What kind of pension could one expect to have with max contributions from age 35-65

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Blackrock1

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I realise there are assumptions to be made around growth etc but based on current tax rules and assuming say an annual 3% gain on investment what kind of lump sum and annuity would you be looking at?
 
Blackrock1 said:
max contributions is the maximum that can be contributed between er and ee on a salary of 115k
Click to expand...

Different rules through. Personal pensions, the maximum contribution is a % of salary, increasing by 5% every decade.

If it's a company scheme, it's how much is required to fund a pension of 2/3 final salary at retirement. You have to use Revenue computation tables to work out the amount based on age, salary, marital status, starting date, retained pension benefits...or just stick it in an online calculator like I do (it's on a broker restricted site before you ask)!


Steven
www.bluewaterfp.ie
 
"max contributions is the maximum that can be contributed between er and ee on a salary of 115k"

By my calculations
And I can forward the details

I got a figure of €1,803,657

After 35 years aged 30 to 65 contributing the max
Assuming growth of 3%


341152362.83
331152361.00
321152359.23
311152357.50
301152355.83
291152354.20
281152352.62
271152351.09
261152349.60
251152348.16
2411528.7558.44
2311528.7556.74
2211528.7555.09
2111528.7553.48
2011528.7551.93
1911528.7550.41
1811528.7548.94
1711528.7547.52
1611528.7546.14
1511528.7544.79
1411534.552.18
1311534.550.66
1211534.549.19
1111534.547.76
1011534.546.37
911540.2552.52
811540.2550.99
711540.2549.50
611540.2548.06
511540.2546.66
41154651.77
31154650.27
21154648.80
11154647.38
01154646.00
1803.657
 
You have two options when claiming from a pension fund in Ireland at retirement.

You can surrender some/all of your accumulated fund in exchange for a regular guaranteed income for life from an insurance company or you can opt to manage it as a post-retirement investment fund instead (which is called an approved retirement fund or ARF) or you can go for a mix of the two options.

So, here are 4 representative illustrations.

Assumptions:
  • 4% single life annuity from 68
  • Full state pension entitlement (single - no dependants)
  • AMRF provision required (even though illustration assumes full state pension)

Total fund assumed = €1,803,000

Option 1: 100% Annuity (without lump sum)
(i.e. fully surrendering your fund in exchange for a guaranteed income for life and foregoing any lump sum entitlements)

Annuity income @ 4%: €6,010 p/m
State pension €1,076 p/m

What you get:
Total gross income (guaranteed) of €7,086 p/m for life


Option 2: 100% Annuity (with lump sum)
(i.e. exchanging the remainder of your fund for a guaranteed income for life after taking the largest cash lump sum possible)

Taxable lump sum @ 25% of pension fund value = €450,750
Less 20% tax paid on excess over €200,000 tax free threshold = €50,150
Net lump sum = €400,600

Remaining balance €1,352,250

Purchased 4% annuity income = €4,508 p/m + state pension @ €1,076 p/m

What you get:
Total gross income (guaranteed) of €5,584 p/m for life + €400,600 in cash


Option 3: 100% ARF (with lump sum)
(i.e. fully investing the remainder of your fund after taking the largest cash lump sum possible)

Taxable lump sum @ 25% of pension fund value = €450,750
Less 20% tax paid on excess over €200,000 tax free threshold = €50,150
Net lump sum = €400,600

Remaining balance €1,352,250

€1,352,250 ARF Investment (less AMRF provision) = €1,352,250 - €63,500 = €1,288,750

4% annual withdrawal rate from €1,288,750 ARF = €4,295 p/m + state pension @ €1,076 p/m

What you get:
Total gross income of €5,371 p/m (€4,295 is variable with €1,076 guaranteed) + €400,600 in cash + €63,500 AMRF


Option 4: 50% Annuity + 50% ARF (with lump sum)
(i.e. using half of your remaining fund to purchase a guaranteed income and the other half to invest in an ARF after taking the largest cash lump sum possible)

Taxable lump sum @ 25% of pension fund value = €450,750
Less 20% tax paid on excess over €200,000 tax free threshold = €50,150
Net lump sum = €400,600

Remaining balance €1,352,250

*No AMRF provision needed in this scenario with the given annuity purchase so the full €1,352,250 could then be split in two as follows;
  • €676,125 used to purchase annuity income @ 4% = €2,254 p/m (guaranteed)
  • €676,125 invested into ARF with 4% drawdown = €2,254 p/m (variable) + state pension @ €1,076 p/m
What you get:
Total gross income of €5,584 p/m (€3,330 is variable with €2,254 guaranteed) + €400,600 in cash


Important considerations:
The biggest difference between the annuity and ARF option is that, on death, the annuity would die with the holder (outside of the guaranteed minimum payment period) while the proceeds of the ARF are inheritable tax-free by the surviving spouse. The ARF also has the potential to grow in retirement.

It's also worth bearing in mind that an annuity purchase is permanent and irreversible while an ARF can always be converted to an annuity later on if required. As such, with an annuity purchase, you need to be absolutely certain that;
  1. It's the right option for you
  2. You get the best rate you can
  3. It's structured correctly from the outset.
Annuities are one thing you really need to shop around for because the difference in rates and features between providers can be big and you can't amend it after your 30 day cooling off period.

Kevin
www.thepensionstore.ie
 
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SBarrett said:
Different rules through. Personal pensions, the maximum contribution is a % of salary, increasing by 5% every decade.

If it's a company scheme, it's how much is required to fund a pension of 2/3 final salary at retirement. You have to use Revenue computation tables to work out the amount based on age, salary, marital status, starting date, retained pension benefits...or just stick it in an online calculator like I do (it's on a broker restricted site before you ask)!


Steven
www.bluewaterfp.ie
Click to expand...

hi steven

im referring to a personal pension but isnt the max % allowable depending on age limited to a max salary of 115k, im working on assumption that itll always be over that.

i think the poster below has worked it all out.
 
kevhenry said:
Total Fund assumed = €1,803,000

Assumptions:
  • 4% single life annuity from 68
  • Full State pension (single - no dependants)
  • AMRF provision required (even though illustration assumes full state pension)

Option 1: 100% annuity without lump sum

Annuity income: €6,010 p/m
State pension €1,076 p/m

Total income (guaranteed): €7,086 p/m (gross)


Option 2: 100% Annuity with maximum lump sum

Taxable lump sum @ 25% of fund = €450,750
Tax paid on excess of €200,000 tax free threshold @ 20% = €50,150

Net lump sum = €400,600

Remaining balance €1,352,250

4% annuity = €4,508 p/m
State pension = €1,076 p/m

Total income (guaranteed): €5,584 p/m (gross)


Option 3: 100% ARF with maximum lump sum

Taxable lump sum @ 25% of fund = €450,750
Tax paid on excess of €200,000 tax free threshold @ 20% = €50,150

Net lump sum = €400,600

Remaining balance €1,352,250

ARF Investment (less AMRF provision) = €1,352,250 - €63,500 = €1,288,750 invested into ARF

4% annual withdrawal rate = €4,295 p/m
State pension = €1,076 p/m

Total income = €5,371 p/m (€4,295 is variable - €1,076 is guaranteed)


Option 4: 50% Annuity + 50% ARF with maximum lump sum

Taxable lump sum @ 25% of fund = €450,750
Tax paid on excess of €200,000 tax free threshold @ 20% = €50,150

Net lump sum = €400,600

Remaining balance €1,352,250

AMRF provision = €1,352,250 - €63,500 = €1,288,750
  • €644,375 used to purchase annuity = €2,147 p/m (guaranteed)
  • €644,375 invested into ARF with 4% drawdown = €2,147 p/m (variable)
Total income:
Guaranteed: €1,076 p/m (State) + €2,147 p/m (annuity) = €3,223 p/m
Variable: ARF withdrawals = €2,147 p/m

Total gross income: €3,223 + €2,147 = €5,370 p/m

Kevin
www.thepensionstore.ie
Click to expand...

thanks for that, much appreciated
 
Is the aim of the game not to max your pension to the point the monthly income is in the 20% tax region?
 
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There's a few ways to look at that.

First, you can earn up to €36,000 p/a as a retiree with a financially dependant spouse from 65.

In this case, and if qualifying for the full state benefit, a married couple would get circa €24,000 p/a from the state pension which leaves the potential to earn an additional €12,000 p/a tax free.

If they had a €400,000 fund they could take €100,000 of this tax-free and annuitise the remaining €300,000 at 4% to give them a guaranteed income of €12,000 per year (i.e. €1,000 p/m) tax-free.

That would keep everything nice and neat assuming a straight 4% and everything remaining constant.

From that point of view you could target a €400,000 fund as being suitable to give you a tax free income in retirement.

However, an annuity is only one option.

With an Approved Retirement Fund (ARF) things are different.

Here, you can manage the level of income you withdraw from your fund so even if you had the maximum €2,000,000 you would still be paying a lower effective tax rate in retirement.

Example: €2,000,000 pension fund

Tax paid to realise maximum lump sum = €60,000

Net lump sum = €440,000

Then, 4% income drawdown on remaining €1,500,000 ARF fund = €5,000 p/m + state pension €1,076 p/m = €6,076 p/m

So, of this, €3,000 would be tax-exempt while the additional €3,076 would be taxed at 40% = €1,230 p/m

Overall, that's tax of €1,230 out of a monthly income of €6,076 which is an effective income tax rate of 20.2%. (Standard rate tax for us is 20%).

USC would also need to be factored in here depending on circumstances.

But the point is that the rate of income tax you pay can be managed and it's better to look at your overall tax rate and plan for that.

Hence, it's a good idea to maximise your pension contributions if you can afford it.

Kevin
www.thepensionstore.ie
 
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