Typical charges on a policy set up by a financial advisor on a full commission basis could easily be in excess of 1.76%.

A 1% difference may sound small, but the impact is huge.

€10,000 invested today with an investment return of 4% and no charges would be worth €32,000 after 30 years.

A charge of 0.76% will reduce the value to €26,000 after 30 years.

A charge of 1.76% will reduce the value to €19,000.

So, what looks like a small difference in charges today, will have a huge impact on the value of your pension fund on retirement.



How much do I need to contribute?

 

[RedOnion]

What are the options?

1) A Personal Pension also called a Retirement Annuity Contract

2) A PRSA

I have a related question if I may. Are these 2 the only options for a sole trader? With both options, I understand there is no way to 'retire' the pension before age 60 and access the money. Is there any way around this limitation for a sole trader who retires young?

 

[Fisoon]

I have a related question if I may. Are these 2 the only options for a sole trader? With both options, I understand there is no way to 'retire' the pension before age 60 and access the money. Is there any way around this limitation for a sole trader who retires young?

Good question, I would love to access my pension earlier than 60. I guess the only way, is to build the pension to a certain level and then let it ride until 60. Then build a separate outside pension portfolio to help you bridge the gap if you retire at 40 for example but 20 years is a big gap to fill.

 

[Marc]

Good question, I would love to access my pension earlier than 60. I guess the only way, is to build the pension to a certain level and then let it ride until 60. Then build a separate outside pension portfolio to help you bridge the gap if you retire at 40 for example but 20 years is a big gap to fill.

It’s funny we were just talking to a partner in a large accountancy firm who has reached the €2m standard fund allowance about getting their pension at 50.

This makes a lot of sense for many people especially those with debts and large accumulated pension funds.

We frequently assist clients to access their benefits, release lump sums and clear debts.

The balance can remain in a vested PRSA with no obligation to take income until age 61.

Also there is no prohibition on continuing to fund another pension and continuing to collect tax relief if you are still under €2m.

Retirement planning is one of the most significant and important purchases you ever make in your life. Yes, of course there are those that will say don’t pay for advice it’s not worth it. I disagree.

This case study, for employees and directors, uses my wife and I as an example https://everlake.ie/articles/can-i-access-my-pension-early/

Self employed access is much more complex but the principles are the same.

 

[Marc]

Why keeping charges low is important.

The fund recommended above has a total charge of 0.76% a year.

Typical charges on a policy set up by a financial advisor on a full commission basis could easily be in excess of 1.76%.

A 1% difference may sound small, but the impact is huge.

€10,000 invested today with an investment return of 4% and no charges would be worth €32,000 after 30 years.

A charge of 0.76% will reduce the value to €26,000 after 30 years.

A charge of 1.76% will reduce the value to €19,000.

So, what looks like a small difference in charges today, will have a huge impact on the value of your pension fund on retirement.



How much do I need to contribute?

0.76%pa seems high for an index tracker

 

[Brendan Burgess]

0.76%pa seems high for an index tracker

Hi Marc

This is an off the shelf product suited for a self-employed person taking out a pension.

It is 0.75% AMC and 0.01% fund management charge.

Please do let me know where you could invest €500 a month and get it cheaper.

Brendan

 

[Marc]

Sure. This is a very good example of where well meaning "recommendations" for very specific regulated products on here can sometimes be miles off the pace.

On a wholesale basis (which is how anyone who genuinely wants an execution only contract should think) the best PRSA I can find has a base cost of 0.45% plus 0.1% for a global index fund. So a total of 0.55%pa for a regular annual contract (not monthly premiums)

Would someone care to work out how much they would be prepared to pay to set that up to save 20bps annually?

Of course, as I have repeatedly said until I am blue in the face, the disclosed charge isn't the real charge and you really need to assess the returns reported by the life companies to establish their "tracking error"

These all track the same index (MSCI World).

That Zurich Index fund doesn't look so good now does it?