I would take issue with that as a hard and fast - or even firm - rule.And if you are getting only 20% tax relief on your pension, you should not be contributing to a pension.
Hi,Should I start a pension
No, If you don't have a house - that is a higher priority
No, if you have an uncomfortably high mortgage, getting it down to a comfortable level is a priority
No, if you are not paying 40% tax. Wait until you can get 40% tax deductions.
Yes, if you have a comfortable mortgage and are paying 40% tax.
Even if you have an uncomfortably mortgage, it might be right to start a pension if you are older as you might be limited in what you can contribute later.
The tax benefits are huge
You get 40% tax relief on your pension contributions.
The fund grows tax free.
On retirement, you will probably get 25% tax free.
The balance will be subject to tax at your top rate - which might be only 20% in retirement.
No. This is bad advice.Hi,
Can I ask why not start a pension if not in the 40% tax bracket? Do you mean in this particular situation or in any situation?
I am self employed, at the moment not in the 40% tax band, and thinking about a pension for first time, in my early 50s.
I am keen to start a pension but this has made me think twice.
If not starting a pension and say I never reach the 40% tax band, what should I be doing instead?
Boss,It depends on your age and your expected earnings.
If you are paying tax at 20% but expect your earnings to rise so that you will be in the 40% tax bracket, then you should not contribute to a pension. 40% tax relieve is much better than 20% tax relief.
However, if you are in your 50s and don't expect to be in the 40% tax bracket, then you should contribute to a pension if you can afford to do so.
Brendan
Plus the tax free lump sum.So even tax relief at 20%
(plus tax free investment growth) is still a good deal, whether above or below age 50.
I think I am but I still don't understand your point.I think you are all missing the point.
Yes, but that doesn't necessarily mean that they shouldn't have been contributing at all when paying 20% tax.I am a 25 year old at the start of my career paying tax at 20%.
I contribute €5,000 to my pension and it costs me €4,000. That is good value.
But the following year I am paying tax at 40%. I contribute €5,000 and it costs me only €3,000. That is much better value.
Don't forget many companies match contributions which effectively double them, no matter how small. In the example above I was contributing just 1k per annum but my employer paid the same. It only made a small difference tax wise but in the long term, the benefit will be very useful given that I will be looking at paying a mortgage until I am 69. This and another modest (albeit a larger) pension should help me when I need it.The person in your example will only get tax relief at 20%.
They would need to earn 45000 to get tax relief at 40% on 5000.
Your person might never earn enough to be taxed at 40%.
It is a good idea to start young and make small contributions into their pension.
Maybe 1000 per year.
They should get into the habit young to see their pension fund grow over time.
This will incentivise them to build up a decent pension fund.
If your person started at age 20 they would have 45 years of investment growth to age 65.
This is a common dilemma. I was in exactly that position as when I originally started my pension I realistically thought I would never be able to afford a home. But it did remain that while I got 20% and after 3 years 40% on my contributions, you don't get any relief (and indeed pay DIRT and CGT) on savings and investments made to save for a deposit or other savings. However the long term growth that results from starting saving at a younger age is well worth the loss in tax reliefs.Someone in their 30s can contribute 20% of their salary each year.
The 40% tax band kicks in at €40,000 for a single person
That allows them to contribute €8,000
It is unlikely that they can afford €8,000 every year.
So say they contribute €5,000 - that will cost them €3,000.
But if they have spent their savings contributing when they were getting tax relief at 20%, they won't be able to afford the €5,000.
Do you think that someone can afford to pay 15% of their salary every year up to the age of 30 when they are earning under €40,000 and 20% every year up to the age of 39 and pay their mortgage and meet all their other expenses?
I don't think so. So when they are paying 20% tax, they should be paying down their mortgage so that they will have scope to increase their contributions and use up the maximum when they are paying 40% tax.
Brendan
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