Pension contribution advice needed

[Alexmartin]

Looks like the consensus from the papers today is that the 41% relief on pension contributions is for the chop. To be lowered to 20 or 30%.
Well thats it for me. I'm stopping. I'm not getting relief of 30% on the way in and then paying 41% plus USC etc on the way out. Not a chance.

So the question is. Invest in funds, foreign property or just go on more holidays.
Even thinking of just upping sticks and moving the family abroad now.

We as a couple are paying about €50k income tax. Never mind all the other stealth taxes. And now more stealth and property taxes on the way. This is getting too much.

 

[Dave Vanian]

Looks like the consensus from the papers today is that the 41% relief on pension contributions is for the chop. To be lowered to 20 or 30%.

And if you looked at the papers from this time last year you'd see the same speculation was doing the rounds then too. It didn't happen. This sort of speculation is great for selling newspapers but until the minister reads his speech, very few people actually know what's in it.

 

[mandelbrot]

Looks like the consensus from the papers today is that the 41% relief on pension contributions is for the chop. To be lowered to 20 or 30%.
Well thats it for me. I'm stopping. I'm not getting relief of 30% on the way in and then paying 41% plus USC etc on the way out. Not a chance.

So the question is. Invest in funds, foreign property or just go on more holidays.
Even thinking of just upping sticks and moving the family abroad now.

We as a couple are paying about €50k income tax. Never mind all the other stealth taxes. And now more stealth and property taxes on the way. This is getting too much.

My heart bleeds! To pay 41% (or whatever the marginal income rate in the future is) on the way out you'll be in quite a comfortable position.

Surely the aim of tax relief on pensions should be to incentivise people who would otherwise be poor in old age to contribute, not to further feather the nests of those who are already wealthy and have the means to provide for their future income one way or another anyway.

 

[DerKaiser]

My heart bleeds!

I wouldn't phrase it as bluntly as mandelbrot, but I'd question why you are putting money into a pension at all if you think you'll be paying higher rate tax in retirement.

Here are some simple sums, I'm assuming the money is invested for 15 years and there is 0% real growth i.e. inflation and charges cancel out fund growth:

Neutral (optimistic) scenario - No future changes in tax
Invest €100k in a pension, net cost €59k after tax.
Gross proceeds after 15 years = €100k
€25k tax free, €75k ultimately taxed at 52% (41% tax, 7% USC, 4% PRSI)
Net proceeds = €61k
Total gain over 15 years = €2k on €59k or 0.2% p.a.
0.2% p.a. is pretty measley for locking up money for 15 years

Plausible scenario - Tax free lump sum removed, 0.6% levy continues indefinitely
Invest €100k in a pension, net cost €59k after tax.
Gross proceeds after 15 years = €91k net of levy
€91k ultimately taxed at 52% (41% tax, 7% USC, 4% PRSI)
Net proceeds = €44k

Conclusion?
Under current taxation rules people who are already expecting to pay higher rate of tax in retirement do not benefit. Even relatively minor tweaks to the levy and allowable tax free lump sums would erode what little benefits there are.

 

[Alexmartin]

You're right.
The problem is that you dont know how much you are going to get taxed on your pension and you could end up actually losing money with all the tinkering going on.

 

[LDFerguson]

I think that there's a misconception out there that people will be taxed at 41% on their pensions. For the avoidance of doubt: Pensions are taxed as income and you will only pay tax on your pension at 41% if your total taxable income in retirement is sufficiently large to put you in the higher rate bracket.

To take an example, at present a singe person can earn up to €32,800 per year in retirement before entering the 41% band. State Pension ~€12,000. Can therefore have a private pension of €20,000 per year and stay below the 41% rate. Pension fund could be up to €693,000.

(€693,000 fund; 25% tax-free lump sum €173,000; €120,000 into an AMRF; balance €400,000 into an ARF; 5% annual withdrawal €20,000)

So a single person can accumulate a pension fund of almost €700,000 before the resulting pension will be taxable at 41%. A married couple can accumulate even more. This is, of course, based on current tax rates and bands.

 

[kennyb3]

This is, of course, based on current tax rates and bands.

That there is the problem though - how can anyone start a pension with no long term pension policy in place - 20/30 years away is a long time. There could easily be no TFLS, lower bands, less credits etc etc The list goes on and on.

And anyway even the standard rate is heading north of 25% already when you account for the USC.

 

[marathonic]

That there is the problem though - how can anyone start a pension with no long term pension policy in place - 20/30 years away is a long time. There could easily be no TFLS, lower bands, less credits etc etc The list goes on and on.

And anyway even the standard rate is heading north of 25% already when you account for the USC.

And what if they tax pensions/remove reliefs to the extent you're predicting and can't tax anymore.. then they decide to introduce the Wealth Tax that some politicians are spouting about and tax the life out of your private savings?

Investing for your future is a risky business - but it's a risk you have to take if you believe the state pension, in it's current form, will not last much longer (which most do). The only other option is to spend everything and hope for the best - something I'm not willing to do.

True, you could move abroad with your private savings - but you can also transfer your pension abroad.

 

[kennyb3]

And what if they tax pensions/remove reliefs to the extent you're predicting and can't tax anymore.. then they decide to introduce the Wealth Tax that some politicians are spouting about and tax the life out of your private savings?

Pensions are an easy target as shown by the levy. Your money is locked away. Moving it abroad is more difficult than transferring savings abroad.

Have you read the agreement with the Troika and what the proposed reduction of relief?

Politicians introducing a wealth tax on themselves? I laughed.

Investing for your future is a risky business - but it's a risk you have to take if you believe the state pension, in it's current form, will not last much longer (which most do). The only other option is to spend everything and hope for the best - something I'm not willing to do.

Or you could save/invest in a another form outside of a pension - no?

Why does it have to be risky? I get that nothing is 100% safe, but you can definitely get more safe.

Pensions aren't the be all, your points above address non of the concerns raised.