Pension well funded at 43, changing employment, salary instead?

[Allegory]

I'd really appreciate some advice on my situation, outlined briefly below. I realise that I probably need to seek out broader advice specific to my situation. I've been in the fortunate position of not giving much consideration to my pension and now finding myself feeling very naive of what my options will be in retirement.

I have left one employer and anticipate joining a new employer and am wondering if in negotiating my contract I should ask the new employer to increase my salary in lieu of pension contributions. I am not sure if they would even contemplate this, but first need to ascertain if it would be in my interests to ask.

My DC fund from the employment I'm leaving is €760k (after recent sell off). I'm 43 and would target retiring in about 20 years. My fund is fairly aggressively invested in all equity (on the basis that my spouse has a generous public sector DB pension and I have income from an investment property). I also anticipate switching to a plural career in 10-15 years and tapering into retirement so would expect to have some flexibilty about when I retire. With 7% returns I see myself hitting a €3m fund value in 20 years without ever paying another penny in. If I start contributing to a new scheme the combined contributions would be of the order of 30k p.a. sending me towards the threshold on an even faster trajectory. I suppose I'm trying to balance the possibility that the SFT threshold increases against the possibility of paying the circa 70% tax. I know I'll have line of sight on the funds and could shift to cash, but if I end up doing that in 10 years time then there's the opportunity cost of having that cash in my hand and invested in higher-returning assets or paying off my mortgage more quickly

If it makes any difference my main concerns are obviously having a comfortable (though not excessively lavish) retirement with plenty of travel, which clearly we will be able to achieve, but also ideally in around 20 years i.e. at the point of retirement being in a position to help my children with a house purchase. I would far rather provide help at that juncture than as an inheritance.

Could anyone give me some broad strokes thoughts on this situation as it may be fairly time sensitive?

 

[_OkGo_]

The first thing to do is to find a good fee based financial advisor who can help you navigate your options.

My understanding (not advice) is that there are a few ways to get around the SFT and one is outlined in the link below under "4. Access benefits early".

Essentially you can retire your current pension pot at 50 because you are no longer in that employment. This is known as a BCE Benefit Crystallisation Event.

For the sake of an example, let's say your current fund grows to €1.1m by 50. If you retire it, take the lump sum and convert to an ARF, you now have €900k remaining in the SFT to use mainly from your future contributions instead of being used up by growth from your existing fund.

Meanwhile the ARF can continue to grow tax free but outside the scope of the SFT. At 61, you must pay tax on 4% of the ARF so you might as well draw the 4% at that point which you suit your ambition of tapering off to retirement at 63.

There are a lot of unknowns to the above scenario such as your entitlement to access the current fund at 50 so I can't stress enough that you need some proper professional advice but hopefully this gives you a starting point

Standard Fund Threshold Ireland - National Pension Helpline

If you’d like help understanding Standard Fund Threshold, The National Pension Helplines experts will assist you in devising the best plan.

nationalpensionhelpline.ie

 

[Brendan Burgess]

A very interesting question.

My DC fund from the employment I'm leaving is €760k (after recent sell off). I'm 43

With 7% returns I see myself hitting a €3m fund value in 20 years without ever paying another penny in.

You should not rely on 7% returns. 4% would be a much better basis for planning on. Of course, it could be 7% but it could also fall in value.

But your employer will be adding something, so you will well exceed the various thresholds unless they increase.

 

[Brendan Burgess]

paying off my mortgage more quickly

If you have a mortgage, I would probably aim to clear that assuming you don't have a very low interest rate fixed for a long time.

That gives you maximum flexibility.

 

[Brendan Burgess]

anticipate joining a new employer and am wondering if in negotiating my contract I should ask the new employer to increase my salary in lieu of pension contributions.

I don't think I would do that. Let's say you are earning €100k with 5% employer contribution. You will be seen as having a salary of €100k. If they agree to add in the pension instead, you will be seen as having a salary of €105k. Of course, it is the same mathematically. But I think it will feel more expensive to the employer.

Actually, it is more expensive as they would have to pay Employers PRSI on the salary paid instead of the pension contribution.

Many pension schemes match the employee's contribution up to a certain max. So you are almost obliged to put in the max.

And there is an argument for maxing your pension contributions while you are getting relief at the top rate. At some stage, this might be reduced to the standard rate, in which case you would no longer be wise to make pension contributions.

Brendan

 

[Allegory]

Thanks for the replies, lots to think about. Particularly appreciate the insight about the BCE. I hadn't realised that was an option and that seems like it would make a lot of sense in my situation. I'll have a look at options for advice.

I would have though 7% for all equity returns was about right for planning purposes. I'm not relying on that level of returns to fund a comfortable retirement, but I think for the purposes of working out when I might hit the threshold it makes sense to consider that level of growth i.e. this is something I may need to address in 10 years rather than 20.

Also I accept I may get relief on the way in, but potentially will pay punitive tax on the way out if I go over the threshold. I'm trying to balance that against having extra money in my hand now to pay off my mortgage sooner given that I'm in the (unusual?) position of having a very well-funded pension for my age but still having a mortgage (about 40% LTV).

Appreciate the responses.

 

[Steven Barrett]

Keep your foot on the gas. You don't know what will happen over the next 10 - 15 years, that's quite a long period of time. You are far enough away from the threshold to think you can glide up to the max without doing nothing.

It is also anticipated that the threshold will be increased. There were no applicants from the current Gardai top brass for Drew Harris's job due to the tax bill they would be landed with for exceeding the €2m limit. This is a serious issue, Ireland needs to be able to recruit the best possible candidates for jobs, especially ones with decades of experience. You can't just limit yourself to PSNI police who aren't impacted by the SFT.