Pension contribution advice needed

[ashambles]

The tax relief is not free money - it is deferred taxation. And you can be doubly taxed - USC now and then tax and more USC when the pension is drawn down.

In reality it will be impossible for normal earners to save enough to cause them the problem of being taxed at the highest rate on the way out. Most people should be able to put in money at what is now 41% relief, and in time take it out at close to 0% taxation. I don’t think it’ll be worth putting money in at only 20-30% tax relief, but we don’t have to cross that bridge just yet.

The latest kite flying suggests that the 41% tax relief will remain, and instead a lower maximum pension pot will be allowed.

 

[kennyb3]

time take it out at close to 0% taxation.

I think you need to look at current legislation (which no doubt will only get more prohibitive given the deficit).

You still have to pay tax at 20% once you are over the exemption limit (which again will no doubt be reduced over time), which no doubt you will if you have any sort of reasonable pension (when coupled with the state pension). This 20% could easily become 25% by the time you retire. Then there is the USC to consider.

So you may be getting taxed at around 30%. You're also paying a 0.6% levy for at least 4 years - I think we can ll guess it will be more.

 

[ashambles]

I’d agree completely with marathonic. My view is there’s a couple main ways to approach pensions.

1) You believe despite pension companies costs and taxes that a combination of inflation and economic growth should see that most well diversified funds increase over a long period of time
2) You don’t believe that funds will grow – charges/taxes too high, global economic disasters etc.

If you fall into the first camp then buying into a dip is a logical consequence, the only thing you know in a dip is the unit price is relatively cheaper (just cheaper, not cheap, not good value) than before. You’re buying more units than you were at an earlier point. If you were able to justify buying those earlier units you’ve a stronger case to buy the cheaper ones. If you can’t justify the earlier purchases you’ve moved to the second camp.

Fair value doesn’t come into the equation with complex funds – all you know is relative value – what the price is now versus what it was before. Nobody can hope to measure the fair value of a fund which might have several thousand components.

If you fall into the second camp and don’t think funds will grow, then you shouldn’t be investing via funds, let alone buying into a pension dip.

If you decide to go with a pension (and there’s plenty of valid reasons not to) for it to have any chance of paying off you need to commit to it. You don’t want to become a pension investor who throws in as much as they can in during the years the fund is growing and scales back every time it looks bad – that’s a variation of buying high and selling low – and is a guaranteed way to get poor performance.

 

[marathonic]

Have they not done this already - see the pension levy. Have they not reduced the maximum amount of relief available? Have they not signed up to an EU/IMF program to reduce pension tax relief further? Are income taxes not increasing in the form of the USC, lower credit etc? (what planet have you been living on?)

I totally agree with you and I think I worded my previous post wrongly. What I'm trying to get at is that the government would be very stupid (and they possibly are) to make it "not worthwhile" saving for your own retirement (at the moment, it still is).

Do you really think the lower rate wont be 30% or more in 20/30 years time? As Orka said tax relief isn't the free money its cracked up to be.The problem is your locking in your money until age 60 with so many taxation unknowns.

What are the alternatives?

Don't save at all and hope that the government provides for you? My first post on this thread.

Save in cash for retirement? Have you considered the impact of inflation over the next 20-30 years?

Invest directly in the stockmarket? Just as the government has hit pension funds with a levy, it has increased capital gains tax on the sales of shares over the past number of years.

Everything has risk and nothing is a certainty. Personally, I'm gambling that any changes to future pension policy will not have an impact so negative that my income in retirement will be worse than the income in retirement of anyone that chose some other option to fund their retirement.

(It's worth noting at this point that my retirement plans are a personal pension and one BTL property - together with a bonus of a state pension if they still exist. With BTL, there's the second house charge, the reduction in rent payable to social welfare tenants, the cap on the max rent if you're renting to social welfare tenants - you see what I mean, nothing is safe and you just have to make your own mind up which retirement plans you feel most comfortable with)

 

[kennyb3]

Save in cash for retirement? Have you considered the impact of inflation over the next 20-30 years?

This imho! But that is a personal choice.

I can't get away from the uncertainty in pension legislation, the increasing tax burden, the pension levy, investment uncertainty, the fact your money is tied away until your 60.

I have spreadsheets galore comparing various outcomes (implied groeth rates, inflation etc), to me the upside to pension tax relief is far outweighed by the above.

My opinion may change as deposit rates lower, pension fund charges reduce, long term pension policy planning is introduced.

But as long as I can get 3.5% (after DIRT,5% gross) guaranteed for my cash, beating inflation by 1.5%, and can take 100% of this tax free on retirement at age 50/55/60 (whatever I chose) i'm happy to continue to invest this way.

I admit i'm risk adverse and crave certainty.

 

[marathonic]

This imho! But that is a personal choice.

Whilst I disagree with your choice, I do agree that everyones attitude to risk is different.

In Northern Ireland, they have the further option of ISA's - an alternative to which, unfortunately, is not available here.

With my own personal circumstances, I'm treated under UK rules for pension purposes and, should they change negatively too much, I've always got the option of transferring it back to Ireland. This has a little influence with my feelings towards pensions. Obviously, this doesn't apply to most on the forum.

 

[leroy67]

Kennyb3

Where are you getting this kind of return on a regular montly contribution or are you saving into state saving certs ? Spill the beans

 

[kennyb3]

Kennyb3

Where are you getting this kind of return on a regular montly contribution or are you saving into state saving certs ? Spill the beans

Read again, never said it was monthly contributions

 

[leroy67]

Was only asking the question as the majority of people saving into pensions are doing so via a regular monthly premium so trying to compare like with like. If you contributed €20k into a pension fund and were entitled to relief on all of it at 41% in essence it has cost you €11,800 to get €20k away for your retirement. Place your investment in any of the numerous cash funds (some paying 5% less 1% amc, maybe you could better if you were to haggle) and secure your return for the next 5 years or so. Appreciate your point re access etc but imho we will see increases in DIRT as the Govt want people to spend monies, not keep it on deposit.

 

[kennyb3]

Was only asking the question as the majority of people saving into pensions are doing so via a regular monthly premium so trying to compare like with like. If you contributed €20k into a pension fund and were entitled to relief on all of it at 41% in essence it has cost you €11,800 to get €20k away for your retirement. Place your investment in any of the numerous cash funds (some paying 5% less 1% amc, maybe you could better if you were to haggle) and secure your return for the next 5 years or so. Appreciate your point re access etc but imho we will see increases in DIRT as the Govt want people to spend monies, not keep it on deposit.

Firstly your confusing cash with deposit - they are different. Cash funds pay less than 1%. So i'm guessing your talking about deposit.

I've spent a lot of time looking into this and when you get into the nitty gritty you realise when comparing like with like:

- Apart from the EBS deposit account with standard Life paying 5% the others available aren't that great. (most are actually around 3.5%). You get 5% with An Post saving certs.
- They generally require a lump sum investment, they are fixed term accounts not regular monthly savers (so it is like with like)
- You need a minimum of €5k (and €20k in a lot of cases) so you can't start from nil
- Then you are left with what you do in 5 years time if standard life don't offfer deposits anymore or the providers are offering crap rates.
- Unless you know what you are doing an go execution only, 5% of your contributions will be gone, so again it doesn't cost €11.8k to get €20k - you ll only get 19k.
- You've minimum 1% charges, minimum of a 0.6% levy, so that 5% is really 3.4%. The levy can go up at a whim - and you cant do a thing to move your funds

And again add in (as stated above):

- Risk of pension company going bust
- EBS riskier than An post saving certs (see here [broken link removed] - to get 5% your not protected by guarantee scheme)
- The 41% tax relief is a bit of a red herring as pointed out, you ll get taxed on a good portion on the way out. So it may only be approx 20% real relief or less. Declining with each budget.
- Government ability to pilfer your tied up money at a whim
- Can't retire until at least 60 (in reality). How many posts have we seen with people need access to their cash before this due to unforseen events.

Is the tax relief really worth it? I'm happy to pay a premium/have a smaller pot for certainty. That way I can plan for my retirement with clear certainty (or in so far as is possible).

Edit:

I should add, this is just my risk profile and a direct response to the post above. If other wish to put forward equities, diversified portfolio's with a long term holding approach I fully accept these could be viable solutions - just not for me.

 

[ashambles]

Is the tax relief really worth it? I'm happy to pay a premium/have a smaller pot for certainty. That way I can plan for my retirement with clear certainty (or in so far as is possible).

If you’re in a company pension scheme it’s likely that you’ll not be paying entry fees so if you invest 100 euro, you should see 100 euro added to your fund. You might even see more if you’ve a company matching your contribution.

As an example someone with a 200,000 fund now, let’s say they’ve contributed 15% and their company 5%. Maybe there’s 10% growth in the fund over 10 years. Until recently contributions were at full tax relief. How much did that 200k fund really cost?

Take out the growth it’s 180,000.
Take out the company contribution it’s 135,000.
Take out the tax relief at ~50%, the cost was 67,000 euro. This is a 200% return over 10 years. If the savings had gone to a deposit account they might be worth 80k?

Now with pension relief at 41%, I think that 200k would cost closer to 84,000, if there’s no company contribution & 41% relief it’d cost maybe 111,600.

When there’s a company contribution involved despite reservations on what the government might do it’s very hard to not go the pension route.

 

[kennyb3]

If you’re in a company pension scheme it’s likely that you’ll not be paying entry fees so if you invest 100 euro, you should see 100 euro added to your fund. You might even see more if you’ve a company matching your contribution.

As an example someone with a 200,000 fund now, let’s say they’ve contributed 15% and their company 5%. Maybe there’s 10% growth in the fund over 10 years. Until recently contributions were at full tax relief. How much did that 200k fund really cost?

Take out the growth it’s 180,000.
Take out the company contribution it’s 135,000.
Take out the tax relief at ~50%, the cost was 67,000 euro. This is a 200% return over 10 years. If the savings had gone to a deposit account they might be worth 80k?

Now with pension relief at 41%, I think that 200k would cost closer to 84,000, if there’s no company contribution & 41% relief it’d cost maybe 111,600.

When there’s a company contribution involved despite reservations on what the government might do it’s very hard to not go the pension route.

Where to start with this - its like junior cert maths.

Firstly forget the past, those who have a pension have already made a decision, this should be about going forward. So the tax relief is 41% not 50% (or any other figure).

Now to your figures:

1. To get from 180k to 200k - thats 11.11% growth not 10% as stated.

2. Please take out 1% charges per annum. (this is a very significant figure over 10 years). In the final year at the €200k it will €2k for example.

3. Please take out a pension levy for at least 2 years (2 more years left at least).

4. Do you think the company contribution is just free? I.e. not part of an overall salary package? You need to include approx 50% of it (you'd get a higher gross and then net salary if it wasn;t made) to any like for like comparison.

5. Your growth figures are low if anything, if you compound 3.5% for 10 years thats 92.2% growth.

6. You've left out inflation.


I have the spreadsheets - there is no doubt you'll end up with more money with a pension:

1. If you can get at least the same retrun as the best available savings account. You may lose money like so many if you try beat this return

2. If tax relief stays at 41%

3. If the pension levy doesn't increase


You then have to worry if the TFLS will be taken away, what rate your taxed at when you take your pension, what annuity rates will be available at that time, and then you'll have to wait till your 60.

The difference in monetary terms isn't as big as people would like to think.

 

[ashambles]

thats 11.11% growth not 10% as stated

10% is an approximation. But thanks for correcting the approximation to 11.11%. Incidentally that “1” is a recurring decimal in case someone needs that precision.

Please take out 1% charges per annum… Please take out a pension levy for at least 2 years

Why? There’s no need to take out charges or levies – I gave a low but real world growth for the last 10 years after all deductions.

Your growth figures are low if anything, if you compound 3.5% for 10 years thats 92.2% growth.

So now I've to increase the figure? Again that’s not been the real world outcome for the last 10 years for equity funds. I’d guess no one has seen 92% growth in their equity pension funds over the last 10 years. Somewhere between around 0%-20% would be more typical.

My point is even with the extremely low growth in funds it has in the immediate past made sense to invest in a pension. Many people do not fully understand how valuable the tax relief is. Turning 67,000 into 200,000 in 10 years can be surprising.

What happens in the future with pension returns and tax relief -I don’t know – I’m in a pension so I’ve little choice but to plough ahead until they make it not worth my while. For someone without a pension, they probably should wait and see.

 

[kennyb3]

My point is you've plucked figures out of the sky. (10% growth after charges & levy, no account of inflation)

It's not €67k to €200k.

It's (€80k + €45k employer contribution)= €125k contributed.

If you put €80k + 22.5k (allowing for tax of 50% on the higher salary) = €102.5k in a deposit account at 3.5% (after DIRT) for 10 years you'd get €140k.

Obviously that's €60k less, but you ve still to be taxed on the €200k coiming out of your pension fund.

This could easily be at 25% or more therefore your €200k is now €150k.
(Or 162.5k if you get 25% tax free lump sum)

The difference for all the uncertainty, increasing tax rates etc. that I've repeated previously. Is it really worth it? That's up to you.

My point is to to do the real figures - not make them up.

So many people are disappointed by their pots because they don't realise

- They are based on 6% growth
- Continually increasing contributions
- Headline charges of 1% don't include transaction and custodial charges

Also one of the most difficult decisions is when to get out of equities - when they are going up people get greedy and when they are going down people want to recoup losses.

As long as people make an educated decision and don't come whinging or looking for a handout when things go wrong.

 

[orka]

Pensions are undoubtedly good value for many people but they are not always good value and it is misleading to imply that. Pension tax treatment and the general taxation regime could change a lot in the next 10, 20, 30, 40 years so that’s a risk for anyone deciding to invest in a pension – or indeed for anyone deciding NOT to invest in a pension as things could improve (50% tax-free lump sum, lower general tax rates than expected). For many people, pensions do make sense but I would suggest the following people in particular should make sure they run the numbers before investing in a pension:
· Those who expect to be high rate tax payers in retirement
· Those who expect the tax treatment of pensions to be worse than now – e.g. reduction of % that can be taken as a tax-free lump sum, increase in % or number of years for the pension levy, increased taxes generally, increased taxes for pensioners (eg move to charge full PRSI and USC) etc.
I fall into both categories so I won’t be investing in a pension again even though I have more than 20 years to retirement. Even on current tax rates/treatment and assuming the same net growth rates after charges, I reckon the pension would only give about an extra 10% fund value for me. The loss of flexibility until retirement and at retirement combined with pension funds being sitting ducks for further government raids (who could argue that reducing the tax-free lump sum from 25% to 15% doesn’t look reasonably – sure didn’t you get huge tax relief on the way in...) means that the possibility of an extra 10% isn’t worth it.
And then there are the charges... 0.75% is about as low as you will get 'down here' but that is taken every year. And that really adds up. On a €1,000 investment earning 5% gross, a 0.75% charge will extract €240 over 20 years, €458 over 30 years and €787 over 40 years. Contrast that with investing directly and holding: you’ll probably pay 1.5%-2.5% to buy the shares/bonds and the same to sell – resulting (at the same 5% growth) in the direct investment being worth 10-13% more after 20 years, 20% more after 30 years and 30% more after 40 years. Higher annual charges are not uncommon and make the direct investment look even better (eg a 1.5% annual fee makes the direct investment worth 73% more after 40 years). There will be some capital gains tax to pay but overall, it’s not a foregone conclusion that a pension investment is always best.
In the short term, I have an offset mortgage so I’m ‘investing’ my money there which effectively gives me a 4% tax-free return with no charges. When I have enough saved, I will buy shares/bonds to hold until retirement.

 

[Alexmartin]

This whole pension thing has me gone crazy. The pension levy really sickened me. I went about stopping the payments a while ago, and thought I had, but life got in the way and I never got round to it.

The calculations are impossible. I'm definitely going to just stop paying into a pension if the government touch the tax relief again, but I cant figure out how much i'll end up with based on what I have.

Can anybody do the sums for me, or is there a formula?

I'm 40 now. Current pension fund value is €110,000.
If I just stopped paying now how much would this grow to by the time i'm 60 and 65. No way am I waiting til 68 to retire.

My wife has a massive pension pot already an i'm positive we'll be on the high tax rate when we retire.

Am I right to just stop now?

And I would have thought that stability was the most important think for planning for your future, but the government modelling have made the whole pension situation volatile. Nobody knows what stupid scheme they are going to come up with next. How on earth can you plan for retirement in that environment.

 

[DerKaiser]

Can anybody do the sums for me, or is there a formula?

The best simple advice I can offer is that you should pay in to a pension up to the point where you have a retirement income of €40k between you, in addition to the old age pension. This would require a pension pot of about €1m.

An important consideration is whether you expect to have income other than from the old age pension or your private pension. For example if you have rental properties that generate €15k per annum then you should only be targeting €25k from the pension.

 

[Alexmartin]

The best simple advice I can offer is that you should pay in to a pension up to the point where you have a retirement income of €40k between you, in addition to the old age pension. This would require a pension pot of about €1m.

An important consideration is whether you expect to have income other than from the old age pension or your private pension. For example if you have rental properties that generate €15k per annum then you should only be targeting €25k from the pension.

Her pension advisor told her she had a pot big enough now for a pension of €30k if she retires at 55 - i think. Must check again with her.
How do I know what size of pot I need to get €10K

Then hopefully we should both have state pensions at 68 too.

Or what if they means test the state pension. Then by looking after yourself you are costing yourself even more money.

This not knowing where the goalposts are going is the killer.

 

[DerKaiser]

This not knowing where the goalposts are going is the killer.

Absolutely right - I hope the government are getting this message and finish their tinkering. If they leave the 41% relief intact and don't renew the 0.6% levy that would be a good start.

To answer your other question, as a very broad rule of thumb you'd need €250k in the pot to provide a €10k per annum pension. This will vary though according to retirement age.

 

[mtk]

Absolutely right - I hope the government are getting this message and finish their tinkering. If they leave the 41% relief intact and don't renew the 0.6% levy that would be a good start.

To answer your other question, as a very broad rule of thumb you'd need €250k in the pot to provide a €10k per annum pension. This will vary though according to retirement age.

This is my view exactly