Key Post The pros and cons of pensions

Fella

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I'm invested in the stock market , I can easily liquidate it and have cash to do what I want with , locking in money for the next 30 years is crazy imo, they done it before so they'll do it again especially with the pensions been unsustainable , it's not worth the risk for me, I'm a low rate tax payer anyway so it's an easy decision but my decision would be the same if I was on high tax .
 

Gordon Gekko

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Someone paying tax at 20% should still divert money into a pension. Because of the numbers involved, he or she will end up paying tax on the pension income at the lower 20% level (or even 0% in certain circumstances).

Consider two options:

- Trying to invest €80 in non-pension world where income tax and capital gains tax are chipping away at your investment.

- Instead putting your €80 and an interest free loan of €20 (i.e. tax relief) into pension world where there is no tax and your €100 is free to compound away for a very long time. Then you draw 25% of your fund out tax-free and draw an income taxed at a combination of 0% and the 20% rate (plus the lowest rates of USC) in retirement (with no PRSI).

Personally, I don't believe that your scepticism is well founded, but in any event such restrictions are far less likely to impact on someone with a smaller fund like yourself.

I genuinely believe that you are making a mistake.
 

Merowig

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dub_nerd

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I'm invested in the stock market , I can easily liquidate it and have cash to do what I want with , locking in money for the next 30 years is crazy imo, they done it before so they'll do it again especially with the pensions been unsustainable , it's not worth the risk for me, I'm a low rate tax payer anyway so it's an easy decision but my decision would be the same if I was on high tax .
+1. Totally agree with this. I understand the objections of others who perhaps understand the pension industry better than I do, but from a purely personal and subjective point of view:
  • government has set a completely disastrous precedent by raiding private pensions. From what I can ascertain, the compounding effect is much worse than the modest percentage they swiped, and will result in a 5% or so reduction in final pension for me. Why on earth would I trust that this won't happen again?
  • annuity calculations are at daft levels. Looks to me like you'd have to live to well over a hundred just to get back the money you put in. Why should I line the pockets of the pensions companies?
  • the internet is full of advice about choosing the right products from the right companies, with the right fees and the right investment mixes. With all due respect to the experts here, the problem is that the non-specialist must trust advisers whose impartiality is unknown at best. The pensions world is hideously opaque, jargon-filled and a minefield for someone like me. I make a point of never trusting anything I don't understand. Having paid advisers retained by my last company did not result in good returns for the pension investment, quite the opposite. Anecdotally I have seen other individuals get completely wrong or unsuitable advice from paid advisers. Basically, I wouldn't trust a pension as far as I could kick it. Hilariously, neither did the salespeople who sold my last pension -- I later discovered they had no pensions themselves!
  • Life's expenses don't come in neat monthly or annual chunks. Having your own lump sum put by lets you vary your own expenditure as you want, whether for voluntary leisure activities or involuntary expenses.
  • With all the downsides of pensions, I consider the tax inefficiency of saving from net earnings to be a necessary evil.
 

Gordon Gekko

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But the pension doesn't give you bad advice or rip you off...an adviser does. So seek referrrals or recommendations.

Why should the fact that the State took an average of circa 0.5% condemn you to a less comfortable retirement?
 

Firefly

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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 30 years would get me to 95 which I think most people would take. You also have the freedom to do what you want - say something bad happens in the future, like the government does actually go broke. You could have your money safely out of the country and your future more secure.

I'm in a lucky position - Mrs Firefly has worked for a large portion of her career in the HSE and has recently returned. Even if the government of the future goes broke, her pension will probably be the same or better than most private pensions anyway. In this regard, I think I will choose carefully and go for a mix of cash / investments and a low cost pension. That would leave a mixture of fixed income and OAP to meet day to day expenditure and a reserve fund to cover big ticket items, be they for pleasure or for health purposes.

One other thing.....surely the government of the day could do away with the 25% tax free lumpsum?
 

Fella

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I wanted to say exactly what Dub Nerd said but he said it better!
I really don't see how I am losing out , I'm still getting the same returns from the stock market as a pension fund , but I have access to my money whenever I want it. There's a big opportunity cost of locking money away for that long and as I already said I just don't trust the tax changes that will be made by governments over time. I don't want to be told when I can touch my money and how much I can withdraw, if theres a property crash in a few years and I think houses are silly cheap I can cash in some shares and buy a house , why would I lock my money away for 30 years now in a pension and the year before I retire the government of the day could decide lets means test pensions , lets do away with the tax lump sum etc etc and there is absolutely nothing I will be able to do. I would argue having your money when you need it invested in the stock market is worth more than the tax relief over time.
 

SBarrett

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As long as you have something to live on when you retire, it doesn't really matter what method you use to save.

The big advantage of pensions is the tax relief on personal contributions and large company contributions can be made into a plan on your behalf without any tax consequences for you. One of the terms and conditions of those massive tax breaks is that it is supposed to be savings for retirement so you can't touch it until age 60. I think that's fair enough.

Unless you have a very large pension fund (the average pot is just €80,000 :eek: ), you can manage the withdrawals to reduce your tax to 20% or even nothing. The big problem is the AMRF, which scuppers control for a lot of people, especially those with a small pension pot. For those with large funds, they tend to have other income and are quite happy to have money kept out of imputed distribution.

If having access to your money is more important, pay your tax and invest it yourself. With tax on growth at 41%, profits are pretty heavily taxed. As I said, it doesn't matter if you have a pension or not as long as you have something to live on. People who say they will continue to work assume that they will stay healthy and the work will always be there.

For people who complain that their pension did crap, it's not the pension, it's the investment strategy you picked and the charging structure. If you pick a low risk strategy, you will struggle to make money. If you go to a salesman, he will give you a poorly structured contract, that will make it difficult for you to make money. Pay an advisor a an implementation fee to get everything set up correctly and stick with your investment strategy.


Steven
www.bluewaterfp.ie
 

North Star

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Hi Fella , Dub Nerd, can we look at some of the various issues which influence your preference for investing via net funds i.e you have already paid your income tax?

  1. Liquidity - yes this is a fair point in that pensions are by design a long term savings plan. With a bit of ingenuity an adviser might in most cases be able to arrange access from age 50 but on balance I fully agree that liquidity is valuable and that not all your funds/savings should be directed to pensions
  2. Govt theft via the pensions levy - Yes agreed that this was a hugely damaging decision. However I wouldn't take a decision that wasn't in my best interests just because of this. To explain - unfortunately any future Govt. if required can attack savings/wealth/income and assets via the tax system. They always have this right - just look at the level of DIRT tax.. So in an extreme case my funds could be hit by a future Govt. irrespective of whether it is in pension, bank deposit or stock broker account. If we open up a foreign bank deposit for clients we are required to inform Revenue so I dont think there is any reasonable way to avoid the tax net
  3. Poor investment returns - I cant accept this as a reason not to invest in a pension if you are comfortable investing your own net funds. You can select either a self administered pension or indeed a self directed pension with a life company and manage your own pension via EFTs directly held equities property etc. Only with the pension as opposed to net funds you have a tax benefit i.e you get more invested now to compound up to a larger amount over time and you defer paying tax for many years i.e. the gross roll up effect.
  4. What about costs? - well there are costs in a pension wrapper but compare and contrast via non pension investing. You can get pensions with 100% net allocation and 0.5% annual charges ( subject to meeting certain criteria) , some self directed pensions will have an annual charge of say between 0.75% to 1% but this is offset by very low trading costs where you can trade equities/etfs for a max cost of €75 per trade. For active traders this low transaction costs offsets part/all of the annual charge. Self administered schemes can cost as little as 0.25% per annum. So yes there are costs but given the tax benefits the cost/benefit analysis in my opinion comes down strongly in favour of pensions when the tax break/tax deferral is added to the mix
  5. Lack of transparency across the pensions industry - well you have a fair point here and I cant argue with you. However you can deal with this - either do your own due diligence and keep asking the hard questions of any adviser and use a fee based adviser if you need advice. Having looked at bigger markets such as the UK and U.S a pension wrapper for a 0.5% annual charge is competitive. If you dont need on-going advice from an adviser then just dont pay for any.
  6. Paying tax at marginal rate in retirement - well you have the tax free cash element which is valuable on its own. You may also have the ability depending on your circumstances to pay little or no tax on pension income you draw down. However even if you pay top rate tax on all income taken in retirement - you still have had the benefit of tax fee growth in the fund whilst contributing, you can enjoy tax free growth in your fund ( ex income drawdowns ) in retirement and for generational planning you can pass on these assets at either 30% or CAT levels of tax i.e well below marginal tax rates.
  7. Annuity rates are unattractive - agreed and the combination of financial repression and increased longevity means that this isnt likely to improve soon. However you can move your pension to an ARF/AMRF and are not forced to buy an annuity.
  8. You didnt mention this - but due to bail in risks any deposits in banks above the guaranteed amount are at risk of haircuts. This is not theoretical and there are recent precedents in both Cyprus and Denmark
So I fully accept the liquidity preference, but once you have adequate liquid investments then in my view pensions are attractive/preferable.

There is a negative perception in regard to pensions, but attractive low cost options are available and the clear and compelling risk that we may have to provide more/all of our income in retirement due to unsustainability of the State pension arrangements means that you really need a good reason not to invest in a pension.
AAM is a great resource to get different views and add to all our knowledge so we can hopefully make well informed choices.
All the best Vincent
 

dub_nerd

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But the pension doesn't give you bad advice or rip you off...an adviser does. So seek referrrals or recommendations.
It's a bit like building a house or any other big endeavour that you don't get to do very often, and probably aren't very well educated about when you first set out. Looking back it's easy to think of things you might have done differently. Personally I'm just happy I noticed the pension didn't pass the "smell test" and contributed as little as possible to it.
 

dub_nerd

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That amounts to saying that people's money needs to be withheld from them for their own good. I don't need to be "protected" from spending money on a holiday I can't afford. And I'd prefer not to be "protected" from having the money in case of an emergency. There are different ways to avoid poverty when you are no longer earning. A pension is just one of them -- one which is particularly inflexible and bad value for money at present, in my opinion.
 

Merowig

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Fees? There are low fee options available (0.75% + x or 1% AMC and no contribution charges)
Performance? I am happy/ok so far with the performance - if you are holding cash or bonds instead of equities and you have 20-30 years still time till reaching pension age it is your own fault
Annuity? Yes they are generally bad here - but you don't need to buy from the pension provider - you can shop around - or transfer the whole pension pot at a later date to a different country where the annuities are better...
The withholding of money is a trade off as you get tax relief - otherwise it wouldn't make sense to give here the tax relief in my opinion.


For emergencies I have a seperate fund. Tapping into retirement savings/investments because you need emergency money and were too lazy to have a seperate emergency fund is reckless. (though it is your money not mine)
If you want to invest yourself - this is possible through self administered funds.
If you hold an investment portfolio outside a pension wrapper you are taxed "to death"
Liquidity: people in Greece and Cyprus were not able to tap in easily in their cash / move it around at the height of the crisis. Return on investment on saving accounts is as well really bad (plus 41% DIRT)
As said in other threads here there are options to move your pension pot abroad (PRSA easier / Occupational Pension Schemes more difficult).


Man forges his own destiny.
 

Homer

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Without reading the entire thread, I agree that having the correct investment strategy is important, but you also need to put in enough money. Rubbish contributions plus great performance equals rubbish fund. Good level of contributions plus rubbish performance equals disappointed expectations.

What constitutes an appropriate level of contributions or an appropriate investment strategy is not something that can be dealt with on a 'one size fits all' basis on a discussion forum.
 
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