Pension versus deposit account

I am trying to get a simple example of the difference between starting a pension versus saving money into a deposit account.

Pension:
Assume 4% yearly fund growth and yearly contributions of 8k

Deposit:
Assume 4% interest rate and yearly deposit of 8k

Now I know you get tax relief on the pension at your marginal rate, lets say 41%.

Over 30 years what is the difference in terms of total fund? On the pension side your pension is taxed (and you can get a % of the fund tax free)but then you also have to pay DIRT on the interest from the deposit. But you have fund charges of about 1% etc.

Or is this just a no-brainer, the pension is always the better option?

If an employer also contributes then I assume it is even more of a no-brainer?

Thanks

To simplify your example I'd be comparing around €13,500 per year into the pension with €8,000 per year into the deposit account. After tax relief at 41% it's the same thing. You could increase the pension figure a bit to take account of PRSI relief. If the employer is matching your contribution, you'd be comparing €27,000 per year with €8,000 per year.

The interest rate on deposit would be 3% after DIRT tax.

The charges on a pension could be the equivalent to 1.25% per year, so let's say 2.75% on the pension side.

How you compare the end result will depend on your personal circumstances. Some people will be tax exempt in retirement, so no tax on the pension. For others, their pension will be taxed at 20% but their lump sum will be tax free. So deduct 15% from overall pension fund (20% of 75% of the fund). If you're wealthy, your pension may be taxable at 41% so worst case scenario would be to deduct 30.75% from the pension fund (41% x 75% of the fund). For this worst-case scenario, we are assuming that ALL your pension will be taxable at 41% so you would have income from other sources using up all your tax credits and standard rate tax band.

Methods above are based on current tax regime, which may well change in the not too distant future.

there are a lot of people out there whose pensions are now practically worthless or who are in receipt of drastically reduced pensions. No doubt there are many who are now wishing they had saved in high interest deposit accounts they might be financially better off than the predictment they now find themselves. In addition, who knows what government plans are in continuing toe give tax relief at the hiigher rate towards pension contributio

Marietta said:

there are a lot of people out there whose pensions are now practically worthless or who are in receipt of drastically reduced pensions. No doubt there are many who are now wishing they had saved in high interest deposit accounts they might be financially better off than the predictment they now find themselves. In addition, who knows what government plans are in continuing toe give tax relief at the hiigher rate towards pension contributio

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But that all depends on what funds they were invested in - if you are risk adverse you can always invest your pension fund in cash funds or bond funds - and still get the tax relief.

My husband was very risk adverse, made it quite clear to the AIB pension advisor, still lost value and is very bitter about it. You may think you have made yourself clear, but you're not really in charge of your funds.

Gervan said:

My husband was very risk adverse, made it quite clear to the AIB pension advisor, still lost value and is very bitter about it. You may think you have made yourself clear, but you're not really in charge of your funds.

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Did he make a complaint? If the pension advisor put him in a fund that wasn't what he wanted, he would surely have grounds for complaint. The pension advisor would presumably have a record of the meeting, even if your husband doesn't. If your husband made it clear that he wanted a low or zero-risk fund, but didn't get one, that would be mis-selling, which can be rectified.

It is most unlikely that the pensions advisor would admit to having a record of anything that would be to his disadvantage.

peter wise said:

It is most unlikely that the pensions advisor would admit to having a record of anything that would be to his disadvantage.

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Any correspondence would be kept on file.

You sound like another peter who used to frequent these pages.....

Marietta said:

there are a lot of people out there whose pensions are now practically worthless or who are in receipt of drastically reduced pensions. No doubt there are many who are now wishing they had saved in high interest deposit accounts they might be financially better off than the predictment they now find themselves. In addition, who knows what government plans are in continuing toe give tax relief at the hiigher rate towards pension contributio

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THere are also a lot of people who think their pensions are practically worthless because they havent got an up to date valuation on them.