The end of Pensions (as we know them)?

Sonnenblumen

Announced today as part of the 4 year plan, some serious changes to pensions including capping and tax relief on contributions etc Does this torpedo the appeal of Irish private pensions?

hmmm

I'm afraid so. Double taxation where you pay 30+% putting money into a pension and then possibly facing 50%+ when you take the money out. Farcical really, their own pensions white paper recommended against standard rating pensions.

In 20 years time when we have a generation of poverty stricken pensioners we'll look back on this day and wonder.

tHE vAGGABOND

capping and tax relief on contributions

So you would rather the super rich were able to hide as much money as they wanted at the top rate of relief, like all the developers and bankers we hear about with 50 million pensions and stuff like that.

its not like they are charging you to put money into your pension, the tax relief is just coming down. You still get a fair whack of tax relief.

We [as a nation] cant afford all the benefits and tax relief's we had/have, WE ARE BROKE - people really need to realise that.

The Rooster

tHE vAGGABOND wrote: »

So you would rather the super rich were able to hide as much money as they wanted at the top rate of relief, like all the developers and bankers we hear about with 50 million pensions and stuff like that.

its not like they are charging you to put money into your pension, the tax relief is just coming down. You still get a fair whack of tax relief.

We [as a nation] cant afford all the benefits and tax relief's we had/have, WE ARE BROKE - people really need to realise that.

But if someone is receiving a pension of €1M per year, they'll be paying €400k+ tax per year on it.

Anyone who put big money into pensions got a tax deferral, but eventually they should be paying back approx what they saved (depending on how their pension fund performed).

Now maybe we can't afford to give people that deferral anymore, but as the first two posters said, that's going to lead to a big decrease in the amount people put into their pension schemes.

Phoenix Park

So if,say, by 2014 you put 20k (example) into a private pension, you get 20% tax relief but when you reach retirement will pay at least 20% tax on your pension..therefore would it be better to lock the original 20k into a high interest account rather than hope the pension can outperform that same interest account?. ie there will be NO tax advantage to having a private pension, therefore why continue locking it away in this fashion.
any ideas??, i'm not working in pensions obviously,was just wondering if i'm getting the right/wrong gist on this, thanks

hmmm

tHE vAGGABOND wrote: »

So you would rather the super rich were able to hide as much money as they wanted at the top rate of relief, like all the developers and bankers we hear about with 50 million pensions and stuff like that.

The easy answer to that is to cap the amount that people can put into pensions - which we already do.

its not like they are charging you to put money into your pension, the tax relief is just coming down. You still get a fair whack of tax relief.

The problem is that we have (had) a system where you don't pay tax on income you save in a pension but do pay tax when you take it out. Now we have a system where people pay tax on the way in and also are taxed a second time on the same income on the way out. It's crazy stuff, standard rating will kill private pensions.

dotsman

tHE vAGGABOND wrote: »

So you would rather the super rich were able to hide as much money as they wanted at the top rate of relief, like all the developers and bankers we hear about with 50 million pensions and stuff like that.

its not like they are charging you to put money into your pension, the tax relief is just coming down. You still get a fair whack of tax relief.

We [as a nation] cant afford all the benefits and tax relief's we had/have, WE ARE BROKE - people really need to realise that.

I really don't think you understand how private pensions work. The tax relief is not a "bonus" or a "perk". It's based on the fact that you will pay tax when you draw down the money. Now we have a situation whereby you pay tax on the money while you it put away, and then pay more tax when you draw it down again as a pensioner.

To use a very basic example. If you are currently paying tax @ 41% and hope to have a pension large enough that it also pays 41%, then everything works out fine, because the 41% relief you are getting now is just acknowledging that you are deferring the drawdown and you will pay 41% on the money (and on the interest it has accumulated) when a pensioner.

With the proposed changes (which some ultra-lefties have been begging for for years), you will only get 20% relief as you fund your pension. For every €100, you can take it as pay today, less PAYE, giving you €59. Or you can put it into your pension (which is supposed to be the sensible thing), lose €21 now (meaning only €79 makes it into your pension fund), and then pay 41% when you're 70 and want to spend it, leaving you with just €46.61 of the original €100.

In other words. Would you rather €59 today or €46.61 in 20 years time.

If this actually gets implemented, by the time I retire, the only people who could afford to retire are public sector workers and those who don't work anyway!, because this BS makes absolutely no sense.


Please note, the above example is very simple and doesn't take into account PRSI, levies, future tax changes etc and is used for illustrative purposes only! I am not regulated by the Financial Regulator:D

LevelSpirit

Yes if this happens Im not putting another penny into my pension fund.
Waste of money.
I'll just save the money instead in my own account.

The whole point of having a pension is planning for retirement. You cant plan for something which is a moving target, which retirement and pensions are now.

I wouldnt believe them even if they said your pension money wouldnt be taxed on the way out. They will just move the goal posts again whenever they feel like it.

stepbar

dotsman wrote: »

I really don't think you understand how private pensions work. The tax relief is not a "bonus" or a "perk". It's based on the fact that you will pay tax when you draw down the money. Now we have a situation whereby you pay tax on the money while you it put away, and then pay more tax when you draw it down again as a pensioner.

To use a very basic example. If you are currently paying tax @ 41% and hope to have a pension large enough that it also pays 41%, then everything works out fine, because the 41% relief you are getting now is just acknowledging that you are deferring the drawdown and you will pay 41% on the money (and on the interest it has accumulated) when a pensioner.

With the proposed changes (which some ultra-lefties have been begging for for years), you will only get 20% relief as you fund your pension. For every €100, you can take it as pay today, less PAYE, giving you €59. Or you can put it into your pension (which is supposed to be the sensible thing), lose €21 now (meaning only €79 makes it into your pension fund), and then pay 41% when you're 70 and want to spend it, leaving you with just €46.61 of the original €100.

In other words. Would you rather €59 today or €46.61 in 20 years time.

If this actually gets implemented, by the time I retire, the only people who could afford to retire are public sector workers and those who don't work anyway!, because this BS makes absolutely no sense.


Please note, the above example is very simple and doesn't take into account PRSI, levies, future tax changes etc and is used for illustrative purposes only! I am not regulated by the Financial Regulator:D

You're making the assumption that someone will lob it all into an annuity. With an ARF you can draw down as much or as little as possible. People will just go back to investing in equities / deposits etc (i.e investments where you are taxed on the gains assuming profit is made) instead of lobbing every penny they've got into a pension.

dotsman

stepbar wrote: »

You're making the assumption that someone will lob it all into an annuity. With an ARF you can draw down as much or as little as possible. People will just go back to investing in equities / deposits etc (i.e investments where you are taxed on the gains assuming profit is made) instead of lobbing every penny they've got into a pension.

You never read my disclaimer:)

But I do agree, it's not the end of all types pensions etc etc. But it certainly is an attack on the most common type. The result? A lot of people are not going to put money into a pension fund when they would otherwise have. The pension bomb is only going to get worse!

stepbar

dotsman wrote: »

You never read my disclaimer:)

But I do agree, it's not the end of all types pensions etc etc. But it certainly is an attack on the most common type. The result? A lot of people are not going to put money into a pension fund when they would otherwise have. The pension bomb is only going to get worse!

In fairness given some of the pension trust deals I've seen in the past, it doesn't pain me to see the farce where a high earner can leverage up based on future contributions and rental income being made a less attractive investment.

kaiser sauze

Pensions are still an attractive proposition, people writing off the private are probably brokers who would only ever deal with someone who was a top-rate payer/contributor.

Myself, I will pour every allowable cent into mine over the next few years to avail of the rates as they decline.

You still get tax relief on contributions, tax-free growth and you can take a tax-free lump sum on retirement. There are also ways of avoiding paying significant tax on the balance drawdown.

kaiser sauze

dotsman wrote: »

Please note, the above example is very simple and doesn't take into account PRSI, levies, future tax changes etc and is used for illustrative purposes only! I am not regulated by the Financial Regulator:D

I'm glad you added that disclaimer, you don't understand how pensions work!

LevelSpirit

kaiser sauze wrote: »

Pensions are still an attractive proposition, people writing off the private are probably brokers who would only ever deal with someone who was a top-rate payer/contributor.

Myself, I will pour every allowable cent into mine over the next few years to avail of the rates as they decline.

You still get tax relief on contributions, tax-free growth and you can take a tax-free lump sum on retirement. There are also ways of avoiding paying significant tax on the balance drawdown.

You are missing the most important point of all.
Planning for your future requires stability.
The Irish government have now proved that planning for the future is anything but stable.

Think about all those people who made calculations on how much they should put into their pension every month. They did this based on the fact that they would have a certain tax relief, they would retire at a certain age, they would have the contributory state pension (for which they paid PRSI all their lives) to add into their calculations.

Now whats changed in the last year?
Retirement age has gone up.
Tax relief will be savaged.
Now you'll pay more tax on the way out.
There is talk about not getting the contributory state pension if you have organized your own pension. So having a pension fund will actually lose you money.

So the goal posts keep moving. You cant plan now at all.
Look at the pensionsboard.ie calculator. The assumptions are no longer valid.
Its impossible to calculate what you'll get and what it will take to get you that.

Pensions are just a MASSIVE gamble now. Might as well just save or gamble yourself in the markets. I was a big believer in pensions and paying as much as you could afford into them. I advised anyone I know to look at their private pension options as soon as they could. No more. I just dont see the sense anymore in them. Stability has left the building.

Kennie1

Yet again the FF have seriously fcuked up with this proposal and have not thought through the implications of this proposal, they are creating a huge gap between personal pensions and Employer sponsored pensions schemes. If you are in a employer scheme, your employer can contribute to it by way of salary sacrifice and they get full tax and prsi relief on the contributions made, as this is deemed as a business cost. So if you take lets say a €500.00 pm pay cut and ask your employer to contribute this to your pension instead of salary, you will still get the full 41% tax relief and 8% prsi relief and BIK relief and income levy relief!!! Now for those that do not have a employer scheme and for the self employed, FF is wrecking retirement planning and is creating a huge disparity within pension planning. This is disgraceful and is totally unfair to an employee whose employer will not operate a employer scheme and the self employed. In my opinion FF should introduce a pensions levy and also cap max contributions to lets say €1000.00pm. They should increase imputed distributions charges for ARF’s from 3% to 7% and force pensioners to spend their pension funds instead of leaving it as an inheritance! They should also cap max pension funds to €750,000.00, this should bring in huge tax revenues. By doing this it will stop the better off hiving off income into pension funds while still making if attractive for the ordinary Joe to start a pension. If FF pensions proposal goes ahead it will cause people to rethink pension funding and will create huge problems down the road, lets not forget that if pensioners have spending power in 20-30 years time they will contribute greatly to our economy but if they don’t have a pension then they will be the greatest drain on an economy we could possibly imagine. Think again FF short term gain equals long term loss!!!

kaiser sauze

LevelSpirit wrote: »

You are missing the most important point of all.
Planning for your future requires stability.
The Irish government have now proved that planning for the future is anything but stable.

Think about all those people who made calculations on how much they should put into their pension every month. They did this based on the fact that they would have a certain tax relief, they would retire at a certain age, they would have the contributory state pension (for which they paid PRSI all their lives) to add into their calculations.

Now whats changed in the last year?
Retirement age has gone up.
Tax relief will be savaged.
Now you'll pay more tax on the way out.
There is talk about not getting the contributory state pension if you have organized your own pension. So having a pension fund will actually lose you money.

So the goal posts keep moving. You cant plan now at all.
Look at the pensionsboard.ie calculator. The assumptions are no longer valid.
Its impossible to calculate what you'll get and what it will take to get you that.

Pensions are just a MASSIVE gamble now. Might as well just save or gamble yourself in the markets. I was a big believer in pensions and paying as much as you could afford into them. I advised anyone I know to look at their private pension options as soon as they could. No more. I just dont see the sense anymore in them. Stability has left the building.

You're right, there is uncertainty, but there is uncertainty in starting a private pension regardless.

The talk about the OAP is just that right now.

What are you talking about tax-relief will be savaged? those on 20% will still be getting the same relief, those on the top rate are going to be graduated downwards.

Anyone who believes that a savings plan would ever be better than a pension over the same long term is not going to be held in a high regard by me.

I do get it though, these are big changes, but we have to adapt and not overreact. The worst case is that talk like this would persuade people to stick it under a mattress.

hmmm

kaiser sauze wrote: »

Anyone who believes that a savings plan would ever be better than a pension over the same long term is not going to be held in a high regard by me.

A pension is a savings plan. For anyone paying higher rate tax, after these measures are passed a pension is out of the question.

I do get it though, these are big changes, but we have to adapt and not overreact. The worst case is that talk like this would persuade people to stick it under a mattress.

The reality is that a higher rate taxpayer will be better off sticking it under their mattress, depending on the assumptions for pension growth. LevelSpirit's point about stability and certainty is also very relevant.

kaiser sauze

hmmm wrote: »

A pension is a savings plan. For anyone paying higher rate tax, after these measures are passed a pension is out of the question.

...a savings plan with lots of differences to a regular savings plan that make them a much more attractive option.

hmmm wrote: »

The reality is that a higher rate taxpayer will be better off sticking it under their mattress, depending on the assumptions for pension growth.

This is never true, I'm glad noone goes to you for financial advice.

hmmm wrote: »

LevelSpirit's point about stability and certainty is also very relevant.

...and I agreed with it.

Kennie1

Pension's still offer a better soloution than a savings plan.
Lets assume that you are 45 years old and you save 400pm for next 20 years into a pension and you get 20% tax relief on this premium.

400pm @ 20% = Net cost 320 p.m. I have made the following assumptions that you get 95% allocation and there is a AMC of 1% with a annual growth rate of 6% p.a. Reduction in yeild is 1.5%p.a. as a result of charges.

€400pm by 20 years= €154,420.00
Tax free lump sum = € 38,605.00
Remainder = €115816.00
After tax@41% = €68,331.00

Total tax free = €106,935.00


Savings plan €320.00p.m. net 100% allocation, 1.65% AFC, annual growth rate 6% reduction in yeild 1.7%

€320pm by 20 years= €104,898 after exit tax @ 28%

In the case of a pension, this is worst case scenario of course, this assumes that tax bands and credits are not used, and entire pension fund is taken at the day of retirement. Reality is that tax bands and credits will go up over the next 20 years and the retirement fund could be taken over a number of years, therefore reducing the tax quite substantially if not all of it.

Yes by the reduction of tax/prsi relief, pensions are not going to be as good as value as they were but to say that they are a waist of time is totally untrue and those that say different really don't know what they are talking about!

hmmm

Kennie1 wrote: »

After tax@41% = €68,331.00

Total tax free = €106,935.00

€320pm by 20 years= €104,898 after exit tax @ 28%

In the case of a pension, this is worst case scenario of course,

Thanks, good figures.

Where did you get 41% from? Top rate tax in 4 years time will be more like 55%

I don't agree also that this is a "worst case scenario". A pension is locked in the vehicle for 20 years, the alternative fund is yours to do as you wish. The government has already reduced the amount that can be taken as a tax free lump sum, similarly there are rumours that instead of lowering the tax allowance to 20% there will instead by an annual charge on the gross value of the pension. The horror scenario is one we've seen in Argentina or Hungary where the government effectively steals pensions. You are taking a 20 year gamble that your assumptions remain the same and this FF government has already shown that they are willing to ignore all previous advice and statements.

There is a value to flexibility, and this is worth a lot more than 2k over 20 years. At current tax rates a pension is a no-brainer. At 33%, it's probably still worthwhile. At 20% the downsides are strongly tilted against top rate taxpayer pensions IMO.

Kennie1

hmmm wrote: »

Thanks, good figures.

Where did you get 41% from? Top rate tax in 4 years time will be more like 55%

I don't agree also that this is a "worst case scenario". A pension is locked in the vehicle for 20 years, the alternative fund is yours to do as you wish. The government has already reduced the amount that can be taken as a tax free lump sum, similarly there are rumours that instead of lowering the tax allowance to 20% there will instead by an annual charge on the gross value of the pension. The horror scenario is one we've seen in Argentina or Hungary where the government effectively steals pensions. You are taking a 20 year gamble that your assumptions remain the same and this FF government has already shown that they are willing to ignore all previous advice and statements.

There is a value to flexibility, and this is worth a lot more than 2k over 20 years. At current tax rates a pension is a no-brainer. At 33%, it's probably still worthwhile. At 20% the downsides are strongly tilted against top rate taxpayer pensions IMO.

I deal in the real world and operate with the current information that is available to hand.
Firstly 41% is the current tax rate and there is no proposals to my knowledge to increase the marginal tax rate to 55% while I do think that it could be increased by 1 or 2% in the next few years. Where did you get 55%???

This is worst case scenario as I assumed that the fund was taken at retirement but only a fool would do this!!! Anyone with a brain would draw the fund down within their tax bands therefore only paying 20% tax but could actually draw down the whole fund tax free if I allowed for inflation.

The government has proposed capping the TFLS to 200K and rightly so but how many people will this actually have an impact on??? Very few and for those that it does they can well afford it. As for the rumors of a pension fund charge, yes your are right the pensions industry has lobbied the government last August/September for this instead of reducing tax relief and this would make a lot more sence as it would be levied accross the entire industry(look at my first post)

"The horror scenario is one we've seen in Argentina or Hungary where the government effectively steals pensions." Look I don't mean to be insulting but you cannot compare Ireland with these countries do so would be stupid to say the least as there is no comparison in policital or economic terms at the point when the IMF moved in. In the case of Argentina they went for a full default and look where that got them!

The problem with savings plans is that they are available whenever you want to cash them in, at least with a pension you cannot touch it until at least 60. I have received more phone calls over the years (especially in the last 2) from people that wanted to take their pension funds early because of various financial reasons and I gladly refused them, but each and every time that a retiree called they have said that they were delighted that they started their pension and that their only regret is that they did not invest more when they had the chance.

Last point; what about all the people that is currently receiving only 20% relief anyway!

hmmm

Kennie1 wrote: »

I deal in the real world and operate with the current information that is available to hand.

The world you are dealing in is a 20 year horizon if you are selling pensions. That's why stability is important if you are locking clients into a long term vehicle and this government has removed much of that stability.

I deal in the real world and operate with the current information that is available to hand.
Firstly 41% is the current tax rate and there is no proposals to my knowledge to increase the marginal tax rate to 55%

The marginal rate (including PRSI & levies) is currently over 50% and will increase slightly under the 4 year plan. In particular, next year "The Plan provides for the elimination of employee PRSI and Health Levy relief on pension contributions in 2011."

"The horror scenario is one we've seen in Argentina or Hungary where the government effectively steals pensions." Look I don't mean to be insulting but you cannot compare Ireland with these countries do so would be stupid to say the least as there is no comparison in policital or economic terms at the point when the IMF moved in. In the case of Argentina they went for a full default and look where that got them!

I know what happened in Argentina and in neither of these countries did the middle class expect their pensions to be seized. Hungary in particular shows what a capricious government can do.

I have received more phone calls over the years (especially in the last 2) from people that wanted to take their pension funds early because of various financial reasons and I gladly refused them

Obviously you have a vested interest then in selling pensions so I can understand you're feeling threatened. Nothing wrong with that, I'm a big fan of pensions under the current regime. But, the goalposts have shifted (or will shift if the 4 year plan is implemented unmodified).

Last point; what about all the people that is currently receiving only 20% relief anyway!

What about them.

Kennie1

hmmm wrote: »

The world you are dealing in is a 20 year horizon if you are selling pensions. That's why stability is important if you are locking clients into a long term vehicle and this government has removed much of that stability.

The marginal rate (including PRSI & levies) is currently over 50% and will increase slightly under the 4 year plan. In particular, next year "The Plan provides for the elimination of employee PRSI and Health Levy relief on pension contributions in 2011."

I know what happened in Argentina and in neither of these countries did the middle class expect their pensions to be seized. Hungary in particular shows what a capricious government can do.

Obviously you have a vested interest then in selling pensions so I can understand you're feeling threatened. Nothing wrong with that, I'm a big fan of pensions under the current regime. But, the goalposts have shifted (or will shift if the 4 year plan is implemented unmodified).

What about them.

If you were to look back over the years you would see that there has always been changes to pensions depending on the economic climate such as the introduction of AMRF/ARF back in '99, before this you only had one option buy an annuity...full stop. Before '03 you could not get PRSI relief on a pension. And currently you cannot get income levy relief on a pension! So to say that there is 51% tax/prsi/income levy is factually incorrect, In fact for those that earn over c. €75,000 they dont get PRSI/Health levy relief at all as they don't pay this on all income over this figure, so I am still at a loss where you got 55% from???

Yes I certainly have a vested interest in pensions and will continue to recommend to the private pensions sector to take out a pension for the reasons I have demonstrated before, yes I will meet a certain part of the population that buys in to the sensationalist views that you have, but I thankfully know that the vast majority of people are logical when it comes to this area, whether they have the luxury of affording same after the proposed cuts... who knows?

As for you comments about Argintina... yes, fully agree with you but as I said we dont live there so we dont have to worry about what happened there.

These proposed cuts are going to cost me thousands every year but I am not going to stop or reduce my payments as I need a comfortably retirement...don't you too

As for the comment about 20% tax payers... Thats just an ignorant comment. In fact I think anyone who is looking at this forum should lose there respect for your views with comments like that...Pure ignorance!!!

hmmm

Kennie1 wrote: »

In fact for those that earn over c. €75,000 they dont get PRSI/Health levy relief at all as they don't pay this on all income over this figure, so I am still at a loss where you got 55% from???

You're being deliberately obtuse now. The majority of higher rate taxpayers who currently contribute to a pension are not hitting the PRSI ceiling, although that will probably be removed anyway. So their marginal rate is over 50%.

yes I will meet a certain part of the population that buys in to the sensationalist views that you have,

Stop with the condescension, I am working off your own figures on this thread.

By the way you can buy ETFs for expense ratios of .3% or less, so plug that into your figures above for the fund return and the difference becomes stark. The cheapest pension I've seen is about .75% of an annual fee.

As for you comments about Argintina... yes, fully agree with you but as I said we dont live there so we dont have to worry about what happened there.

That's a very optimistic outlook. Who knows where we will be in 20 years? Only recently the government decided that 33% tax relief was their long term plan for pensions, now that's been cut and the IMF have moved into government buildings.

These proposed cuts are going to cost me thousands every year but I am not going to stop or reduce my payments as I need a comfortably retirement...don't you too

Again with the condescension. And again using your own figures. At current higher rates of tax, saving for a pension is a no brainer. At 33%, probably justified. At 20%, hard to justify. Very hard.

As for the comment about 20% tax payers... Thats just an ignorant comment. In fact I think anyone who is looking at this forum should lose there respect for your views with comments like that...Pure ignorance!!!

20% tax payers will be largely unaffected by these changes, what are you ranting about. Be careful stepping down from that high horse you're on in this weather.

LevelSpirit

hmmm wrote: »

Thanks, good figures.

Where did you get 41% from? Top rate tax in 4 years time will be more like 55%

I don't agree also that this is a "worst case scenario". A pension is locked in the vehicle for 20 years, the alternative fund is yours to do as you wish. The government has already reduced the amount that can be taken as a tax free lump sum, similarly there are rumours that instead of lowering the tax allowance to 20% there will instead by an annual charge on the gross value of the pension. The horror scenario is one we've seen in Argentina or Hungary where the government effectively steals pensions. You are taking a 20 year gamble that your assumptions remain the same and this FF government has already shown that they are willing to ignore all previous advice and statements.

There is a value to flexibility, and this is worth a lot more than 2k over 20 years. At current tax rates a pension is a no-brainer. At 33%, it's probably still worthwhile. At 20% the downsides are strongly tilted against top rate taxpayer pensions IMO.

QFT
The most sense yet in this thread.

Kennie1

Again the max tax relief available for pensions is 41% and 8% PRSI/Health levy = 49%

I delibratly used 95% allocation and 1% AMC as this is the higher charging structure for pensions and if I were to use the best on the market the fund values would be higher at retirement,thus making the case for a pension even stronger! ETF's have a Bid/Spread offer of usually between 2 and 5% plus stamp duty for trades both ways and to the best of my knowledge ETF's are not available on a regular premium basis (may stand correctted) so you cannot compare to a regular savings plan. Any way if you go down the self directed route you can buy ETF with your pension fund and get an extra 25% buying power by way of tax relief and not pay capital gains on your profits at point of sale therefore you take advantage of gross roll up of your fund.

Have to be optimistic, if not may as well throw in the towel now and think that the government will tax all assets and haircut savings!!! Don't forget that these are only proposals and the pension's board white paper is still on the playing field nothing has changed here as a result of IMF/EC intervention. As the NPRF is now being used I would think that the pensions board recommendation will be viewed a lot more seriously by a new governemnt.

I did justify the figures as I said "worst case scenario" but the vast majority will take funds tax efficently and lets not forget about inflation over the next 20 years so 154K V 104K...No brainer?

Your right 20% tax payers will be largely unaffected by proposed changes but the vast majority of people paying into pensions are 20% tax payers and this is why I took issue with your comment. It is a totaly unfair system that some get 20% relief and strugle to pay a pension and those that get 41% are probably in a better position to save for their retirement.

Now I have answered each of your points, I think we will have to agree to disagree. I do understand where you are coming from though and can confirm that the government has indicated that they are open to alternative proposals from the pensions industry on how to approach this. It is in both your and my interests to keep the 41% relief. The real issue in the pensions market is the disparity between private and company pensions where the latter is not going to be affected by the proposed changes!

hmmm

Fair enough. I'm surprised they didn't simply follow Gordon Brown's famous pension smash and grab UK and axe the tax relief on dividends within pensions. Brown slipped it into the budget as a footnote and no-one noticed, until pension funds figured out it cost them 5 billion a year.

kaiser sauze

LevelSpirit wrote: »

QFT
The most sense yet in this thread.

Nope, not so.

Kennie1 wrote: »

Again the max tax relief available for pensions is 41% and 8% PRSI/Health levy = 49%

I delibratly used 95% allocation and 1% AMC as this is the higher charging structure for pensions and if I were to use the best on the market the fund values would be higher at retirement,thus making the case for a pension even stronger! ETF's have a Bid/Spread offer of usually between 2 and 5% plus stamp duty for trades both ways and to the best of my knowledge ETF's are not available on a regular premium basis (may stand correctted) so you cannot compare to a regular savings plan. Any way if you go down the self directed route you can buy ETF with your pension fund and get an extra 25% buying power by way of tax relief and not pay capital gains on your profits at point of sale therefore you take advantage of gross roll up of your fund.

Have to be optimistic, if not may as well throw in the towel now and think that the government will tax all assets and haircut savings!!! Don't forget that these are only proposals and the pension's board white paper is still on the playing field nothing has changed here as a result of IMF/EC intervention. As the NPRF is now being used I would think that the pensions board recommendation will be viewed a lot more seriously by a new governemnt.

I did justify the figures as I said "worst case scenario" but the vast majority will take funds tax efficently and lets not forget about inflation over the next 20 years so 154K V 104K...No brainer?

Your right 20% tax payers will be largely unaffected by proposed changes but the vast majority of people paying into pensions are 20% tax payers and this is why I took issue with your comment. It is a totaly unfair system that some get 20% relief and strugle to pay a pension and those that get 41% are probably in a better position to save for their retirement.

Now I have answered each of your points, I think we will have to agree to disagree. I do understand where you are coming from though and can confirm that the government has indicated that they are open to alternative proposals from the pensions industry on how to approach this. It is in both your and my interests to keep the 41% relief. The real issue in the pensions market is the disparity between private and company pensions where the latter is not going to be affected by the proposed changes!

The real deal.

thlint

Apart from the inherent injustice of claiming tax relief and depriving the state of needed funds ( or even worse obliging the state to get more tax from those who cannot afford to buy pensions) , pensions are not saving accounts. They may or may not increase in value over 40 years. using a rate of 6% growth or even -3% decrease is a simple lie. Why? because nobody knows how pension funds have preformed in Ireland over the last 35 years. Nobody -not even the pension board knows. I have asked them , and they do not know. All we can be certain about is that over 10 years pension funds lose money. Now take into account inflation and purchasing power and the benefits of pension funds to pensioners becomes very doubtful. Mind you pension funds are very good for banks . Think very carefully before committing to any pension fund.

Kennie1

thlint wrote: »

Apart from the inherent injustice of claiming tax relief and depriving the state of needed funds ( or even worse obliging the state to get more tax from those who cannot afford to buy pensions) , pensions are not saving accounts. They may or may not increase in value over 40 years. using a rate of 6% growth or even -3% decrease is a simple lie. Why? because nobody knows how pension funds have preformed in Ireland over the last 35 years. Nobody -not even the pension board knows. I have asked them , and they do not know. All we can be certain about is that over 10 years pension funds lose money. Now take into account inflation and purchasing power and the benefits of pension funds to pensioners becomes very doubtful. Mind you pension funds are very good for banks . Think very carefully before committing to any pension fund.

Cant actually get you the figures for a 35 year pension but have the figures here for a pension that is inforce since 1979 albeit a single premium invested into a managed fund. 1250.4% return after all charges deducted with 9 years left to retirement. Have not allowed for inflation (over 35 years) as I do not have the figures to hand. (I am sure someone out there has them though and might post them!). 10 year return was 7.43%. This of course is against a back drop of a headline inflation figure of 2.4%pa over the last 10 years so have to agree that this pension fund has lost money over this 10 year period in real terms. Not making excuess but we have to remember we are still going through the worst financial crisis since the great depression.

Looked at another pension that invested in a low risk fund 10 years ago (capital guaranteed), again a single premium but this time the 10 year returns were 36.8%, retirement date 20/12/10. So made 10.3% in real terms. Nearly all pension's have a deposit account option, and to be fair if you opted for this you would have lost money in real terms as it is only in the last few years that banks started to offer rates that actually beat inflation

Moral of the story, chose carefully what type of risk you are prepared to take with your pension fund based on your expected retirement date

The information is out there if you know where to look. I think that it would be reasonable to assume that the pensions board would be able to provide some type of indication of returns based on low, med and high risk funds

thlint

Thanks for the 30 year return. Pension/life companies are inclined to suggest that the returns are better during the life of the policy but when it matures - miraculously values fall. (personal experience of endowment policy where returns were exaggerated right up until when it was cashed in -- financial regulator thought it was all OK and completely above board as values go up and down) .
It will be interesting to see the actual return on the 20th Dec for that 10 year policy.
I have to disagree about availability of information - long term information is not available to consumers in a manner that can be digested easily. This is an indictment of the entire pension industry and the pension board in particular. When information is hidden there is usually a damn good reason -- Any body out there who has a defined contribution pension that has matured anytime in the last 5 years who has got good value ?? - Single premium policies are not really normal pension policies as most people understand them.
By the way the price of a pint of Guinness in 1979 was 0.70 and wages about 104 euros per week.

Sonnenblumen

I'm surprised with some of the 'pension selling' going on here and nobody mentioned that the only real certainty with any pension is AFC. As the tax relief on contributions narrows, this will certainly make the option much less attractive.

The returns over the last 10 years have been miserable, and despite all the fees etc, the pension companies and retained Fund Managers have many questions to answer.

I would prefer if the Gov provided incentive for more private pension, self managed/trust are an option but too heavily related to property.

Only 2 years ago, 000's switched all sorts of funds into secure savings which were barely above annual charges.

Overall a regressive step by Gov with/out capping.

Kennie1

thlint wrote: »

Thanks for the 30 year return. Pension/life companies are inclined to suggest that the returns are better during the life of the policy but when it matures - miraculously values fall. (personal experience of endowment policy where returns were exaggerated right up until when it was cashed in -- financial regulator thought it was all OK and completely above board as values go up and down) .
It will be interesting to see the actual return on the 20th Dec for that 10 year policy.
I have to disagree about availability of information - long term information is not available to consumers in a manner that can be digested easily. This is an indictment of the entire pension industry and the pension board in particular. When information is hidden there is usually a damn good reason -- Any body out there who has a defined contribution pension that has matured anytime in the last 5 years who has got good value ?? - Single premium policies are not really normal pension policies as most people understand them.
By the way the price of a pint of Guinness in 1979 was 0.70 and wages about 104 euros per week.

Most pensions invest in stockmarkets and the life/pension companies have no control over stockmarkets as for endowment policies those projections were over stated all right but were based on the returns over the eightys which seen huge stockmarket returns but the FR made the life companies go back and inform clients that they would need to pay extra and give them give them an option of a guranteed rate if they wanted this as an option.
I will gladly post the returns on the 20th (someone remind me if I forget) Yes information is hard to understand by Joe public, this is why these days it takes up to 4 years for someone to qualify to advise in this area, but any advisor worth his/her salt should be able to interpret, compare and contrast this info for you based on your want for risk and reward, you wouldn't try and self diagnosing an illness without medical training would you.
There is a problem with DC schemes with regard to having to buy an annuity but we can blame FF for this as the pensions industry has been telling the government this for years!!! There solution to this after the market crash in 08 was to defer the annuity for 2 years if the employee wanted to, this was still not a real solution though.
Wage inflation 700% Pension growth 1250% Not bad over 31 years! Regular premium growth over 25 year term is about 30% allowing for inflation.

thlint

There is no doubt that defined contribution schemes have many serious problems but it is not just confined to these. Defined benefit schemes have major funding problems and most people do not understand that private defined benefit schemes are not actually guaranteed and if the underlying fund fails to preform the defined benefit may not actually be paid. (see for example Waterford Wedgewood ).
The problem with a growth rate of 1250% is :that its on the earliest contributions which would be very small relative to todays money and later contributions will swamp their value.
Providing for ones latter years is important but getting back to the thread "The end of pensions as we know them" - Is it not time for the ethos of the current pension industry and regulation to be changed? The concept of growth rates of 11% per year (1985 pension schemes) and 5% as suggested today just misleads and confuses. Can pension schemes not operate like "with-profit" funds where the benefits are locked in at regular intervals ? The entire industry from regulator to broker needs to change and recognise the shambles (from the consumers point of view) that is todays pension industry. Maybe somebody has thoughts on what a real solution would be!

perch

I agree with quite a lot of what you write but you fail to consider the difference between money already invested, and new money not yet invested.

With new money not yet invested, it is perfectly ethical and unarguable legally that the government can offer different terms to what it offered in the past. This is not the same thing as the argument as to whether the policy is wise, or fair.

With money already invested, the individual punters have accepted the offer of the Government at the time of their investment. There was no provision that the terms of the offer were subject to change by the government in retrospect. For this reason, it is unethical and possibly illegal for the government to make caps now interfering with moneys already invested, and I believe that they carefully do not make any such changes in retrospect. It is equally unethical and possibly illegal for the government to create new taxes and new classes of taxes which would effect such already invested moneys but they do make such changes in retrospect.

Kennie1

thlint wrote: »

It will be interesting to see the actual return on the 20th Dec for that 10 year policy.

Cashed out just shy of €41,000

thlint

Kennie1 wrote: »

Cashed out just shy of €41,000

Well done -- ,
What was the actual return in %. It is interesting to get an actual real investment product as "the powers that be" try to keep real information to themselves.
How much was invested in 2000 -- did it make a real return on the investment. ( I mean when you compare say the price of a car or a pint in 2000 and today ). Since it was a pension fund product I am sure that with Tax allowance it must do OK -- but if it was a standard investment ( as pensions appear to be going ) without tax relief was the return good.

Kennie1

thlint wrote: »

Well done -- ,
What was the actual return in %. It is interesting to get an actual real investment product as "the powers that be" try to keep real information to themselves.
How much was invested in 2000 -- did it make a real return on the investment. ( I mean when you compare say the price of a car or a pint in 2000 and today ). Since it was a pension fund product I am sure that with Tax allowance it must do OK -- but if it was a standard investment ( as pensions appear to be going ) without tax relief was the return good.

As previous post 01/12/10 the returns were about 36% with real returns at about 10% gross, take tax relief into account and you can add to this real return! Again this was a low risk fund where as if it were a med/high risk fund it would have lost money hence this is the risk that you take. I thought that I had the value posted rather that the % returns posted and I was just too lazy to look last night!!!

Would disagree with you that the info is not out there. See the point is that you have to be able to interperate the info and like any profession you have to study hard to become qualified in this area, just to take an example; to ask me about anything regarding family or criminal law etc I would not have a clue, that is why I would employ a solictor like wise if you need to know anything about penison you should employ a pensions expert with suitable qualifcations eg QFA with pensions diploma and so on. Most pensions have whats called "derisking" built into them these days (but certainly not all) where a % of the fund is switched into a secure fund each year, this would usually happen 10 years before retirement at least with 10% switched each year. So if you were 62 in '07 you would have 70% invested in assets such as cash or bonds and only 30% of your fund would have been exposed to the crash at the time. Hope this make sence!

Will be very interesting to see what happens to the employee/employer Bik/PRSI/USO relief for private pensions over the next couple of weeks in the finance act...industry is lobbying government because of the different and unfair treatment of Private/Occ pensions so there may be some head way hopefully!

thlint

Thanks Kennie,
I have to admit that I am coming from the belief that pensions are mis-sold and that really it is only the pension funds themselves that do well from pensions. ie Admin fees based on % of total value even when the funds are doing poorly. I accept that charges need to be made but the charges appear to be out of kilter with the work done. Investments are one end of the market but since Pensions are almost compulsory and taxpayers (on 20%) who do not contribute to pension are paying for other peoples (those on 40%) pensions there is a much higher requirement to protect the value of pension funds . There is an obligation to fully inform pensioners of exactly what they will get when they retire and I do not believe this is happening.
Your 10 year fund is good, but when an annuity is purchased the most you could expect is 20.00 per week (and tax will have to be paid on this possibly upto 50% leaving 10 per week)
There is another aspect of pensions which is tax avoidance (not evasion) which requires a whole different skill set but unfortunately the pension industry and government have got confused between genuine pensions, tax based systems and the holy grail of public service pensions.
About information -- nobody knows (really true they say they do not know pension board and actuary association ) how pension funds have preformed over the last 30 -40 years . Is that not an indictment of the pension industry. Thanks again Kennie for at least one good news story from investments

Jim2007

thlint wrote: »

Maybe somebody has thoughts on what a real solution would be!

Well I don't know if it's a real solution, but I can tell you what is done here in Switzerland:

The system is broken into three pillars as they call them:

The first pillar is the state contributory pension, which is very small - an entire years pension would only cover about 3 months living expenses for an average couple.

The second pillar is your work pension, which is mandatory and should account for the major portion of your final pension. These are almost all defined contribution pensions rather that defined benefits. These funds have a guaranteed minimum annual return, currently about 3.5%

The third pillar is personal savings - you can pay up to about €5,000pa into a special savings account which has a min. return of about 2%pa and comes of your gross salary, so tax free.

All 3 pillars are locked until retirement age, with the exception that you are allowed to use a percentage of the 2 pillar as a deposit on a house.

For an average Swiss professional this should result in a pension of around €50K pa from pillars 1 + 2, which is taxed as normal income and savings of around 100K in the third pillar, which is payable as a lump sum, currently taxed at 10%.

In addition to this, there is what I call the fourth pillar, there is no CGT on the gains from investment activities of private investors, which is usually defined as less than 10 trades per month. The result is that pretty much everyone has got a little stock portfolio on the go.

I would be interested in hearing how it is done in other countries.

Jim.

Kennie1

Only too happy to post the info. May i just say before i bow out of this post (Hopefully I hear everyone say) You may have a point to some extent when you point the fingure at the industry but may I just point it back for a moment; Look you are provided with the info at point of sale so you must "read and understand" if you dont read or understand dont come back 30 or 40 years time and say "I was not told that" It makes me smile sometimes when people are able to tell me everything that they were not told but when asked what they were told, there is utter silence ...and then a moment later... "Jasus I cant remember back that far"

A pension is not something that you take out some day you are passing the life company/bank/ brokers office and dicide to throw a few bob into, it sually the second largest investment you take out after your home. Like your home it need regular mantinance and care. What I am saying is you need to sit down with your advisor and review your risk attuite in relation to the fund you are in, take on board the advice they give you and then make the decision that you are most comfortable with. When you take out a pension your broker receives a renewal commission every year for this service but all clients are too busy to come in and take the time to review their second largest investment in life, mean while the broker is raking it in and having to do SFA for it. So make them work for you as they are getting paid for this!

Agree with you with your comment about 20% tax payers. It was a social injustice that the people that could afford to do with out a pension got massive tax breaks for investing in pension while those that needed it most only got 20%.

Fund managers have no control over stock market movements, and with each fund there is a mandate for the level of stock, bond, property and cash to mantainrd the fund, the managers mandate is to try and to get the best return compared to the index it is tracking so when markets a falling the pressure is higher to beat the index so you could say that the fund managers actually work harder when there is a bear market! But here is a little secret that the managers would not like you to know...They rarely beat the index they are competing against over a 5 year period! so indexed are the way to go and they also offer lower AFC's than managed funds.

thlint

Unfortunately it is often the case that people do not remember - as it happens I do not have to remember, I wrote it down in 1985 (25 yrs ago) where I was told to expect a 13% growth and a projected fund of IR£213,000 with pension of IR£31,000 per year if saved IR£40 per month, this was 8% of my gross wages at the time. My notes say we discussed galloping inflation ( at the time around 10%) job changes and top ups - does not give the conclusions and I cannot remember what we said about them
Maybe the professionals thought it accurate at the time but even if it made the accumulated fund of 213000 the pension you could expect would be 6 to 7000 per year . Why do pension companies not be honest and give the actual values the policies achieved instead of projected values so that real returns over the longer period can be seen. Customers could compare the expectations of previous pensioners with to-days realities. I do not disagree with pensions or pension provision but the selling and regulation of pensions needs major reform and a serious dose of transparency. It is unfair to expect economically ignorant -(as in not knowing or having the ability to understand) - customers to be able to make any meaningful decisions about a complex issue. It is up to the professionals and the government to look after their interests. The professionals also have an obligation to look after themselves as best they can so this leaves the government who sadly appear to inept in terms of real customer protection. Maybe as you suggest and I believe managed funds with admin charges are not suitable for pension funds expect in exceptional circumstances with savy customers who understand properly the risks. The change needs to come from inside the industry and I as an engineer can do no more than point the problems as I see them and help people to see the situation from a different perspective. . Standard investment saving is not the same as pension fund provision and the government appears to have difficulty in distinguishing between them.

Kennie1

My previous post was not directed at you but was a general observation so I hope I did not offend. The 13% that you were quoted at the time was reflecting the returns achived historically at the time as is the 6% quoted in todays projections. These projected figures are approved and set dpwn by the financial regulators office and lets face it that department was asleep at the wheel for the last decade so there may be change to them in the future.

So what's changed in the 35 years since you took out your pension. Inflation continued to fall from 10% in the mid 80's to historically low levels in mid to late 90's whilst they did go back up to peak at about 6% or so in the early to mid nought's, interest rates fell about 80 to 90% which all of this has impacted on annuity rates so if interest rates and inflation stayed the same the real value of your annuity rate would have stayed at about the 30000 that was projected. Life expectency has increased for a retired person aged 65 by c.60% from the mid 80s so the life company has to pay out a pension for a extra 4 to 5 years with the same pot of money!

When you received your policy information pack it would have stated that the value of your investment may go down as well as up and the the figures are only a projection and are not guaranteed. May I ask did you continue to invest 8% of your salary each year, this would have protected your real value against wage inflation. Just ran a quote for your 213 k and this would generate a yearly pension increasing by 3%pa of 8900.

All that said the regulation was lax to say the least in the mid 80s and you would need a degree in law to understand some of the jargon that was wrote in the policies documents, but I do think that there has been a dramatic improvment over the years and for the most part the information provided is clear and easy to understand for those that take the time to read it. The charging structure is simple to understand now a days as well, Risk profiling is now mandatory for clients so they decide which funds is right for them, if they do not understand what they are investing in, the advisor is obliged to tell them that the fund is not suitable for them and will direct them to other funds. If the advisor does not comply with the regulations they run the risk of being struck off. But like everything in life there is always room for improvement:)

thlint

It became a paid up policy after about 10 years -- houses and kids just suck money. Started another policy when demands became a bit less -- but having analyzed my experience I regret starting a pension in my mid 20s when I should have been spending on other more important things at the time.

perch

That is exactly what is happening in my family. They can see my experience where the government feels free to move the goalposts to the disadvantage of my retirement arrangements.

So my next generation, aged 30-40, are making moves to get away from
locked up arrangements which seem to benefit mainly institutions, and are vulnerable to government manipulation at any time in the future. They are looking at direct investment in ETFs. They will pay the tax now and have the money free to take with them to a sunnier retirement elsewhere, or to opt out of Ireland Inc if things here deteriorate much further. Mobility is the key.