Pension Starter Questions

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KeenToLearn

Registered User
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Hello,

I am starting to look into the requirement/ advantage of starting a pension. I have limited knowledge in this area and know I need to go to an independent advisor at some point before I will be in a position to make any decisions. I want to build up my knowledge on the main points first so I can make the most of the advice I receive. If you feel that this is a repeat of existing threads as there is already a lot of info on Pensions here, please feel free to remove.

My Background
Im mid-thirties, single and own my PPR, with no loans on it. I have no other loans. I have no current pension arrangements in place. I have no other investments presently but will be interested in investing in future. I have about €20K in cash and a gross income of approx. 80K. I work as a contractor under an umbrella company setup, of which I am a director. Currently no money is held in the company and I am paid monthly with all relevant taxes being deducted and paid each month. If I don’t work for a month, no invoice and my tax credits get carried over to the next month.

There is an option for me to change to a full ltd company and hold funds within the company and even out the Salary payments to myself, get a smaller amount every month and hold some money within the company. I understand there are extra tax implications on the corporation tax payment (not 12.5% as single person company) in this scenario, but for this thread, Id like to stick to creating the best scenario for building a pension.

Short Term Aims

Build up a cash reserve. For the past while, most of my income was funding my PPR so I sacrificed the savings side of things. For me, Id like to have 30K set aside as RDF which is reasonably accessible. In parallel, I want to select and implement a pension plan.

Pension Strategy Considerations
1. Im self employed at the moment but in future may take a permanent position. What impact does this have on my current Pension strategy?

2. I can place max 20% of my salary (up to 115K) in a Pension in my age bracket to receive tax relief. Is the 20% for a specific employment or if I earned an income from another source, e.g. working weekends on other projects, 80K umbrella company income and 10K other source, 20% of 80K or 20% of 90K?

I understand PRSI and USC would have to be paid if I had additional income and could put towards pension contributions

3. Control Pension Management Costs. I am not someone who is familiar with Stock Market Trading etc, so don’t have a background in understanding the fees. I do get the impression that a lot of pensions only exist to serve the industry and pay the bills and actually don’t deliver much for the consumer. What are standard industry norms? For a PRSA, I understand a 1% management fee and a 5% max contribution charge. If I expect a 6% return, but start with a 5% contribution charge, Am I not already behind?

4. 800,000K seems to be a pension pot figure to aim at. This seems like an unattainable figure unless maxing out pension contribution every year from the start. I have created a very simple spreadsheet which multiplies the total value by 1.045 (4.5%), next year add my contribution to the previous total and multiply by 1.045 again, and so on for 20 years. Is this correct to understand the compound effect over the years, excluding inflation? 4.5% annual growth seems to be a conservative long term fund growth expectation.
Any comments on this?

1 €16,000.00 €16,720.00
2 €16,000.00 €34,192.40
3 €16,000.00 €52,451.06
4 €16,000.00 €71,531.36


Im sure I have many more considerations to take into account, but this is my starting point. Id appreciate any comments or advice on what pension product would appear to suit me best.
 
5% cont fees and 1% AMC do exist, but only a fool would pay that.

You can get 100% allocation and 1% MAC fairly easily.
 
Protocol said:
5% cont fees and 1% AMC do exist, but only a fool would pay that.

You can get 100% allocation and 1% MAC fairly easily.
Click to expand...
I agree I would also say good Independent advisers are hard to find .Don't rule out a tied adviser getting you the best deal once they know you are clued in,
 
KeenToLearn said:
There is an option for me to change to a full ltd company and hold funds within the company and even out the Salary payments to myself, get a smaller amount every month and hold some money within the company. I understand there are extra tax implications on the corporation tax payment (not 12.5% as single person company) in this scenario, but for this thread, Id like to stick to creating the best scenario for building a pension.
Click to expand...

I know you are just looking at the pension aspect in this thread but you should double check the point above. My understanding is that you cannot retain funds in a company from year to year as a Contractor, you have to pay Capital Gains and an additional Surcharge also. The gurus here can fill you in but just don't make any assumptions based on that. You can definitely even out the payments to yourself over the year if you want, the main thing is that you need to clear down the profits by paying out to salary or lodging to pension every year.

One other point that might help - you may get more flexibility having your own ltd company for the pension side of things - I don't know how that would work in an umbrella company. You are probably looking to setup an occupational scheme to give you maximum flexibility, again the experts here on AAM would give you exact details on that.

Have a look for other threads on AAM - there are mentions of being able to setup an index based fund with friends first for a charge of 0.45% - I think you need to go through a broker to get that though so there will probably be an additional cost for that. Try to get a fixed fee to set it up if possible rather than the broker adding X percent to your annual charge.
 
As a director, you can set up an company paid pension scheme. I know under an umbrella company, your income just passes through this company for a fee, but you can get the company owners to set up the direct debit and instead of being paid all you invoice, you can pay into a pension. You have the ability to pay more into a company scheme and the payments aren't subject to PRSI or USC. If you leave, you can transfer the benefits into your own name or transfer them to the new employers scheme.

Don't pay a 5% contribution charge for a PRSA. You can pay a fee (charged to your company) instead.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Thanks for the replies.

So from what I have read so far, there appears to be 2 main options for me.
Option 1: Non Standard Execution Only PRSA with a 0.75% AMC + individual ETF fund charges only if I select Irish/ London traded ETF's and do not go with the Default 'DIS' as this incurs an additional AMC charge.
Selecting the correct ETF's is another matter :) !
Net cost to contribute max amount on 80K Salary calculation:
80K * 0.2 = 16K
16K * 0.6 = 9.6K
For 9.6K of my net cash, I get a 16K pension contribution.

Main Benefits for me;
Easy to setup and manage.
Easy to transfer in future if my employment status changes.
Easy to adjust payment amounts and to pause/ resume payments.


Option 2: As SBarret outlined above, I also have an option of a Company scheme, also called an Executive Pension I believe.
Im unsure of the setup costs and the running costs of this type of pension. The main benefit I see so far are the additional tax deductions. Is my net cost calculation below correct or is it too simplistic?

Net cost to contribute max amount on 80K Salary calculation:
80K * 0.2 = 16K
16K * (0.6+0.04 +0.08) = 7.68K
For 7.68K of my net cash, I get a 16K pension contribution.
If correct, this is a cash saving of 1.9K, but what are the cost implications?

Does it have to same flexibility for adjusting payments as the PRSA option does?
 
The maximum contributions for an executive pension is much higher than that of a PRSA.

All pensions are flexible regarding adjusting contribution levels. It's just PRSA rules are set out in legislation. Insurance companies can stop, start, increase or decrease premiums as you wish (although it's better to set the premiums and frequency at a level that is manageable and don't be chopping and changing all the time).


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Thanks for the replies,

I have gone through my options with an independent advisor along with speaking to a number of different pension providers. The executive pension advantages do not really apply to my current situation, but would be a very good option in many circumstances. I am going with a standard PRSA, 100% contribution and 1% AMC with a wide range of fund choices available at different risk ratings.

I will be starting to build my fund from 0 and will try to add 10-15K a year depending on finances available. I will review my options as the fund grows to see if I can get a better AMC rate, though not sure if there is much scope for improving on it in Ireland without a substantial lump sum.
 
Hi KeenToLearn, Can you tell me who did you set up your pension in the end with? did you go with a PRSA? can you tell me the costs involved.

My current employer pays into a pension scheme and i match it. However im moving jobs and the new employer does not have a pension scheme however, is willing to contribute to a pension of my choice. to a max of 5% from them so i will match it. Have no clue who to go with - so i would appreciate some advice

Thanks
 
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