Should I join pension?

danindub

Hi guys,

I'm 26 and I think it's time to think about my future. My salary goes into 41% tax bracket so I though that maybe it's time to join pension, as it's not going to cost much at the end of the day.

Now the question is - with current economic situation - does it make sense? Will I wake up in 10 years time with my pension gone?

Also - I don't entirely understand principle of pension. Let's say i'll put aside €350 a month. Over 39 years that's just €163,800. That's surely can't last me for longer than 6 - 7 years once I reach my retirement age and start getting it back. After inflation probably even less. How much sense does it make?

Thanks in advance

danindub

seriously ? no one ? nothing?

handlemaster

danindub wrote: »

seriously ? no one ? nothing?

Your employer has to give you a broker to speak with regarding pensions. Best to direct your questions their.

danindub

Thanks but I was really looking for regular people opinion.

Obviously pension broker will tell me to go for it, that's how he makes his money after all.

Pablo Sanchez

danindub wrote: »

Hi guys,


1.Now the question is - with current economic situation - does it make sense? Will I wake up in 10 years time with my pension gone?

2.Also - I don't entirely understand principle of pension. Let's say i'll put aside €350 a month. Over 39 years that's just €163,800. That's surely can't last me for longer than 6 - 7 years once I reach my retirement age and start getting it back. After inflation probably even less. How much sense does it make?

1.Of course its possible, its unlikely but there is no guarentee as to the performance of the markets.

2. your forgetting to take into account any growth that your investment is likely to make over the next 40 years. This crisis has been going for the last 3/4 years, but everything will rebound eventually. But seeing as your getting tax relief at the higher rate it makes more sense to put it into a pension then into a savings account/under your bed.

JaneyMacker

I have two jobs for the last 12 years.
One is a technical office job and the other is that I do all the maintenance for a property agent for they properties they manage, which I do in the evenings and at weekends, for which I also get free apartment, for which I pay BIK on.

So im well into the 41% tax bracket on the primary job alone.
Ive been paying €1000 a month into my pension and my employer has been paying €500 a month for the last 12 years.

I stopped those payments last year. Used to get the 41% plus PRSI relief on my contributions.
The government decided that they could help themselves to my pension last year, which annoyed me enough.

So now thy are going to cut the tax relief even more, tax you god knows what when you draw down your pension. And probably means test the contributory state pension so i probably wont get that.

Better off with no pension now. Look after your own money. It could be a situation where you will provide for your own pension and that will actually cost you more than just getting the state pension in the long run.

Pensions are useful if there is some security in your future.
But now they just keep chopping and changing . That is not good for something that is supposed to provide stability for you.

I used to preach that everyone should organize their pension. I am of the polar opposite view now. The govt meddling with people retirement plans is a disaster.

Also, I just checked the value of my pension. In 12 years it has grown by 1% of the total of my contributions + the tax relief on it.
So 1 % total growth in 12 years. When I culd have got at least 4% PER YEAR average over that 12 years in a savings account. An also the govt will be helping themselves to a nice chunk of my pension every year now.
I wish I could just take it out now, but its trapped there in the pension.

Raskolnikov

Firstly, you won't be retiring at 65. The retirement age for you has recently been raised to 68, so you will have another 3 years of contributions to be making. Secondly, you are ignoring the compounding of your pension. Average returns from the stock market after inflation are 6.5% (apparently!). Doing some quick compound interest calculations says that saving €4.2k a year for 42 years at 6.5% will yield a pension pot of €845,338.66.

What is in your employment contract with regard to pensions? Do they contribute at all, or provide any match in your contributions? Do they provide any mechanism that allows your pension contributions to be deducted at source?

I think you're best off waiting with regard to starting up a pension. Currently, in the IMF program for government, they are requesting that Ireland abolishes the higher rate of tax relief on pension contributions. Of course, when you reach 68 and come to retire, your pension will be subject to both income tax and the universal social charge. Essentially, this could leave you in the situation where you are being double-taxed. i.e, you put €100 into your pension, costing you €80 today. However, when you come to draw down on your pension, you will be subject to the higher rate of tax and the USC (41%+~6%). In other words you are putting €80 in, to get €53 back. Also, you still have the pension levy of 0.6% taking a chunk of your total capital for the next three years.

Kennie1

JaneyMacker wrote: »

So im well into the 41% tax bracket on the primary job alone.
Ive been paying €1000 a month into my pension and my employer has been paying €500 a month for the last 12 years.

I stopped those payments last year. Used to get the 41% plus PRSI relief on my contributions.
The government decided that they could help themselves to my pension last year, .

So you can now put €590 in a bank account and save for your pension this way instead of putting €1500.00 into a pension fund. How does that make sence

coylemj

Raskolnikov wrote: »

Firstly, you won't be retiring at 65. The retirement age for you has recently been raised to 68, so you will have another 3 years of contributions to be making.

The higher age is when you can draw the State Old Age pension (now called something more PC but that's what it is), it does not mean that you have to continue paying into a personal pension fund until you reach that age. Revenue rules allow you to draw a private pension from age 50 so if you take early retirement from your job at or after age 50, you can start drawing from the pension you have funded.

Raskolnikov wrote: »

I think you're best off waiting with regard to starting up a pension. Currently, in the IMF program for government, they are requesting that Ireland abolishes the higher rate of tax relief on pension contributions. Of course, when you reach 68 and come to retire, your pension will be subject to both income tax and the universal social charge. Essentially, this could leave you in the situation where you are being double-taxed. i.e, you put €100 into your pension, costing you €80 today. However, when you come to draw down on your pension, you will be subject to the higher rate of tax and the USC (41%+~6%). In other words you are putting €80 in, to get €53 back. Also, you still have the pension levy of 0.6% taking a chunk of your total capital for the next three years.

What you're saying is that the OP should forego 41% tax relief and 50% employer top-up so he can wait until they stop takoing the 0.6% levy. So he should wait until the tax relief goes down to 30% or the standard rate - just to avoid a levy of 0.6% ???? I don't think so.

If he contributes 1,000 in a 12 month period under the current tax system, he gets 410 tax back and the employer puts in 500 so for a net cost to him of 590, he gets a pension investment of 1,500. The 0.6% levy wil take just NINE EUROS of this money. If the tax relief only went down to 30%, he would still be getting 1,500 of a pension pot in a 12 month period for a cost to him of just 700, the Govt. levy is completely insigificant and should not affect his decisions in any way whatsoever.

JaneyMacker

I'll get my employers contribution even if i pay nothing myself. Though i would prefer it in cash now if i could get it.

My problem is that i cant plan on how much i will get in my pension. I cant say now that it wont be taxed to the eyeballs when i draw it down.
I cant touch it for many a year yet.

I am very borderline now about paying the 41% now and bank the rest. If the tax relief is cut anymore, as the dragons say - im out

Better to have less money where you can reach it now than have a bit more that you cant reach, and may be wiped out on you in the next 30 years or so at the stroke of a pen.

Pensions just arent the stable investment they were touted to be over the last decade.

pfurey101

They are very worthwhile - if you are a politician.

coylemj

I realise that pension funds have been hit recently but they have been hit before and they bounced back, you need to think of it as a long term investment and not make rash decisions just because there is a dip in the market.

You also need to undertstand that you are liable for DIRT on deposit interest and you have to pay capital gains on any gains you make yourself investing directly in shares whereas all of the gains made by pension funds are tax freee so you only pay tax when you start drawing the pension.

Getting tax relief at 41% is the best deal you are ever going to get from the taxman so I'd say forget about the 0.6% levy and pump as much as you can afford into your personal pension, it will be the best investment you ever made.

JaneyMacker

coylemj wrote: »

I realise that pension funds have been hit recently but they have been hit before and they bounced back, you need to think of it as a long term investment and not make rash decisions just because there is a dip in the market.

You also need to undertstand that you are liable for DIRT on deposit interest and you have to pay capital gains on any gains you make yourself investing directly in shares whereas all of the gains made by pension funds are tax freee so you only pay tax when you start drawing the pension.

Getting tax relief at 41% is the best deal you are ever going to get from the taxman so I'd say forget about the 0.6% levy and pump as much as you can afford into your personal pension, it will be the best investment you ever made.

its not a rash decision. btw i work in the pensions industry. I used to tell everyone i know to sort out their pension. Now i tell them wait and see what the budget brings. If its not 41% after the budget, forget it.

Drumpot

Disclosure : I am a financial adviser. I am not giving professional financial advice on this post, just giving personal views on what I have been seeing while meeting people.

The 3 main reasons to do a Pension to most people I meet nowadays:

- Tax relief
- Money is locked away that actually stops impulse buying , if you save in a bank you can spend easily
- There will possibly not be even a state Pension by the time many of us are retiring.

I felt that many people would be seriously turned off Pensions (certainly happening with higher earners) but I am finding that lower earners are more interested in setting up a Pension nowadays with the above two factors being the most important.

If you setup a pension into a diversified portfolio (ie several funds instead of one) you reduce the risk exposure to one specific field.

I personally like Pension plans that have consistant long term returns (one or two around still). The fund choice and of course the charges are a huge factor in how a pension will progress, moreso then contributions when a person gets closer to retirement.

I would also suggest that you look at how protected your income is (income protection). There is also tax relief at your standard rate on this and in many cases its more important to have your income protected in your earlier years then it is to save to your pension.

Example - You setup a Pension today at €1,000 a month and in 4 years you get seriously ill and will not be able to work for a long time (years), what good is your pension while you are unable to work ? Why not for example setup Income Protection costing eg €100 per month and put €900 into a pension ? That way you are contributing to your Pension and you are covering your income if you get ill or injured.

Either way, you should consult with either the broker advised by your employer or an independent broker.

Kennie1

Drumpot wrote: »

Disclosure :I am not giving professional financial advice on this post,
I would also suggest that you look at how protected your income is (income protection). There is also tax relief at your standard rate.
.

Probably just as well...you can get tax relief at your marginal rate on PHI;)