My pension pot has reached €800k - should I stop contributing ?

Cicobr

Registered User
Messages
11
I am starting a new role in a company that does not have a pension scheme. They will offer a PRSA as they are legally obliged to do but they is no offer of contribution.
I am aged 51 and I have other pensions that mean that all my future income will be at the higher rate of tax.
Am I correct in saying that it does not make financial sense to start as I will get 40% relief upon investing but will pay 52 % when I take it out so I am behind from the start.
I will not be able to get a tax free lump sum through this PRSA as I will use elsewhere.
 

Conan

Frequent Poster
Messages
895
If you effect a PRSA you get tax relief on your personal contributions. On retirement. You can take 25% as a retirement lump sum. Currently up to €200,000 can be taken tax-free (including any lump sum from your previous scheme).
As regards income in retirement (including any income arising from the 75% of the PRSA thst might be invested into an ARF) is potentially liable to Income tax plus USC. Once over age 66, there is no PRSI deduction.
So the tax effectiveness of the PRSA is :
- potentially 25% tax free (depending on the size of your lump sum from your previous scheme)
- the income from the 75% being taxable at a max of 44% currently (40% +4%)
- you get up to 40% tax relief on contributions
So overall, it may still be tax effective.
 

Cicobr

Registered User
Messages
11
Thanks Conan but I will have reached the tax free lump sum elsewhere so at best it’s 40% relief versus 44% taxable and will have fees etc so might just invest the net privately or forget about it...or else get the new employer to contribute
 

Marc

Frequent Poster
Messages
1,000
There are no zero cost and zero tax options so you need to make a comparison between some different scenarios all of which could leave a financial benefit.

1) pay in and obtain the 40% tax relief. Defer the pension to age 75. If you die before you reach age 75 your spouse or civil partner receives the whole value of the fund tax free. No income tax, no capital gains tax, no CAT and no penalty tax if you exceed the lifetime €2m allowance.
Conclusion: life insurance with tax relief on the premium

2) gross roll up.
Let’s say you invest in equities and the return is say 7.2%pa net of charges to keep the maths easy.
Now let’s say a fund held directly also pays 7.2% net of charges but is subject to personal tax.

Your pre-tax €10k will be worth €20k in 10 years time.

Whereas if you invest the net income that’s going to be about €5000 which if you invest today you will have €10 in the fund (rule of 72)

You will then lose a further 41% in exit tax so €2,050 in tax. Net position €7,950 vs €20,000.

So let’s assume that you always have a marginal rate of tax of 50% and that you’ve used up all your lump sum entitlement. Taking that €20,000 as a lump sum fully taxable at your highest marginal rate is still going to leave you with a net €10,000 compared to €7,950.

In effect you received an interest free loan from Revenue and the difference is the gain on the income tax deferred.

If you invest in something that’s subject to CGT you will be taxed at 33%

If you pay income tax you will lose your marginal rate of tax (up to 55%)

So a pension gives you gross roll up relative to any other option you will have a larger gross fund in the future and the longer you leave it the more this will compound in your favour.

3) taxable lump sum

Even if you have a pension fund of €800k and can use up the tax free lump sum the next €300,000 of lump sums is only taxable at 20%

4) not all of your pension is taxable.

Imagine you have an ARF with €1m and you are forced to take an income of 5% which is subject to income tax at your marginal rate of 40% plus USC

In this example ; 95% of your ARF is not subject to tax. See earlier argument about gross roll up.

Assume your ARF grows by 5% net pa every year so the value rises back to €1m every year.

Effectively your ARF hasn’t paid any tax it’s constantly deferred. You are only paying income tax on the income distribution not the original tax deferred capital.
When you die your spouse or civil partner inherits the ARF then adult children inherit at a rate of 30% which doesn’t count towards the CAT thresholds so these are also available.

Had you held those assets personally and the CAT thresholds had been used up then the kids would pay an additional 3% tax €30,000 tax saved

5) match withdrawals with medical expenses

Imagine you have an ARF with a million and in your 70s you incur €100k of medical expenses. That year you should take a larger withdrawal from the ARF partially to meet those expenses but partly because you can claim 20%tax back on medical expenses. That’s a €20 grand tax rebate
 
Last edited:

Cicobr

Registered User
Messages
11
This is great ..thank you
The 20k gross is only useful versus the 7950 if I can get it out of the fund and I see your points regarding medical and giving to my children. I think my plan needs to look at the tax free lump sum side of things to maximize and prevent the 20k being taxed at 52%.
I need to look closer at what I have to see where I am with my current schemes .
Thanks for pointing out the fact that that there are more things to consider.
Regards
 

Sarenco

Frequent Poster
Messages
5,378
Excellent post @Marc

Mods - suggest making this a sticky in the pensions forum, perhaps with a slightly adjusted title.
 

elacsaplau

Frequent Poster
Messages
538
Cicobr,

As other have said, Marc's comments are all completely valid. As this should become a "sticky", there are probably two more considerations which may be relevant to you or to someone in similar circumstances to you.

1. The Personal Fund Threshold (PFT). Gordon Gekko outlined many of the considerations in a thread that didn't get the traction Gordon's post deserved.
https://www.askaboutmoney.com/threads/navigating-the-standard-fund-threshold.205113/

2. Because of the PFT and because of tax individualisation, if you have a spouse/partner, then his/her pension sityawation (I was travelling with a Northerner this week) may be relevant - i.e. that as a couple, pension contributions are directed into his/her pot.
 

Conan

Frequent Poster
Messages
895
If you die your spouse or civil partner inherits tax free then adult children inherit at a rate of 30% which doesn’t count towards the CAT thresholds so these are also available.
Two points Mark:
- “If you die” .....(if only we had a choice).
- The spouse does not quite inherit “tax free”. The ARF transfers into the spouse’s name and continues to be taxed as normal on drawdown. Subsequently children can inherit any remaining funds on the death of the spouse.

Btw, excellent post, a great way to look at the process.
 

Sarenco

Frequent Poster
Messages
5,378
I think my plan needs to look at the tax free lump sum side of things to maximize and prevent the 20k being taxed at 52%.
It's probably worth bearing in mind that, as things stand, PRSI is not payable on income once you reach 66 and the 8% USC rate only applies to income over €70,044 (and there is no USC payable on social welfare payments (including the contributory State pension)).
 

elcato

Moderator
Messages
3,062
If someone suggests a better title I will sticky this. if anything to show Marc's post above.
 

RETIRED2017

Frequent Poster
Messages
772
Sarenco If I remember correctly yourself and Gordon had posted in the past on how to get round pension pots over 800K,
 
Top