pension - tax relief or tax postponement?

[JAMESBROWN]

Hi , after a bit of a trawl through here and other sites , is the following correct or am I missing something?

For simplicity I assume growth of 5% , and tax relief of 50%.

1)I stick 10 grand a year pre tax income into a pension for 20 years so ive got 330 k at the end.I then use this to provide an income which is taxed.
or
2)I stick 5 grand a year post tax income somewhere for 20 years so Ive got 165 k at the end.I then use this to provide an income that is not taxed.

the advantage I can see to 1) is that I can take a tax free lump sum and hope/ensure that my pension income is not taxed at the highest rate.

Am I missing something obvious besides the enforced saving and the tax free lump sum ?

thanks in advance

 

[asdfg]

1)I stick 10 grand a year pre tax income into a pension for 20 years so ive got 330 k at the end.I then use this to provide an income which is taxed.

The income/pension you decide to take after deducting the lump sum is taxed taking into account the tax credits and 20% tax cut off point so you may not have to pay any tax.

 

[JAMESBROWN]

thanks but exactly what tax credits and even if the income i take is huge , is it still taxed at 20%?

 

[ClubMan]

Your question seems to be which is better - saving for retirement through a pension or through a deposit account. The answer is almost certainly always the former. Remember that you get tax and PRSI relief on pension contributions, you can take a 25% tax free lump sum and if you buy an annuity with the rest then your income could well be below the income tax exemption threshold or subject to low taxation. Lodgements to a deposit account are from net income and DIRT of 20% is deducted at source.

 

[Don_08]

Pension

Contributions - Tax Exempt
Investment Returns - Tax Exempt
Lump Sum at Retirement - Tax Exempt
Pension Income - Taxed ( at marginal rate on retirement income)

THere are some cases, where you would get tax relief at 41% plus PRSI, yet only get taxed at the lower rate on retirement due to fall in income.

Savings

Savings - Taxed ( as in post tax income)
Investment Returns - Taxed
Fund on maturity - not taxed.

 

[JAMESBROWN]

Clubman , thats exectly what I am talking about , my 5% growth being after dirt ( or net growth from anywhere ) , and the 5k invested being from net pay as opposed to 10k from gross
the only benefit , as you state is the 25% tax free lump some!
and of course if you get tax relief at top rate and take pension income at low rate.
if you were getting relief at low rate , and taxed pension income at same ,the only benefit is the tax free lump sum , not to be sneezed at at all .
Not being able to access it till retirement is another downside!
ahh I know the pension makes sense but its not the 'free' money it can sometimes be made out to be!

 

[ClubMan]

the only benefit , as you state is the 25% tax free lump some!

That's not what I said and is not the case. See the Don_08's post for example. In any case you yourself even say:

and of course if you get tax relief at top rate and take pension income at low rate.

You may or may not pay even low rate tax on pension income. You might even feasibly pay marginal relief rate tax:

[broken link removed]

Also - chances are a pension is or should be invested in unit linked funds with a diversified asset mix which will, in the long run, significantly outperform deposit returns.

Not being able to access it till retirement is another downside!

Or an advantage if you need to save for retirement but might be tempted to blow it if you were able to access it.