Key Post The pros and cons of pensions

[Gordon Gekko]

Contributing to a pension makes huge sense.

For €60, you get €100 moved into an investment world where there is no income tax and no capital gains tax.

At retirement, you can take out 25% of the value of your fund. The first €200k of this is tax free and the next €300k is taxed at 20%. That's only €60k of tax on €500k.

The balance in the ARF/AMRF can be withdrawn at will, with a 4% mandatory minimum withdrawal. Because of the 20% band, you probably won't pay top rate tax on everything. And there's no PRSI once you're 66.

Re cost, just shop around. 100% of your contributions should always be invested.

I pay 0.5% - That's it.

 

[PaddyW]

I started my pension back in 2005 (if I remember correctly). I pay higher rate tax and I also have employer contributions. Total contributions to date have been €48,500 (roughly) and when I checked 2 days ago, the total fund was worth €71,500. Not bad! I'd advise people to start asap on their pensions.

 

[Jim2007]

At retirement, you can take out 25% of the value of your fund. The first €200k of this is tax free and the next €300k is taxed at 20%. That's only €60k of tax on €500k.

I would ignore this - no one can tell you what the tax situation will be like when you come to retirement other than the later you retire the more likely that it will be fully taxable like it is in other Euroland countries.

 

[Gordon Gekko]

I would ignore this - no one can tell you what the tax situation will be like when you come to retirement other than the later you retire the more likely that it will be fully taxable like it is in other Euroland countries.

That depends how old you are...

 

[facetious]

Contributing to a pension makes huge sense.

At retirement, you can take out 25% of the value of your fund. The first €200k of this is tax free and the next €300k is taxed at 20%. That's only €60k of tax on €500k.

There are some hefty figures being put forward here. I would ask a simple question, what value is the average pension pot?

I read recently that in the UK, the average pot was about 45k.

You put money into a pension fund and cannot get at it until you are at retirement age (or sometimes from 55 years. Not a lot of use to you if you are having your home repossessed and have money in a pension pot but can't access it!

 

[Gordon Gekko]

There are some hefty figures being put forward here. I would ask a simple question, what value is the average pension pot?

I read recently that in the UK, the average pot was about 45k.

You put money into a pension fund and cannot get at it until you are at retirement age (or sometimes from 55 years. Not a lot of use to you if you are having your home repossessed and have money in a pension pot but can't access it!

Equally not much good to get to 66/68/70 and to be forced to live on €12,000 a year...

 

[facetious]

Equally not much good to get to 66/68/70 and to be forced to live on €12,000 a year...

I'll be 70 next year and retire due to ill-health just before my retirement age. I am on the non-contributory pension (just under 250 per month, winter time!) and my main expenses are for electricity, food and clothing etc plus nearly 1k for management services charges (I own my own apartment). My food bill per week is less than €25 per week (and I eat well), I have a medical card, free travel, and free TV licence.

Thus, per year, food is €1,300 p.a.
Management charges are €1000 p.a.
Electricity less than €1000 p.a.
Total on main expenses is €3,300
Leaving me €6,700 p.a. for anything else, holidays clothing etc.

€12,000 a year is plenty to live on.

Sorry, I've gone off topic.

 

[Gordon Gekko]

Fair play to you. However, I would strongly dispute your contention that €12,000 a year is plenty to live on.

 

[trasneoir]

You put money into a pension fund and cannot get at it until you are at retirement age (or sometimes from 55 years. Not a lot of use to you if you are having your home repossessed and have money in a pension pot but can't access it!

To my mind that's an argument against un-affordable mortgages rather than against pension investments.

I see no evidence that the state will be able to afford an old age pension by the time I get there, so funding my own is mandatory.

 

[Gordon Gekko]

Absolutely. My own view is that all State Pensions will be means tested by the time I retire. The numbers just don't stack up (i.e. more retirees and less workers).

The present system is fine - It's malinvestment and disgraceful charges that have given pensions a bad name.

 

[Steven Barrett]

I started my pension back in 2005 (if I remember correctly). I pay higher rate tax and I also have employer contributions. Total contributions to date have been €48,500 (roughly) and when I checked 2 days ago, the total fund was worth €71,500. Not bad! I'd advise people to start asap on their pensions.

Well done Paddy. There will be crashes along the way and that €71,500 will drop in value. As long as you are invested in a portfolio that is within your comfort zone, there is no need to panic. Stick with it and things will come back.

Sometimes I come across policies that people took out 25-30 years ago. They invested £50 a month into a managed fund and they have done nothing with it since. There have been a lot of ups and downs along the way and they just rode them out. Those policies usually have returns of 8/9 times the amount paid in.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Steven Barrett]

€12,000 a year is plenty to live on.

It depends on what you want to do and the cost of your lifestyle. If you were earning €100,000 when you were working, a drop to €12,000 a year would be quite a shock as your lifestyle is based around a €100,000 salary.

The reality is people won't have enough in their pension pot to have the lifestyle that they want in retirement. Pension funding should be part of a overall strategy to provide an income in retirement, you should also look at other income streams, if possible.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Firefly]

just to add hopefully some clarity to the discussion ( argument?) .
I have sourced an indicative annuity quote for the following;
Male age 65 female age 62
Fund to buy annuity is €1mio
The annuity inflates at 3% per annum
The annuity provides for a 50% spouses pension
The guaranteed term is 5 years
nil commission
The annuity income is €19,542.20
and I now tiptoe quitly away....

Thanks to North Star for producing the figures above for a different thread.

OK, so what I am trying to figure out is whether it would be easier and better to just put money in the bank for someone aged 40 planning to retire at 65, i.e. 25 years. I'm close to this age and have a pension but I'm not sold on whether to continue or just put the money into the bank. I am ignoring the potential growth of the fund (or potential risks). I realise this growth could be significant but I am also ignore the fees involved in building up and drawing from the pension fund any money grab by another goverment in the future.

I am not ignore tax benefits and these are included below

Monthly budget is 1,000, higher rate tax payer.

Option 1 - Pension.

For a net cost of 1,000 per month, 1,666 per month can be put into a pension fund (higher rate tax payer). After 25 years, this amounts to almost exactly 500k (499,800). Based on the figures above for 1m, this would be something as paltry as 10k per year or thereabouts.

Option 2 - save directly to the bank

1,000 per month for 25 years would yield 300k. The same 10k a year would see this person / couple (it doesn't matter!) reach 95 before the money runs out. I appreciate there is inflation at play and the figures above include an inflation rate of 3%, but even taking this into account the couple would probably be 90 before the money runs out. All the while they have full access to the entire amount and don't have to worry about the stock market value when they reach 65.

I could be completely wrong above and if so I would love someone to point out to me where I am wrong. I have a feeling the potential growth of the fund would be the biggest omission...

 

[dub_nerd]

Just my tuppence worth: I very much take the "bird in the hand" approach. I would go for the bank saving option. That's what I've done with my own money. I do have a pension fund from previous employment but my employer contributed most of the funds and I paid the minimum possible amount into it from my own salary. My concerns about its performance were amply realised -- it yielded miserable returns over more than twenty years. It's still there for whenever I draw it down but I'm not holding my breath for the annuity it will buy.

Meanwhile I saved more than ten times the amount I contributed to the pension. Rates of return on cash were reasonable until a few years ago, and I locked in some rates that are only expiring now. Yes, I paid punitive tax on the earned income and then more through DIRT, but the money is now available for whatever I want. The government hasn't (yet) dipped into it like it did with my pension. If I want exposure to the stock market I'll invest it myself -- from my admittedly limited experience so far my returns are vastly better than anything my pension ever achieved.

I value liquidity, mostly as a way of keeping my options open to escape the ravages of government.

 

[Boyd]

Why not do both? Spilt the cash and get best of both worlds. If your mortgage is paid then this should be possible.
Also, you didn't mention the 250k (225k?) tax free lump sum on pensions. Finally you don't have to buy annuity, you can continue to invest in an ARF.

 

[Boyd]

Actually, 225-500 is taxed at 20%, above that is at marginal rate. Can you quit your high paying job just before retiring, take up a lower paid job so you drop back to being a lower rate tax payer and then only pay 20% tax on amounts above 225k? I assume not, surely they've thought of this and somehow closed this option?

 

[Firefly]

Why not do both? Spilt the cash and get best of both worlds.

That's probably the best option actually, maybe 60/40 for cash/pension. It would be handy to have fixed income as well as a reserve fund.

 

[Fella]

Personally I wouldn't put a penny into a pension , if pensions are going to be unsustainable in the future like most here are saying then I'd expect the government to get involved and they can just do what they want. They'll interfere again , id rather cash all day long , I can move myself and my cash easily it's not locked in till I'm 65 with me hoping that the clowns in charge leave it alone.

 

[Gordon Gekko]

Guys,

The negativity about pensions is incredible. With the time horizon that's been talked about, it would be insane to provide for one's retirement using "after-tax funds".

Even using Firefly's cash option, the position is clearcut. Of the €500k, €125k would come out tax free, with the balance going into an ARF/AMRF. Someone at that level would pay little or no tax on the ARF drawdowns, so they have 50 years of money at €10k a year rather than 30 years of money using after-tax funds.

But with a time horizon like that, investing makes perfect sense. People's bad experiences with pension are never as a result of the structure; it's a great structure. You get the free use of government money to invest (i.e. tax relief). The problem is when people get scalped by unscrupulous brokers or banks, and when people invest in rubbish, whether that's bank stocks that go to zero or fee-laden rubbish funds. Pay no more than 1%, go into a managed fund with circa 50-60% equity content (e.g. Zurich Pathway or Standard Life My Folio) and contribute as much as you can.

With that sort of time horizon, nobody has ever lost money when investing in a globally diversified manner. Advisers can never say this, but with a 25 year time horizon, reasonable fees, and diversification, you simply cannot lose. The guy who invested in 1928 didn't lose. The guy who invested in 1999 didn't lose. The guy who invested in 2008 didn't lose.

 

[Gordon Gekko]

Personally I wouldn't put a penny into a pension , if pensions are going to be unsustainable in the future like most here are saying then I'd expect the government to get involved and they can just do what they want. They'll interfere again , id rather cash all day long , I can move myself and my cash easily it's not locked in till I'm 65 with me hoping that the clowns in charge leave it alone.

Fella, with all due respect, your strategy is ill-judged and you will regret it.

The penalty tax that applies to larger pension funds also applies to public sector pensions. If they were to drop that level at which the tax problem arises, it would start to capture mid-ranking public servants, which would cause uproar.

You are leaving a massive opportunity on the table here.