Starting a pension late or invest

KAGY

I was working on a problem with someone in my class. If someone is in their early forties with no pension, is it better to start one now, or put the same amount into a regular investor account.

Let's say they will retire in 25 years, and have 25 years of retirement after that. They would have €500 a month to put in.

Using the Irish Life pension calculator, that would give a €6,192 p.a. pension on top of the state pension. So over a 25 year retirement, about €155k.

Using excel, and an average long term interest rate of 2.3% (I've seen double that figure on the web, so I think I'm being conservative)
FV(2.3%/12,25*12,-500,0,1), the retirement pot would be €202k, or about €8114 pa
But you'd still be earning interest on what you haven't withdrawn so:
PMT(2.3%/12,25*12,202k,0,1) would suggest that you could draw €888 p/m or 10.6k pa

TLDR: putting €500 pm into a pension in your 40's would give you slightly over €515. Investing this at 2.3% would allow you to draw €888 pm

BTW it was a spreadsheet class!

KAGY

Quick reply: just realised I forgot about tax relief, would I be right in assuming that someone could put in €600 p/m for €500 if they're on the 20% income tax band?
If so that would be €7441 pa, or €645 p/m as a pension top up.

And if I reduce that 2.3% by a third to account for taxes and charges, they would still be better off by over €100 p/m

Any thoughts

Henry Ford III

KAGY wrote: »

Quick reply: just realised I forgot about tax relief, would I be right in assuming that someone could put in €600 p/m for €500 if they're on the 20% income tax band?
If so that would be €7441 pa, or €645 p/m as a pension top up.

And if I reduce that 2.3% by a third to account for taxes and charges, they would still be better off by over €100 p/m

Any thoughts

2 thoughts:-

1/. Anyone paying €500 or €600 per month into a pension isn't likely to be on the lower tax band.

2/. Ignore annuity rates. Concentrate on the accumulated cash fund. ARF's are becoming more and more popular with these ultra low interest rates.

coylemj

KAGY wrote: »

Quick reply: just realised I forgot about tax relief, would I be right in assuming that someone could put in €600 p/m for €500 if they're on the 20% income tax band?

€500 net would equate to a gross monthly contribution of €625.

Divide the net payment by (1-marginal tax rate).

So 500/(1-0.2) = 625 and 500/(1-0.4) = 833 meaning that a top rate payer could contribute €833 p.m. at a net cost of €500.

Heres Johnny

Was this class designed to get you using spreadsheets or to compare financial products?

If you're happy to ring fence the money until retirement age, the pension will win out over any savings like for like.

You can invest pension money in the same way as a savings plan or investment plan only you get tax relief and tax free growth as well with the pension.

Like for like, pension every time. And my pension has averaged almost 10% annual returns since the day I started, it's starting to grow quickly now

KAGY

Thanks for your input, I was showing them functions in excel and it just popped up in discussion.

The figures for the pension returns came from the Irish life pension calculator, and even using a low return for savings the figures appear to lean towards just saving. Don't know their income so I just assumed 20% (should have known to divide by 80% though).
I'm sure a financial advisor could advise him better than a computer tutor anyway. :-)

Edit: by saving I mean investing in a managed fund

KAGY

Henry Ford III wrote: »

2/. Ignore annuity rates. Concentrate on the accumulated cash fund. ARF's are becoming more and more popular with these ultra low interest rates.

Fairly sure he's self employed so that's the act/caf out. I haven't heard of the ARFs must look into them

Heres Johnny

A pension is simply a tax efficient savings plan. That's all it is until you draw it down.
Put it this way, if you invest 100 into a pension as a higher rate tax payer, before charges etc you are only paying 60 with tax relief

So your 60 gets you 100 or a 67% return on your 60 straight away. Risk free. This is not possible with any savings plan.

For lower rate, 100 costs 80 so that's a 25% return risk free.



In no way is any savings plan even remotely comparable to a pension

donkey balls

As the other posters have mentioned putting the money into a pension rather than a savings account has a better return over the years, One of the pension schemes that I have was worth around 60k just before the downturn in 08.
From memory I had put in approx 25k so it doubled in size even though I hadn't contributed to it in the previous 5 years, Also it took a hammering during the down turn dipping down under the 10k mark.
The fund has since gone up but not yet to the original amount.

Heres Johnny

From 60k to 10k? That's a huge drop. Only funds I heard of doing anything like that were the ones sold by banks which invested heavily in their own shares and other banking stocks. A well managed diversified fund would have lost about 30-40% in 2008 and be well recovered by now

donkey balls

Heres Johnny wrote: »

From 60k to 10k? That's a huge drop. Only funds I heard of doing anything like that were the ones sold by banks which invested heavily in their own shares and other banking stocks. A well managed diversified fund would have lost about 30-40% in 2008 and be well recovered by now

It's back up over 50k at the moment hopefully when it comes to retiring another crash won't be on the way.
And the fund is with what you could say one of the big fund companies

donkey balls

Heres Johnny wrote: »

From 60k to 10k? That's a huge drop. Only funds I heard of doing anything like that were the ones sold by banks which invested heavily in their own shares and other banking stocks. A well managed diversified fund would have lost about 30-40% in 2008 and be well recovered by now

It's back up over 50k at the moment hopefully when it comes to retiring another crash won't be on the way.
And the fund is with what you could say one of the big fund companies

jimmycrackcorm

A pension is an investment fund in any case and with the benefit of significant tax savings in putting the money in.

Unless you personally can out do the pension fund managers, then it's a pretty shut case for the pension.

On top of that. Most employers also contribute to your pension fund.

canonball5

If a pension fund is only offering 2.3% that's very low. I don't know what the average return on these funds are but with a little bit of research you could easily return double that on an ETF and you won't need to pay the fund fees. You will of course need to look into the tax side of things.

The S&P 500 returned over 21% in 2017 and has returned over 9% in the last 60 years.

KAGY

So from the answers here the pension calculator online must be widely conservative or I'm not understanding pensions. If I think of it when in at the PC I must stick up the file.

Heres Johnny

They are conservative but not too much. My projections when I sold them were normally about 2% less than the long term returns on each fund type.

The more aggressively managed funds returned about 8% long term but I always projected at 6% and another pessimistic 4%. You want to underpromise and over deliver really.

ted1

KAGY wrote: »

Quick reply: just realised I forgot about tax relief, would I be right in assuming that someone could put in €600 p/m for €500 if they're on the 20% income tax band?
If so that would be €7441 pa, or €645 p/m as a pension top up.

And if I reduce that 2.3% by a third to account for taxes and charges, they would still be better off by over €100 p/m

Any thoughts

Someone on the 20% band would struggle to put 500 aside for a pension.

Even if their other half is working that will put them in the higher band