Pick holes in my pension strategy

M

Mez!

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I’m currently maximizing my pension tax relief contributing to a single PRSA. I intend to always contribute to achieve max tax relief on this PRSA until retirement at aged 60 to 66.

With 20 or so years to go until then I’m considering opening another PRSA (with a different provider) to contribute additional funds over my primary PRSA, obviously devoid of tax relief but no different to increasing my contributions to the primary PRSA.

My reasoning for opening a second PRSA is that it gives me options.

Firstly, if I get to 60 and need/want to retire then I simply use both to buy an annuity or ARF. No real benefit, but no real loss either (assume growth rate is the same).

Secondly, if I want to continue working full time or go to part-time at 60 but needed some cash or additional income to supplement, I could cash-in the smaller PRSA and buy an annuity or ARF with the remaining funds, whilst still allowing my primary PRSA to (hopefully) continue to compound and also remain in my job.

Thirdly, if I get to 60 to 66 and retire I can cash-in the primary PRSA to buy an annuity or ARF and leave the smaller PRSA compounding for a few more years.

Finally, I’m hedging my bets to mitigate the loss of one provider going under.

Is my logic sound? I am assuming that I can cash-in one PRSA and leave another in place. Is this correct?
 
I don’t like your logic, for one reason. Taxation.
If you are currently maximizing your tax relieveable contribution then you won’t get tax relief on the excess. But any income arising from that excess will be taxable (potentially ) as income when you eventually draw it down.
If you want to save beyond the PRSA limits (up to 40% of Income) doing so outside of formal pension structures may be better. You will have greater flexibility as to when you access the funds, how much you extract etc etc.
The one argument in favor of your strategy is that the excess funds will grow tax free in the second PRSA. But against that, any income arising from the 75% (after taking 25% tax free) will be open to income tax etc. However if you think your future income will be below the tax exemption threshold or taxable at a lower rate, it may be a runner.
As for hedging against one provider going under, I think that is a bit extreme. I agree with some degree of asset diversification or manager diversification.
 
Your strategy only works if you pay income tax at the lower rate in retirement. You will be paying tax on 75% of the fund value in retirement versus 41% on the growth of an investment fund. If you are maxing out your tax relief and putting even more into a pension, I suspect you will have a well funded pension and be paying tax at the higher rate.

You also won't have access to this money until 60 at the earliest. A lot can happen in that 20 years that you may need the money.

On using multiple providers, pick mainstream providers or one that uses an independent custodian. No other need to use different providers. You mentioned on another thread that you are invested in index funds, so the fund performance should be the same no matter where you invest...as long as the passive fund manager is doing his job right :rolleyes:

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Thanks for the responses. I didn’t factor in taxing the entire fund value vs taxing only the growth. Your advice is much appreciated.

I think I’ll go with low cost IRE domiciled ETF’s for the extra funds.

Thanks again!
 
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