Key Post "Should I just save money or contribute to a pension?"
- Thread starter LDFerguson
- Start date
ok, my take on pensions is this:
Firstly if you are going to get one, get the one with the cheapest fees. Generally this is a passive fund (ie one that doesnt try to beat an index, just match it minus fees).
Secondly most managers (over time) do not manage to outperform, they match the market at best- so stick with a passive fund that tries to match the market.
Thirdly most people are not financially literate enough to stay abreast of the markets enough to do any better than fund managers or passive funds.
But mostly I dont think pensions (As are currently structured) are any value for money. Think about this scenario:
Somebody aged 35 with 50K currently in their pension fund. This person has approx 32 years left to retirement. Assume 10% growth per annum (which is unlikely), inflation at 2% (ECB long term target) and annual contributions of 2500. At retirement the person would have about 540K of a retirement fund (in todays money). This cost the person about 43K in annual after tax contributions (assuming 52%).
How much of an annuity would 540K buy? Judging by an earlier post it would be in the region of 17K (before tax). Not bad? Well what happens if you die aged 68? Who gets the 540K fund? Not your family...the annuity seller.
So what if you held onto the 540K in a savings account? Lets say you dont earn the 10% pa anymore...maybe something more realistic like 3%. Thats 16K per annum before tax. So you are still getting something similar to the annuity without reducing the capital amount. And if you die the money goes to your estate and your family get it...not some pension company.
To me it would be far better for the state to allow people to lock funds away into an account like this and at retirement only allow them to withdraw any capital increases (at most) every year, with the fund value (maybe less a tax?) going to the estate on passing of the owner. Those large capital amounts going back to the population would increase wealth (and taxes) over time and the funds wouldnt be lost to a pension company
**admittedly the 540K will be somewhat reduced by taxes from investments/interest if you dont use the pension fund...but i've also not included mgmt fees for the pension fund so its a reasonable like for like comparison.
Firstly if you are going to get one, get the one with the cheapest fees. Generally this is a passive fund (ie one that doesnt try to beat an index, just match it minus fees).
Secondly most managers (over time) do not manage to outperform, they match the market at best- so stick with a passive fund that tries to match the market.
Thirdly most people are not financially literate enough to stay abreast of the markets enough to do any better than fund managers or passive funds.
But mostly I dont think pensions (As are currently structured) are any value for money. Think about this scenario:
Somebody aged 35 with 50K currently in their pension fund. This person has approx 32 years left to retirement. Assume 10% growth per annum (which is unlikely), inflation at 2% (ECB long term target) and annual contributions of 2500. At retirement the person would have about 540K of a retirement fund (in todays money). This cost the person about 43K in annual after tax contributions (assuming 52%).
How much of an annuity would 540K buy? Judging by an earlier post it would be in the region of 17K (before tax). Not bad? Well what happens if you die aged 68? Who gets the 540K fund? Not your family...the annuity seller.
So what if you held onto the 540K in a savings account? Lets say you dont earn the 10% pa anymore...maybe something more realistic like 3%. Thats 16K per annum before tax. So you are still getting something similar to the annuity without reducing the capital amount. And if you die the money goes to your estate and your family get it...not some pension company.
To me it would be far better for the state to allow people to lock funds away into an account like this and at retirement only allow them to withdraw any capital increases (at most) every year, with the fund value (maybe less a tax?) going to the estate on passing of the owner. Those large capital amounts going back to the population would increase wealth (and taxes) over time and the funds wouldnt be lost to a pension company
**admittedly the 540K will be somewhat reduced by taxes from investments/interest if you dont use the pension fund...but i've also not included mgmt fees for the pension fund so its a reasonable like for like comparison.
LDFerguson
Registered User
- Messages
- 4,717
You've just pretty well described an Approved Retirement Fund, which is available as an alternative to an annuity.
Ah i didnt realise thats what an ARF was...just goes to show how badly its explained by the Financial world (and i'd count myself as extremely financially literate)!
Gents,
I've read all the previous posts which are quite detailed in fairness but with all those details I got lost halfway through unfortunately.
I'm not even sure whether there is an answer to the OP's question but from my point of view I didn't get a clear definition although I'm sure I just don't have enough info/experience to decipher whether or not it is worth it.
From a personal point of view I have the below details and would appreciate your comments based on the info I can give you.
Just turned 31 yrs of age.
Started pension 8 months ago
Contributions of €120 p/m (wanted a year of low contributions just to settle in as my financial situation was up in the air due to personal circumstances at time of commencement)
Planned contributions of €250 p/m starting in November.
Annual management fee of 1% of performance (Zurich Life)
Allocation rate of 100%
No hidden fees (AFAIC) but open to correction as my question is "How do I know" as it's hidden?
I'm also saving €800 p/m into a savings account but my contribution increase will be coming out of this money so pension/savings fund/s will essentially remain the same total.
My very basic questions are:
What should I be asking myself after 8 months into this pension?
How do I know I'm doing the right thing? (aware that this is not an exact science and nobody can ever really know) but am I doing anything completely wrong based on the above.
All pointers and advice would be greatly appreciated as I'm only doing a pension as it's the common advice given to anyone who would like some security for retirement.
Savings for 8 months €6400
pension contributions for 8 months €960
retirement age 68
I've read all the previous posts which are quite detailed in fairness but with all those details I got lost halfway through unfortunately.
I'm not even sure whether there is an answer to the OP's question but from my point of view I didn't get a clear definition although I'm sure I just don't have enough info/experience to decipher whether or not it is worth it.
From a personal point of view I have the below details and would appreciate your comments based on the info I can give you.
Just turned 31 yrs of age.
Started pension 8 months ago
Contributions of €120 p/m (wanted a year of low contributions just to settle in as my financial situation was up in the air due to personal circumstances at time of commencement)
Planned contributions of €250 p/m starting in November.
Annual management fee of 1% of performance (Zurich Life)
Allocation rate of 100%
No hidden fees (AFAIC) but open to correction as my question is "How do I know" as it's hidden?
I'm also saving €800 p/m into a savings account but my contribution increase will be coming out of this money so pension/savings fund/s will essentially remain the same total.
My very basic questions are:
What should I be asking myself after 8 months into this pension?
How do I know I'm doing the right thing? (aware that this is not an exact science and nobody can ever really know) but am I doing anything completely wrong based on the above.
All pointers and advice would be greatly appreciated as I'm only doing a pension as it's the common advice given to anyone who would like some security for retirement.
Savings for 8 months €6400
pension contributions for 8 months €960
retirement age 68
Surely the two simplest questions for (PAYE) people are;
Are you a higher rate tax payer?
Does you employer contribute?
Seems to me the answer would have to be no to *both* to consider not contributing to a DC scheme
Higher rate contributions despite the prsi and USC exemptions still experience a considerable boost to what they contribute and employers contributions are usually like for like
If you're in a position to worry about higher rate tax on the way out you must be close to the new limits on contributions then and be looking at a fund of over 1m. I'd say most people are nowhere near that and if they were this would be well down their list of issues
Are you a higher rate tax payer?
Does you employer contribute?
Seems to me the answer would have to be no to *both* to consider not contributing to a DC scheme
Higher rate contributions despite the prsi and USC exemptions still experience a considerable boost to what they contribute and employers contributions are usually like for like
If you're in a position to worry about higher rate tax on the way out you must be close to the new limits on contributions then and be looking at a fund of over 1m. I'd say most people are nowhere near that and if they were this would be well down their list of issues
Gordon Gekko
Registered User
- Messages
- 7,843
Asset allocation seems to be key. As is cost. And a 20/30/40 year old should be nowhere near the lower end of the risk spectrum. Volatility is your friend as you pick up units during market weakness.
A young person who allocates 100% to equities and who pays reasonable fees will be in a great place at retirement.
A young person who allocates 100% to equities and who pays reasonable fees will be in a great place at retirement.
Steven Barrett
Registered User
- Messages
- 5,330
That would be grossly unfair. The old age pension of €12,000 costs about €300,000. If you work and pay your PRSI stamps all your working life but have a private pension, you get nothing but someone who works but never bothers saving for retirement gets handed a pension worth €300,000?
The government should start with ring fencing PRSI contributions to actually pay for old age pensions i.e get the pension reserve fund back. As with every tax they collect, they just lump it all into one pot and take what the need from it.
Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
Gordon Gekko
Registered User
- Messages
- 7,843
It would be terribly unfair - But so is plenty of what's done in this country. The pension levy is grossly unfair.
That's what I was thinking when I read Steven's message - it's not what should be done but probably is what will be done once we've passed the point of no return (and we're getting there fast).
Regardless of what anyone thinks the solutions are, we can all agree that nothing is been done at Government level which would come any way to resolving the issue for the future... adding a couple of years to normal retirement age might help for now. I can only envisage that if I do provide for my own retirement, by the time I reach retirement age the State will have to bail out anyone that didn't as part of its social contract and there won't be sufficient funds to cover everyone. As long as unfunded schemes are acceptable, the problem will continue to grow.
You'd need an electorate who were prepared to patrol the fence (and break the legs of any politician who looked sideways at it). It seems that we reserve this kind of fervor for water and children's shoes.
How would you appoint the fund manager?
Steven Barrett
Registered User
- Messages
- 5,330
With the lack of interest in pensions in Ireland, I don't think you will find the electorate campaigning for this one.
The Pension Reserve Fund had fund managers. There's plenty of highly qualified fund managers who would take the job.
If the OAP was means tested, there is a high chance there would be protests. Public servants are in a mandatory pension scheme and in a lot of cases, their pension is LESS the OAP. Would they suddenly get no OAP?
As long as I can remember, we have been told that our PRSI pays for our OAP when we get old. Are they going to turn around and say, we're going to take that as tax and give you back nothing.
And all of this will come from the mouths of people who themselves will be taking €100,000 + from the State every year in retirement?
Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
People are responsible for their own happiness/future.
In my opinion having a pension is a necessity unless you want to risk later poverty.
The advantages are obvious and the illiquidity even protects against using the money against holidays etc...
If people want to behave differently - c'est la vie.
In my opinion having a pension is a necessity unless you want to risk later poverty.
The advantages are obvious and the illiquidity even protects against using the money against holidays etc...
If people want to behave differently - c'est la vie.
TrundleAlong
Registered User
- Messages
- 202
Back in 2000 through my employer I invested €30k in an AVC when taking a redundancy package.
Today, this is worth €54k.
The An Post Savings Certs/Bonds were paying attractive rates back in 2000, until a few years ago.
Would anyone have any idea, how much my €30k would have roughly earned me with An Post over the same period.
I understand that I received some tax relief on the lump sum that I invested at the time.
I found the best place to look up historical state savings rates was irishstatutebook.ie where I . You can
find rates going back to the foundation of the State (and some of them are eye-watering, e.g. 40% after 5 yrs 9 months as recently as 1994). Here are the last seven issues:
Buying €30k of Savings Certificates in 2000 and reinvesting the return would have looked something like this:
So your €54k from the AVC was significantly better and, if you got tax relief on the original €30k, even better again.
Last edited:
40&worried
Registered User
- Messages
- 1
Can anyone help here.
I’m 40 with 3 kids, a small pension pot from a previous low paid role.
I’m on 45k and my current employer will match my pension contributions up to 8%.
My wife is a teacher and has about 10 years contributions to her pension.
Our youngest ( which was very much a surprise) is only 11 months old so we have a few years left of full time childcare.
I’m putting the children’s allowance away for the three kids university costs but we put all our previous savings of 140k towards a deposit on a house, which we will soon need to leave as it’ll be too small. The mortgage is only 800 though so not too bad really.
My question is should I bother paying into the company pension or look to maybe alternative investments, such as real estate.
I’m far from financially savvy and have worked hard but maybe not smart enough so far!
Any advice, greatly received.
I’m 40 with 3 kids, a small pension pot from a previous low paid role.
I’m on 45k and my current employer will match my pension contributions up to 8%.
My wife is a teacher and has about 10 years contributions to her pension.
Our youngest ( which was very much a surprise) is only 11 months old so we have a few years left of full time childcare.
I’m putting the children’s allowance away for the three kids university costs but we put all our previous savings of 140k towards a deposit on a house, which we will soon need to leave as it’ll be too small. The mortgage is only 800 though so not too bad really.
My question is should I bother paying into the company pension or look to maybe alternative investments, such as real estate.
I’m far from financially savvy and have worked hard but maybe not smart enough so far!
Any advice, greatly received.
+1
If a company is matching pension contributions then (where possible) you should try to take full use of it. It's doubling your impact even before tax benefit.