Show me where the value is in a lifetime of contributing to a private pension?

@ashambles

Not necessarily. Keeping your ARF fully in bonds/equities means it is vulnerable to investment losses. Big losses in the early years mean you may not live long enough to grow out of trouble.

Personally I think a balance between purchase of an annuity and ARF drawdown is a good strategy. If I had €1m at 65 I would probably not bother with an annuity as I could basically self insure.

But if your fund is much more realistically in the €100k-€200k range I would put some of it into an annuity even with rates say as low as 2%.
 
As was stated earlier, an ARF and an Annuity are entirely different strategies.
An Annuity (even with what might appear to be low Annuity rates currently) offers certainty. Irrespective of longevity or investment markets, you have security of income for life. No worries.
An ARF requires you to invest the capital (involving some level of investment risk) but offers flexibility in terms of drawdown. The risks here involve “investment risk” (values can fall) and longevity risk (you might outlive the fund).
In making a choice one might bear in mind the following:
- your state of health (clearly if in poor health you would not buy an Annuity)
- you attitude to risk, longevity or investment.
- what other assets and income you might have. Clearly if you have significant assets or other income, then you might be able to live with the investment risk and fluctuations involved with an ARF. But if this is going to be your only income in retirement then you might favour a more secure income source such as an Annuity.
For a male retiring at say 65, a single life Annuity rate is circa 4.5%. Whilst that may seem poor value, it offers certainty. An ARF involves investment risk (something that retirees often cannot stomach). If one looks back to 2007, 2008 when Equity markets fell by c40% many ARF investors could not hang in long enough for markets to recover (which they did from mid 2008).
 
kevhenry said:
You would need to allocate €35,000 of your marginal gross income each year to save €21k outside of a pension fund whereas the €21k pension is probably only costing you a net €10,000 each year with a 5% employer contribution.
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I think that this type of analysis gives financial advisors a bad name. While all the numbers are factually correct (ignoring USC and PRSI) the impression given is that pensions are 3.5 times better than savings by comparing gross with net and assuming employer contribution.

kevhenry said:
Standard rate tax on excess lump sums over €200,000 to a maximum benefit of €440,000.
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Equally here "maximum benefit" is quoted, which is a confusing term and not clear that the €200,000 tax free is included in it nor that €60,000 tax will be paid. Why not state that the lump sum is taxed at the standard rate between €200,000 and €500,000?
 
mcauleyej said:
I think that this type of analysis gives financial advisors a bad name. While all the numbers are factually correct (ignoring USC and PRSI) the impression given is that pensions are 3.5 times better than savings by comparing gross with net and assuming employer contribution.
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That type of analysis gives advisors a bad name even though all the numbers are 'factually correct' -

Good one

Kevin
www.thepensionstore.ie
 
kevhenry said:
Well, as a financial product, it’s benefits should be evaluated based on financial metrics.

And they are more than just perceived benefits.

You get;
  1. Tax relief on contributions of up to 40%
  2. Tax free investment growth
  3. Tax-free lump sums up to €200,000
  4. Standard rate tax on excess lump sums over €200,000 to a maximum benefit of €440,000.

Not only that, as a married individual with dependent spouse, you could amass a fund of up to €400,000 before you start paying any tax on your income in retirement.

You might live to regret making a big decision like this based on something that may or may not happen in the future.

In any case, figuring out the best way to distribute the proceeds of a €738k pension fund would a very nice problem to have.

Kevin
www.thepensionstore.ie
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The reality is that very few will actually get 40% tax relief. They may get it when contributing but when the taxable element is withdrawn they will likely pay some element of tax plus USC when combined with state pension. Its a partial tax deferment.
If you wrote this summary a number of years back, you would have said there was up to 500k tax free lump sum available. That dropped to 200k very suddenly in one go and while the 25% lump sum may well continue, the maximum limit will once again drop to a level that won't upset too many civil servants. I predict this will happen within 3 yrs.
The huge problem with pension planning is that you cannot plan, as the legal framework is forever changing. This is almost a bigger risk than investment risk in my mind.
Folks still need to plan and save for retirement though, I just don't think expensive, uncertain pension plans are the way.
 
JoeRoberts said:
Its a partial tax deferment.
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No, it's a full deferment of income tax.

It's certainly true that any subsequent drawdown is subject to income tax (at a rate as yet unknown). But it's still a full deferment until that point and that's very powerful in terms of building retirement savings.

Even if the (now capped) 25% tax-free lump sum was abolished in the morning, pension vehicles would still be the most tax-efficient way of saving for retirement.

That's not an opinion - it's simple maths.
 
I think a fact that hasnt been mentioned so far is that if you die, your tax relieved PRSA will pass directly to your estate, a significant advance on post tax investments. Open to correction on this.

Nevertheless, I remain unconvinced about a negative pensions environment. A risk of a rule change is of course real but this could equally apply to any investment related rules, CGT, DWT etc.
 
kevhenry said:
That type of analysis gives advisors a bad name even though all the numbers are 'factually correct' -

Good one

Kevin
www.thepensionstore.ie
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Yes cherry picking acts and presenting them as if they were typical rather than highly selective is the type of so called analysis that gives many financial advisors a bad name.

A number of other financial advisors post regularly on AAM and I do not think that any of those others engage in that type of thing.
 
cremeegg said:
Is it not possible to invest an ARF in cash or govt bonds thus avoiding risk 2 if one wishes.
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Yes one can obviously invest in Cash but the return (currently) will be zero or negative after charges. And with 4%/5% drawdown the fund will gradually reduce.
Govt Bonds still involve investment risk (particular if interest rates rise in the future).
So Cash may eliminate investment risk but at cost, no upside.
 
Conan said:
Yes one can obviously invest in Cash but the return (currently) will be zero or negative after charges. And with 4%/5% drawdown the fund will gradually reduce.
Govt Bonds still involve investment risk (particular if interest rates rise in the future).
So Cash may eliminate investment risk but at cost, no upside.
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But isn't this effectively what annuity providers are doing? Investing in risk free instruments?

With interest rates so low the reality of an annuity for a 65 year old is they would have to live beyond 90 just to get your money back, and that's on a straight basis with no inflation adjustment. There's no hiding from that.

What's the investment risk with government bonds held to maturity Vs an annuity at a fixed rate?
 
RedOnion said:
What's the investment risk with government bonds held to maturity Vs an annuity at a fixed rate?
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How would you be doing today if you'd put 100% of your pension into Greek government bonds c 2008?

Also please note that German government bonds are now negative at every point on the yield curve!
 
NoRegretsCoyote said:
@Red onion

Greek bondholders took a >50% haircut in 2012.

This is not a regular occurrence, but sovereign defaults can and do occur.
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Fair enough.
The point Conan made was "particular if interest rates rise in the future". I had been thinking about interest rate risk rather than credit default, but I see your point.

If we're factoring in sovereign default risk, we can't overlook default by the life company providing the annuity either?
 
RedOnion said:
If we're factoring in sovereign default risk, we can't overlook default by the life company providing the annuity either?
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I guess so. Not sure what the regulatory regime is like or whether there is formal investor protection.

Even if there isn't, large-scale default on annuities would probably see government step in.
 
Conan said:
Yes one can obviously invest in Cash but the return (currently) will be zero or negative after charges.
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Also, Eurozone banks (including Irish banks) now routinely charge interest on large corporate deposits so cash can certainly lose value, even in nominal terms.

And that's before you take account of the costs of the ARF provider...
 
Conan said:
For a male retiring at say 65, a single life Annuity rate is circa 4.5%. Whilst that may seem poor value, it offers certainty. An ARF involves investment risk (something that retirees often cannot stomach). If one looks back to 2007, 2008 when Equity markets fell by c40% many ARF investors could not hang in long enough for markets to recover (which they did from mid 2008).
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Is there an Irish company currently offering 4.5% for a relatively healthy person?

The Irish life calculator annuity calculator for a single male 65 is showing 3.6%. (A 65 year old pensioner gets their money back by the age of 92.)

If you'd like inflation linked, and a second person, then you're already today looking at under 2% annuities.

I'd be happy with restricting fund choice to safe or ideally guaranteed funds - over forcing people into annuities at rates less than 5%.

Put it this way, forget about pensions, if you'd 100k in cash at 65 would you give it someone who'll dribble it back to you at 3.6% - and hope you live past 92 and still be in a position to care about your annuity?

Back when annuities were 7-9% you did have people opting to convert savings into annuities. Outside the captive pension market, no one now is buying annuities.
 
Ok an annuity is a poor option (for most - everyone's circumstances are different), it does not translate that pensions are a poor option.
 
He said that he is funding at the maximum rate for his age and salary in conjunction with an employer contribution.

€21,000 is the amount being funded every year in total which, as he said, represents the maximum 25% threshold given his age, which gives relevant earnings of €84,000.

Therefore he is comfortably a marginal rate taxpayer.

With nothing else to go on I made an assumption of 5% of salary as a contribution rate which would not be outrageous.

Therefore, as a comparison of asset value and relative costs of assembly;

Pension fund;
  • 5% employer contribution (€84,000 x 5%) = €4,200 which leaves him €16,800
  • Marginal Rate Tax relief = €6,720
  • Personal contribution = €10,080
  • Accumulated asset value €21,000
Cash savings;
  • Gross salary equivalent at marginal rate €35,000
  • Tax Paid €14,000 + USC + PRSI
  • Accumulated asset value €21,000
Tax relief is not being utilised in savings fund as the tax has been paid where it is being retained as an asset through a pension.

That’s hardly cherry picking notwithstanding the assumption of a 5% employer contribution.

That said, I apologise that this was unclear as this was obviously not my intention.

Lesson learned.

Kevin
www.thepensionstore.ie
 
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