benefit of having a pension?

thebourke

I work in private sector...I have previous pensions from other jobs....pension contributions for these pensions was 55k..pension value about the same....so my question what the benefit of investing in a pension?
Would i better of saving the money and keeping it in the bank
I recently started a new job..they offer a pension...but not sure will i take it up as i don't really see any benefit in having one.

AndrewJRenko

There is huge tax benefit that you won't be able to match with your own savings.

Does your new employer offer to match your contributions or make any contribution?

thebourke

My current employer doesn't offer any contribution!
Tax benefit of 40%,but when you come to retirement age ,isn't there much tax charged?
Plus what about the fees the pension providers charge...
Whats the benefit?

AndrewJRenko

thebourke wrote: »

Plus what about the fees the pension providers charge...
Whats the benefit?

What fees will you be charged?

thebourke

Isn't there fund management charges for having a pension every year for having a pension?

Ace2007

thebourke wrote: »

Isn't there fund management charges for having a pension every year for having a pension?

Yea there is, but it's still better than putting your money in the bank, for example assuming your marginal rate of tax is 40%.

Every €100 you put into your pension pot actually only costs you €60 because of the tax relief, the investment return you earn on this €100 is also tax free.
While you pay annual management charges, you should have the choice how you want this invested - you can go for high risk or low risk fund, and you should be able to change this as you wish, or just go for the default option which I assume will be a lifestyle option.

Compare that with if you don't have a pension, you will only get €60 of the €100 into your hand as you have to pay tax on it. You then put the money in the bank to save, but you have to pay DIRT on the interest which I think is about 37%?
There is also no guarantee that you will save this money to retirement - you could spend it on coke and hooker for instance. So then when you get to retirement you may not have any money saved at all. Whereas if it's in a pension pot - you can't spend it on coke and hookers or whatever you may spend it on.

Henry Ford III

€55k in contributions (over how long?) versus a similar fund value today doesn't sound too good tbh. As always get proper advise.

On the upside your contributions would have benefited from tax relief, and you'd not have paid any tax on your employers contributions.

Assuming a 50/50 contribution split and 40% income tax relief on your side, that €55k has actually cost you €16500 net.

Get a proper review done by an Authorised Adviser, and take it from there.

Liam D Ferguson

thebourke wrote: »

Tax benefit of 40%,but when you come to retirement age ,isn't there much tax charged?

It's a good question. People selling pensions tend to focus on the tax relief on contributions, but not to highlight the fact that some of your pension may be taxed when you draw it. That said, for most people there's still a huge tax advantage in saving through a pension compared with saving in a savings account. Many people will be tax exempt when they retire. At present, a married couple where one is over 65 can have up to €36,000 per year income and be exempt from tax.

Take an example of a married couple with one earner. The State Pension (including an allowance for a dependent spouse) would be €385 per week. So the earner could fund privately for an additional pension of over €15,000 per year and still be tax exempt. That's a pension fund of around €300,000. You can take the first 25% of a pension fund as a lump sum, tax-free. So this person could accumulate a fund of €400,000 at retirement, take €100,000 as a tax-free lump sum and €15,000 per year of a pension for life and still be tax exempt under current thresholds. If s/he's getting tax relief at 40% on contributions to the fund while earning, s/he's getting 40% tax relief on the way in and paying no tax on the way out.

Even if you're not going to be tax exempt in retirement, it can still make a lot of sense to fund a pension. Another example - a single man. Roughly the first €35,000 of annual income is going to be taxed at the lower 20% rate. If we take it that his State Pension is going to be roughly €12,000 per year, then he can fund for a pension of around €22,000 per year privately and still remain on the lower tax rate. He could accumulate a pension fund of nearly €600,000 and still be taxed at the lower rate in retirement. First €150,000 of the fund can be taken as a tax-free lump sum. Balance of the fund (€450,000) could be used to provide him with a pension of under €23,000 per year. So he'd be paying tax at 20% on three-quarters of his pension fund (after the tax-free lump sum). That's an effective tax rate of 15%. So this guy gets 40% tax relief on contributions on the way in and pays 15% tax on the way out.

These are only examples. As has been said here and elsewhere, it's worth getting specific professional advice about your own particular circumstances.

bri007

That’s a very informative and well explained examples you gave.

Say someone on early 40’s k salary starting a pension now mid 30s started paying €350 into a pension, would this be considered too low? So if 40% tax relief means could be paying in overall 500+ but effectively paying just the 350.

Would this be considered a good enough amount to start one off, as with trying to buy a house start a family it be all I’d be able.

To be honest I never thought of doing one but lately I have been thinking more and more, probably Caus of the fact buying a house but I would like to put something away for retirement time.

Liam D Ferguson wrote: »

It's a good question. People selling pensions tend to focus on the tax relief on contributions, but not to highlight the fact that some of your pension may be taxed when you draw it. That said, for most people there's still a huge tax advantage in saving through a pension compared with saving in a savings account. Many people will be tax exempt when they retire. At present, a married couple where one is over 65 can have up to €36,000 per year income and be exempt from tax.

Take an example of a married couple with one earner. The State Pension (including an allowance for a dependent spouse) would be €385 per week. So the earner could fund privately for an additional pension of over €15,000 per year and still be tax exempt. That's a pension fund of around €300,000. You can take the first 25% of a pension fund as a lump sum, tax-free. So this person could accumulate a fund of €400,000 at retirement, take €100,000 as a tax-free lump sum and €15,000 per year of a pension for life and still be tax exempt under current thresholds. If s/he's getting tax relief at 40% on contributions to the fund while earning, s/he's getting 40% tax relief on the way in and paying no tax on the way out.

Even if you're not going to be tax exempt in retirement, it can still make a lot of sense to fund a pension. Another example - a single man. Roughly the first €35,000 of annual income is going to be taxed at the lower 20% rate. If we take it that his State Pension is going to be roughly €12,000 per year, then he can fund for a pension of around €22,000 per year privately and still remain on the lower tax rate. He could accumulate a pension fund of nearly €600,000 and still be taxed at the lower rate in retirement. First €150,000 of the fund can be taken as a tax-free lump sum. Balance of the fund (€450,000) could be used to provide him with a pension of under €23,000 per year. So he'd be paying tax at 20% on three-quarters of his pension fund (after the tax-free lump sum). That's an effective tax rate of 15%. So this guy gets 40% tax relief on contributions on the way in and pays 15% tax on the way out.

These are only examples. As has been said here and elsewhere, it's worth getting specific professional advice about your own particular circumstances.

Liam D Ferguson

bri007 wrote: »

That’s a very informative and well explained examples you gave.

Say someone on early 40’s k salary starting a pension now mid 30s started paying €350 into a pension, would this be considered too low? So if 40% tax relief means could be paying in overall 500+ but effectively paying just the 350.

Would this be considered a good enough amount to start one off, as with trying to buy a house start a family it be all I’d be able.

To be honest I never thought of doing one but lately I have been thinking more and more, probably Caus of the fact buying a house but I would like to put something away for retirement time.

Thanks.

I'm a financial broker and I do tell my own customers to prioritise buying your first home above putting too much into a pension. If there's an employer pension contribution on offer, then you should try and get your hands on that because it's free money but if not, concentrate on the house first and then when you're in the door, revisit the pension.

Kids are different. Those little bundles of joy will cost you an arm and a leg for at least 20 years per skull, so if you wait until after the kids are reared before you get stuck into the pension you're probably leaving it too late.

You mention a contribution rate of around 13 - 15% of salary before tax relief. With 30 years to go before you retire, that wouldn't be a bad place to start if you can keep it up for the next 30 years. Any decent broker would be able to give you projections as to what that might get you at retirement. Or the Pensions Authority have some general information and calculators that can be useful. https://www.pensionsauthority.ie/en/I_want_to_start_a_Pension_PRSA/

bri007

Hi thanks for the reply and information,

I am 35 so starting it very late, that’s why anxious enough to start something even if it’s very small to get the ball rolling.

The mortgage term is looking like 28 years, we hope to overpay as our salaries increase as we are on increments each year.

Liam D Ferguson wrote: »

Thanks.

I'm a financial broker and I do tell my own customers to prioritise buying your first home above putting too much into a pension. If there's an employer pension contribution on offer, then you should try and get your hands on that because it's free money but if not, concentrate on the house first and then when you're in the door, revisit the pension.

Kids are different. Those little bundles of joy will cost you an arm and a leg for at least 20 years per skull, so if you wait until after the kids are reared before you get stuck into the pension you're probably leaving it too late.

You don't mention what age you are so it's hard to comment on your suggested contribution rate.

Liam D Ferguson

bri007 wrote: »

Hi thanks for the reply and information,

I am 35 so starting it very late, that’s why anxious enough to start something even if it’s very small to get the ball rolling.

The mortgage term is looking like 28 years, we hope to overpay as our salaries increase as we are on increments each year.

Sorry - you did mention your age earlier but I missed it. I edited my last post.

Sounds like you have your financial head screwed on. Overpaying the mortgage is sensible too. Karl Jeacle has a free online mortgage calculator that allows you to see the effects of overpayments on your loan over the long-term. I find it can be motivational because if you're thinking about overpaying but are not sure how much, seeing the months or years knocked off your mortgage term can give you the kick you need. https://www.drcalculator.com/mortgage/

bri007

Thanks for Your help, I really appreciate it.

Liam D Ferguson wrote: »

Sorry - you did mention your age earlier but I missed it. I edited my last post.

Sounds like you have your financial head screwed on. Overpaying the mortgage is sensible too. Karl Jeacle has a free online mortgage calculator that allows you to see the effects of overpayments on your loan over the long-term. I find it can be motivational because if you're thinking about overpaying but are not sure how much, seeing the months or years knocked off your mortgage term can give you the kick you need. https://www.drcalculator.com/mortgage/

digzy

What happens to a pension pot should you die?

Let's say you retire at 65 with a 'pot" of 300k hoping to live off 30 k a year for 10 years. Then you die at 70 with 150k in the 'pot'

Liam D Ferguson

digzy wrote: »

What happens to a pension pot should you die?

Let's say you retire at 65 with a 'pot" of 300k hoping to live off 30 k a year for 10 years. Then you die at 70 with 150k in the 'pot'

I'm assuming that you've chosen an Approved Retirement Fund (ARF). The remaining €150,000 can be passed to your spouse or dependents.

billyhead

What if you don’t have any direct dependents I.e no spouse or children.

AndrewJRenko

billyhead wrote: »

What if you don’t have any direct dependents I.e no spouse or children.

It would be an asset of your estate, so it would go with your house and other assets.

You make your will to decide what to do with it

If you buy an annuity and not an ARF, then your annuity provider takes the risk. If you live one year, the insurance company does really well. If you live 30 years, they do really badly. Either way, there is nothing left at the end.

An Cigire

I read that between 13-15% of your pay packet should be placed into your pension each pay period, is that 12-15% of pre tax wages or after tax?

If I’m putting in 8% and company puts in a higher figure would that qualify as the recommended amount or is it meant to be separate from your employers contributions?

Cheers

coylemj

An Cigire wrote: »

I read that between 13-15% of your pay packet should be placed into your pension each pay period, is that 12-15% of pre tax wages or after tax?

The number that gets bandied about is typically expressed as a % of gross pay but there's no simple number. It depends on your age when you start paying into a scheme, what age you'd like to retire at, what % of final income you'd aim to draw as a pension and if you want a spousal/survivor pension to be paid to your partner if you die first.

Have a look at the pension calculator on the Pensions Authority website ...

https://www.pensionsauthority.ie/en/Calculators/Pension_Calculator/

thebourke

roughly how much of a pension pot should you have when you retire?How many years do pension conpanies assume you live for if you retire at 65/66?

Liam D Ferguson

thebourke wrote: »

roughly how much of a pension pot should you have when you retire?How many years do pension conpanies assume you live for if you retire at 65/66?

If you're using an annuity for your pension, at the moment rates work out that the break-even point is around age 85 / 86. That's a very rough "back of an envelope" figure. Options will cost you more, e.g. indexation on pensions (which are usually bad value), spouse's pension etc.

Another very rough rule of thumb is that you should try to aim to have a pot of 20 times the annual pension you want, plus your lump sum.

thebourke

So assuming you want pension of 20,000euro a year for 20 years when you retire,
it would cost you 7,364euro a year (20k-government pension of 243 per week)
So for 20 years that would be roughly 147,280 euro i would have to pay into pension

mrcheez

AndrewJRenko wrote: »

You make your will to decide what to do with it

Interesting thread so jumping on board. If you have no will does your estate go to your next of kin by default?

Roughly how much does it cost to setup a will, and then how much to change it (if you get married etc)?


I have no will, but already assume my house will go to my parents/siblings if something happens to me.
If I had a will this is exactly how I would delegate my estate as well so not sure I need it.

AndrewJRenko

thebourke wrote: »

So assuming you want pension of 20,000euro a year for 20 years when you retire,
it would cost you 7,364euro a year (20k-government pension of 243 per week)
So for 20 years that would be roughly 147,280 euro i would have to pay into pension

Investment growth of your fund is a major factor in the value of your pension. Over the long term, it should double or treble your contributions.

Try out some of the pensions calculators linked above.

AndrewJRenko

mrcheez wrote: »

Interesting thread so jumping on board. If you have no will does your estate go to your next of kin by default?

Roughly how much does it cost to setup a will, and then how much to change it (if you get married etc)?


I have no will, but already assume my house will go to my parents/siblings if something happens to me.
If I had a will this is exactly how I would delegate my estate as well so not sure I need it.

If you die intestate (no will) it would go to your parents. If both parents are dead. it would go to your siblings.

Making a will is very straightforward. Many credit unions or trade unions have a deal with a solicitor to do this for free or very low cost. It's worth doing, to ensure you get to choose your executors and eliminate any doubt about your wishes.

There are all kinds of complications that you might not think about. For example, if one sibling has died, should their share go to their partner/children, or does your estate just get divided among your surviving siblings?

mrcheez

AndrewJRenko wrote: »

If you die intestate (no will) it would go to your parents. If both parents are dead. it would go to your siblings.

Making a will is very straightforward. Many credit unions or trade unions have a deal with a solicitor to do this for free or very low cost. It's worth doing, to ensure you get to choose your executors and eliminate any doubt about your wishes.

There are all kinds of complications that you might not think about. For example, if one sibling has died, should their share go to their partner/children, or does your estate just get divided among your surviving siblings?

My will would be: "my estate to go to surviving parents, siblings, their children"

So if that's the default, perhaps I don't need to bother unless I get married etc.

AndrewJRenko

mrcheez wrote: »

My will would be: "my estate to go to surviving parents, siblings, their children"

So if that's the default, perhaps I don't need to bother unless I get married etc.

That's not the default:

http://www.citizensinformation.ie/en/death/the_deceaseds_estate/what_happens_the_deceaseds_estate.html

Make a will, to make it easy for those you leave behind.

mrcheez

AndrewJRenko wrote: »

That's not the default:

It is the default.

As per your link:

Relatives entitled to be appointed administrators follow this order:

Spouse or civil partner
Child
Parent
Brother or sister

so my will would be: "my estate goes to Parent, Brother or sister" in that order (I have no spouse/child)

AndrewJRenko

mrcheez wrote: »

It is the default.

As per your link:



so my will would be: "my estate goes to Parent, Brother or sister" in that order (I have no spouse/child)

What does the comma between Parent and Brother mean? Does it mean your parent AND your brother, or solely to your parent if still alive, and if not to your brother?

Having 'or' clauses in legal statements like this isn't a good idea, but it isn't legally clear when the 'or' kicks in.

Without a will, your family will have to go through a messy process to take it through probate. Make a will.

Tar.Aldarion

With the tax relief a pension is the easiest money you will make. Don't underestimate compound interest.

ford2600

AndrewJRenko wrote: »

What does the comma between Parent and Brother mean? Does it mean your parent AND your brother, or solely to your parent if still alive, and if not to your brother?

Having 'or' clauses in legal statements like this isn't a good idea, but it isn't legally clear when the 'or' kicks in.

Without a will, your family will have to go through a messy process to take it through probate. Make a will.

My wife and I just made our wills.

Citizen information site isn't the place to get such important advice. Depending on your circumstances making a will needs good legal advice.

I know quite a few solicitors, some of whom I wouldn't fancy with the finer details. I chose carefully and would urge anyone to do likewise.

Revenue really like it when people make have arsed/no wills.

thebourke

my pension pots is currently worth about 60k..company paid half..i paid the other half...contributions were about 55k..so my pension has nowhere near doubled or trebled...

antodeco

Just a linked question. You have pension with company A and that investment is worth 100k as an example (for 70k contributions as a n example). If you move your pension to company B, are you only moving the 70K or what happens to the investment value of 100K?

Alkers

thebourke wrote:

my pension pots is currently worth about 60k..company paid half..i paid the other half...contributions were about 55k..so my pension has nowhere near doubled or trebled...

But if you'd taken your 30k contributions as pay how much would you have after tax?

AndrewJRenko

thebourke wrote: »

my pension pots is currently worth about 60k..company paid half..i paid the other half...contributions were about 55k..so my pension has nowhere near doubled or trebled...

You have doubled your money through the matching employer contributions, though that isn't what I was getting at above. So you've contributed something like €27k, and ended up with a €60k fund.

How long have you been contributing? What kind of fund have you chosen?

Ace2007

thebourke wrote: »

my pension pots is currently worth about 60k..company paid half..i paid the other half...contributions were about 55k..so my pension has nowhere near doubled or trebled...

Are you in a high risk fun that has taken a nose dive lately?
Are you in a cash fund that is basically getting you no return and probably costing you move over the last few years?
What is the time frame that you are looking over - Pensions are a long term game.