Should one contribute post-tax funds to a pension scheme?

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nest egg

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My wife wants to retire at 50, 8 years from now. She has a pension pot of 125k, invested in a passive global equity fund. She's adding 23k p.a. to it (increasing in line with pay inflation) meaning she should have 500k by the time retirement comes along (subject to market conditions). So 125k TFLS & 15k p.a. from an ARF thereafter.

We're in a position to double the size of her pot using post-tax savings. Meaning a fund of ~750k by age 50, TFLS of 187.5k & 22.5k p.a. from an ARF. The alternative is an accumulating passive ETF which might get us to 180-190k in 8 years, after the 41% is paid. Nothing guaranteed of course!
 
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Given it's highly unlikely her pot will be bigger than 800k by 50, even if we bumped it up now, the main question is if it makes sense using after-tax income to fund a pension. I would never have thought so before reading this thread...
 
Pro: you get the benefit of tax-free growth within the fund.

Con: eight years is a very short period for equities and you may have negative or trivial returns.

Finally it’s hard to receive or give good advice with limited information like this. I suggest a money makeover.
 
Dr Strangelove said:
Con: eight years is a very short period for equities and you may have negative or trivial returns.
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The alternative approach with an ETF would have similar risk, and in any event, the intention would be to leave this pot in equities indefinitely. If the market was really in the doldrums, she could always defer dipping into it, we should have cash reserves built up to cover that contingency.

A MM is a good suggestion, as a preview it looks like we should be comfortable by then, no debt/mortgage & my pension is well funded, so the decision purely is about what will leave us better off financially.
 
@nest egg

You posted this in a thread on the €800k limit, which does not seem relevant here.

If I understand your question correctly, your wife is maxing her contributions to her pension fund already.

You are now asking if she should add money on which she will not get tax relief?

nest egg said:
She has a pension pot of 125k, invested in a passive global equity fund. She's adding 23k p.a. to it (increasing in line with pay inflation) meaning she should have 500k by the time retirement comes along
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So she will have about €300k before returns. I doubt that will be €500k but again, that is not really relevant here.

If she contributes €100k now on which she gets no tax relief.

When she retires, she will get €25k of this tax-free.
When she draws down the balance of €75k, she will pay at least 25% between tax and USC.
So about €19k tax.
The effective tax rate is 19%

Why would she put money into a fund which is taxed on what she takes out?

Let's say it grows at 5% per annum. It would be tax-free in the fund
So she will have €148k in the fund after 8 years.
She will pay €29k tax, and so will have about €120k net.

If she invests directly at say 3% net after Income Tax and CGT
She will have about €127k

The difference will be much bigger if she is taxed at 40% at age 50, which seems likely.

Brendan
 
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If you top it up and get more than 5% returns, then I think the effective tax rate is higher?

Let's say that the fund reaches €900k

She will pay 25% on the balance over €800k.

So on the additional €100k she is contributing now.
She is paying
€25k @ 20% = €5k
€75K@25% = €19k
So 24%
 
nest egg said:
Very helpful, thanks!
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Great.

In summary, it depends on the timescale and your wife's marginal tax rate in retirement. Pension contributions without tax relief should outperform ETFs after ~8 years for a 20% tax payer but will take ~22 years for a higher rate taxpayer, all other things being equal like charges and investment choices etc.

From what you have said, I think your wife expects to be a lower rate tax payer in retirement and should be invested for about 20-25 years average.

Shares might perform a little better than ETFs depending on the circumstances. So for shares the cut-off might increase from 8 years to maybe 10 years; that does not really change the decision in this case.

Just remember that as she gets older, the investment horizon will be shorter and the situation may change. You might need to review this decision every few years.

Note that this assumes 100% investment in equities. If her pension is invested more conservatively, the pension contributions option becomes less attractive.

Bets of luck with your decision.
 
Over the next few years I could see the private investing space getting a lot better in Ireland. I would invest after tax income outside of the pension.

Would you effectively pay income tax twice by using after tax funding for the pension?
 
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