Why are people obsessed with getting a pension

AndrewJRenko

maestroamado wrote: »

I am not aware if there are any pensions in private funds that are guaranteed by Government.
If its to work something need be done in this area, i know a few people who got caught in last financial crisis.

There are no Government guarantees, but no-one has lost their pension fund because of a dodgy bank or insurance company. The people who 'got caught' suffered investment losses, probably because they were heavily invested in equities. A basic rule of pensions is to move investments from high-risk equities to low-risk bonds gradually over the ten years before your retire to minimise risk. Those who were greedy and left their money in equities chasing higher returns got caught.

maestroamado wrote: »

There is no freebee here if we get the tax concession at the front end we pay tax when we draw out, that's the way it is. We can get 25% of the cash tax free.
Thats my understanding of how it works...

It's not that simple. First, you get investment growth on the tax-free money, which is far greater than you could hope to achieve if you were investing after-tax money yourself.

Secondly, a good part of your income each year is tax free because of tax credits. By spreading your income over your retirement years, you avail in full of the tax credits to reduce overall tax paid. There is also a generous special tax credit for pensions to reduce this further.

S.M.B.

AndrewJRenko wrote: »

It's not that simple. First, you get investment growth on the tax-free money, which is far greater than you could hope to achieve if you were investing after-tax money yourself.

Secondly, a good part of your income each year is tax free because of tax credits. By spreading your income over your retirement years, you avail in full of the tax credits to reduce overall tax paid. There is also a generous special tax credit for pensions to reduce this further.

Is the first point primarily beneficial as a result of the second point?

In a hypothetical situation where you were liable to pay the exact same rate of tax at the points of earning and retirement and there was no tax free lump sum then getting 'investment growth on the tax-free money' is irrelevant?

donkey balls

Squozen wrote: »

46, €153k (dropped fairly significantly due to covid-19!), putting in €687/month between myself and my employer (would love to put in more, but I can't until I can find a house to buy) and working on an average gain of 9% per annum.

I'm around the same age as you my to pension funds had a combined value before the Covid 19 of 140k it dropped down to 112k.
It has since climbed back up to 130k between myself and my employer I put away 1685 a month, The airline pension i be able to draw down when I turn 50.
Although I'm in 2 minds whether to draw down on it regarding still working full time and the tax implications.
I'm really playing catch up with the pension as I didn't have one for the best part of 13 years, I'm also planning on paying of my mortgage earlier and still put the money aside would like to buy a place in Lanzorote all going to plan.

donkey balls

Squozen wrote: »

46, €153k (dropped fairly significantly due to covid-19!), putting in €687/month between myself and my employer (would love to put in more, but I can't until I can find a house to buy) and working on an average gain of 9% per annum.

I'm around the same age as you my to pension funds had a combined value before the Covid 19 of 140k it dropped down to 112k.
It has since climbed back up to 130k between myself and my employer I put away 1685 a month, The airline pension i be able to draw down when I turn 50.
Although I'm in 2 minds whether to draw down on it regarding still working full time and the tax implications.
I'm really playing catch up with the pension as I didn't have one for the best part of 13 years, I'm also planning on paying of my mortgage earlier and still put the money aside would like to buy a place in Lanzorote all going to plan.

Bass Reeves

Bass Reeves wrote: »

When you get much above 800K in a pension fund(in todays terms) unless an employers is matching funds you have to question if you really need to be funding your pension to that extent unless you intend your children to inherit it or intend to retire in your 50's.

Taking 200K from an 800K pot leaves 600K for pension income distribution. If going into an ARF and withdrawing 4%/year or taking an anunity you are hitting the higher tax bracket if you are drawing a state pension . Unless my employer was funding part of the pension I be inclined to invest outside the pension scheme. If you factor in changes to taxation and maybe reduction in state pensions a 1 million max fund will cater for most retirements.

You can take over 200k. The €200k is a tax free lump sum, you can take another 300k and pay 20% tax on it (the amount in excess of €200k).

AndrewJRenko

S.M.B. wrote: »

Is the first point primarily beneficial as a result of the second point?

In a hypothetical situation where you were liable to pay the exact same rate of tax at the points of earning and retirement and there was no tax free lump sum then getting 'investment growth on the tax-free money' is irrelevant?

No. If you were trying to invest after tax, for every €100 you could be putting into a pension, you'd be putting €60 into an after-tax fund.

So the compound growth available to you over the years is much, much higher in your pension fund.

nailer54321

You have only lost money if you get out of your investments, this is unfortunate for people coming up to retirement but for someone a number of years off retirement there should be time for you to claw back this. As was said before , if you are close to retirement you should have had your money transfered to a safer option, just ride this out and like what's gone before, this will (should) reverse itself, always has and should do in the future. now is the time not to panic, damage is already done.

S.M.B.

AndrewJRenko wrote: »

No. If you were trying to invest after tax, for every €100 you could be putting into a pension, you'd be putting €60 into an after-tax fund.

So the compound growth available to you over the years is much, much higher in your pension fund.

Expanding on this hypothetical situation, I can either pay 40% tax now, or 40% tax later.

1) I invest €60 for 20 years while getting a return of 5% excluding fees/tax each year. In 20 years I now have a pot of €24,764.78 which consists of a decent €10,364.78 in interest and €14,400.00 in deposits.

2) I put €100 into my pension for 20 years while getting a return of 5% excluding fees (no tax is due) each year. In 20 years I now have a pot of €41,274.63 which includes a lovely €17,274.63 in interest and €24,000.00 in deposits. On drawing down this money I am charged 40% on each payment. I end up with €24,764.78 in my bank account.

Apologies if I've completely misunderstood your point but to me the ''investment growth on the tax-free money" is only significant if the amount of tax you are liable to pay now far exceeds the amount you would be liable to pay in the future, which is highly likely but not guaranteed.

Or maybe there's something I'm failing to wrap my head around.

donkey balls

S.M.B. wrote: »

Expanding on this hypothetical situation, I can either pay 40% tax now, or 40% tax later.

1) I invest €60 for 20 years while getting a return of 5% excluding fees/tax each year. In 20 years I now have a pot of €24,764.78 which consists of a decent €10,364.78 in interest and €14,400.00 in deposits.

2) I put €100 into my pension for 20 years while getting a return of 5% excluding fees (no tax is due) each year. In 20 years I now have a pot of €41,274.63 which includes a lovely €17,274.63 in interest and €24,000.00 in deposits. On drawing down this money I am charged 40% on each payment. I end up with €24,764.78 in my bank account.

Apologies if I've completely misunderstood your point but to me the ''investment growth on the tax-free money" is only significant if the amount of tax you are liable to pay now far exceeds the amount you would be liable to pay in the future, which is highly likely but not guaranteed.

Or maybe there's something I'm failing to wrap my head around.

My friends father pays 1% USC on his private pension,

You can't ' I invest €60 for 20 years while getting a return of 5% excluding fees/tax each year'.... Exclude tax on an annual investment return.
Tax and fees will approximately halve the 5%.

Pension fund rolls up without tax deductions.... There will be far more of a pot at the end if each contribution is 66% larger and no tax is deducted annually from growth.

Your hypothetical calculation is error strewn.

Also tax free lump sum up to 200k from a pension is huge.

Jim2007

maestroamado wrote: »

Why has property gone off this agenda, is it that it is too expensive?

Property is a very high risk asset class, it always has been. A portfolio with more that 7% in property is considered a high risk investment.

You break every single rule of investing when you buy a property:
- Borrow to invest
- Fail to diversify among asset classes
- Fail to diversify fail to diversify within the asset class
- And go all in in a hight risk asset class.

It should be no surprise that people got badly burned in the last recession, but it seems many did not learn the lesson, as they blamed everyone but themselves.

One of the best bits of marketing every was the developers - get on the property ladder and rent is dead money.

What many Irish people fail to realise is that is that while equities took a hit in the last recession as well, they recovered long before the Irish property market. And it is nothing new, it always happens.

S.M.B.

Augeo wrote: »

You can't ' I invest €60 for 20 years while getting a return of 5% excluding fees/tax each year'.... Exclude tax on an annual investment return.
Tax and fees will approximately halve the 5%.

Pension fund rolls up without tax deductions.... There will be far more of a pot at the end if each contribution is 66% larger and no tax is deducted annually from growth.

Your hypothetical calculation is error strewn.

Also tax free lump sum up to 200k from a pension is huge.

I know there will be far more of a pot with the increased contributions, my example shows there would be 66% more.

Fair enough about the difficulties in trying to find a matching return excluding taxes and fees, right now in Ireland there is no alternative tax free investment wrapper unlike the UK were there are ISA's, is there? I would have thought some of these auto enroll schemes that employees will be part of will have reasonably high fees and modest returns that may be matched or improved upon elsewhere, possibly not though.

.... Your logic also is based on pension being taxed at higher rate of tax. You are ignoring tax free lump sum, lower rate of tax on 200k to 500k lump sum & the 40% rate not being applicable to a large percentage of pension income for most pension pots.

S.M.B.

Augeo wrote: »

.... Your logic also is based on pension being taxed at higher rate of tax. You are ignoring tax free lump sum, lower rate of tax on 200k to 500k lump sum & the 40% rate not being applicable to a large percentage of pension income for most pension pots.

It is, but I acknowledged this when I first said.

'In a hypothetical situation where you were liable to pay the exact same rate of tax at the points of earning and retirement and there was no tax free lump sum then getting 'investment growth on the tax-free money' is irrelevant?'

You have pointed out that trying to get returns that match what you would get inside the pension wrapper would be very difficult which is a valid point.

The roll up difference is as valid IMO.

Considering even your hypothetical situation isn't providing a better return when all if the points you ignore in that situation are factored in surely you can see no disadvantage in long-term investment being made via pension as opposed to investing with net wages.

AndrewJRenko

S.M.B. wrote: »

Expanding on this hypothetical situation, I can either pay 40% tax now, or 40% tax later.

1) I invest €60 for 20 years while getting a return of 5% excluding fees/tax each year. In 20 years I now have a pot of €24,764.78 which consists of a decent €10,364.78 in interest and €14,400.00 in deposits.

2) I put €100 into my pension for 20 years while getting a return of 5% excluding fees (no tax is due) each year. In 20 years I now have a pot of €41,274.63 which includes a lovely €17,274.63 in interest and €24,000.00 in deposits. On drawing down this money I am charged 40% on each payment. I end up with €24,764.78 in my bank account.

Apologies if I've completely misunderstood your point but to me the ''investment growth on the tax-free money" is only significant if the amount of tax you are liable to pay now far exceeds the amount you would be liable to pay in the future, which is highly likely but not guaranteed.

Or maybe there's something I'm failing to wrap my head around.

I've bolded the bit where you go wrong. You don't pay 40% on every payment when you draw down, because of your tax free credits. If it is a smallish pension, you might well pay 0% on every payment. If it is modest, you may well pay the lower tax rate 20% on each payment. If it is a good pension, you'll still pay 0% and 20% on a good chunk. That's the bit that you're missing.

Yellow_Fern

Calculations should also factor in some peoples non investments might be dividend free shares which would narrow the difference. Irish people are extremely mobile, if you happen to spend a few years in the likes of Singapore, Jersey or Dubai, your non pension investment might have a lot of tax reduced even if you return to Ireland.

S.M.B.

Augeo wrote: »

The roll up difference is as valid IMO.

Considering even your hypothetical situation isn't providing a better return when all if the points you ignore in that situation are factored in surely you can see no disadvantage in long-term investment being made via pension as opposed to investing with net wages.

What's the roll up difference?

The advantages / disadvantages are mostly dependent on the tax you are liable for now and the tax you will be liable to pay in the future which is all I was really trying to highlight using these hypothetical situations. Something like the abolishment of the tax free lump sum over 20 years would have major implications but fingers crossed that and the state pension will still be there.

S.M.B.

AndrewJRenko wrote: »

I've bolded the bit where you go wrong. You don't pay 40% on every payment when you draw down, because of your tax free credits. If it is a smallish pension, you might well pay 0% on every payment. If it is modest, you may well pay the lower tax rate 20% on each payment. If it is a good pension, you'll still pay 0% and 20% on a good chunk. That's the bit that you're missing.

I'm not missing that bit. I said 'In a hypothetical situation where you were liable to pay the exact same rate of tax at the points of earning and retirement and there was no tax free lump sum then getting 'investment growth on the tax-free money' is irrelevant?' and you said "no".

Looptheloop30

Spent 2 years in England. How does somebody go about reclaiming money paid into a pension fund there?

Surely it's possible....

The J Stands for Jay

TK Lemon wrote: »

Hi everyone,

My OH, Mr Lemon is 28 going on 29 . He has been in a defined contribution pension scheme in his current place of work since 2018 when he was 27.

If I'm not mistaken, tax refunds and tax credits are claimable for up to four years.

Is it possible to make a retrospective AVC contribution to his current provider for former employment in 2016 and 2017 and claim the tax relief immediately?

You can only backdate it one year.

Sheep Shagger

Looptheloop30 wrote: »

Spent 2 years in England. How does somebody go about reclaiming money paid into a pension fund there?

Surely it's possible....

First port of call should be the trustee/administrator.

maestroamado

S.M.B. wrote: »

Expanding on this hypothetical situation, I can either pay 40% tax now, or 40% tax later.

1) I invest €60 for 20 years while getting a return of 5% excluding fees/tax each year. In 20 years I now have a pot of €24,764.78 which consists of a decent €10,364.78 in interest and €14,400.00 in deposits.

2) I put €100 into my pension for 20 years while getting a return of 5% excluding fees (no tax is due) each year. In 20 years I now have a pot of €41,274.63 which includes a lovely €17,274.63 in interest and €24,000.00 in deposits. On drawing down this money I am charged 40% on each payment. I end up with €24,764.78 in my bank account.

Apologies if I've completely misunderstood your point but to me the ''investment growth on the tax-free money" is only significant if the amount of tax you are liable to pay now far exceeds the amount you would be liable to pay in the future, which is highly likely but not guaranteed.

Or maybe there's something I'm failing to wrap my head around.

What i was saying to the OP earlier that wanted to use the money to live with now which is the choice.
If a person invests in modest pension it can be win-win.
If as you say a single person is on 40% tax they get this benefit paying in.
On retirement the same person will fall into some tax bracket.
If the credits are more than the state pension+private pension no tax is paid drawing down.
When i said this earlier the other posters were talking in Millions and it got lost.

I have the 40 year local authority public service pension, went in at 17. I was so reluctant to take up the job, where you were infantilised so much, only about a quarter of my working life was in any way enjoyable. Working hours were unsociable, but at least some part of the time I could use my creativity. The big plus is the pension I now have as I was able to retire at 57. It means I can now enjoy life thoroughly, and travel...when there isn’t a lockdown per se. At this stage in my life I am more adventurous than ever, and when retired one is not restricted by annual leave. So I would say to anyone, do go for whatever it takes to have a decent enough pension, as your lust for living rarely de teases with age.

maestroamado

Deleted User wrote: »

I have the 40 year local authority public service pension, went in at 17. I was so reluctant to take up the job, where you were infantilised so much, only about a quarter of my working life was in any way enjoyable. Working hours were unsociable, but at least some part of the time I could use my creativity. The big plus is the pension I now have as I was able to retire at 57. It means I can now enjoy life thoroughly, and travel...when there isn’t a lockdown per se. At this stage in my life I am more adventurous than ever, and when retired one is not restricted by annual leave. So I would say to anyone, do go for whatever it takes to have a decent enough pension, as your lust for living rarely de teases with age.

Have you a young wan?

The J Stands for Jay

S.M.B. wrote: »

Expanding on this hypothetical situation, I can either pay 40% tax now, or 40% tax later.

1) I invest €60 for 20 years while getting a return of 5% excluding fees/tax each year. In 20 years I now have a pot of €24,764.78 which consists of a decent €10,364.78 in interest and €14,400.00 in deposits.

2) I put €100 into my pension for 20 years while getting a return of 5% excluding fees (no tax is due) each year. In 20 years I now have a pot of €41,274.63 which includes a lovely €17,274.63 in interest and €24,000.00 in deposits. On drawing down this money I am charged 40% on each payment. I end up with €24,764.78 in my bank account.

Apologies if I've completely misunderstood your point but to me the ''investment growth on the tax-free money" is only significant if the amount of tax you are liable to pay now far exceeds the amount you would be liable to pay in the future, which is highly likely but not guaranteed.

Or maybe there's something I'm failing to wrap my head around.

You've missed out that your after tax investment will have been taxes along the way. If it's in a fund, there's a 1% levy on the way in, and 41% tax on the growth deducted every 8 years and when you make a withdrawal. If it's direct investment in shares, there's 1% stamp duty (I may have that rate wrong), dividends will be paid to you, so they'll be subject to income tax and you'll need to reinvest them to get a decent return which means more stamp duty, then there's 33% CGT to be paid whenever you sell a share. That's a big drag on your returns on top of using post tax money.

Don't forget that OAPs have higher tax thresholds, so they can have higher pension income without paying tax.

S.M.B.

McGaggs wrote: »

You've missed out that your after tax investment will have been taxes along the way. If it's in a fund, there's a 1% levy on the way in, and 41% tax on the growth deducted every 8 years and when you make a withdrawal. If it's direct investment in shares, there's 1% stamp duty (I may have that rate wrong), dividends will be paid to you, so they'll be subject to income tax and you'll need to reinvest them to get a decent return which means more stamp duty, then there's 33% CGT to be paid whenever you sell a share. That's a big drag on your returns on top of using post tax money.

Don't forget that OAPs have higher tax thresholds, so they can have higher pension income without paying tax.

I wasn't aware of the extent of the taxes and charges on investing outside of a pension in Ireland right now. That's pretty significant when you break it down to that level.

Is there ever any talk of having a tax free alternative in Ireland like in the UK?

bilbot79

[Deleted User] wrote: »

I have the 40 year local authority public service pension, went in at 17. I was so reluctant to take up the job, where you were infantilised so much, only about a quarter of my working life was in any way enjoyable. Working hours were unsociable, but at least some part of the time I could use my creativity. The big plus is the pension I now have as I was able to retire at 57. It means I can now enjoy life thoroughly, and travel...when there isn’t a lockdown per se. At this stage in my life I am more adventurous than ever, and when retired one is not restricted by annual leave. So I would say to anyone, do go for whatever it takes to have a decent enough pension, as your lust for living rarely de teases with age.

This is so gonna be me. Planning to retire at sixty and gallavant around the place

S.M.B.

S.M.B. wrote: »

What's the roll up difference?...........

"I invest €60 for 20 years while getting a return of 5% excluding fees/tax each year. In 20 years I now have a pot of €24,764.78 which consists of a decent €10,364.78 in interest and €14,400.00 in deposits.

2) I put €100 into my pension for 20 years while getting a return of 5% excluding fees (no tax is due) each year."

In your hypothetical case both options grow at 5% per annum, you'd need a real return of 10% to achieve that net. You aren't factoring that in so there's a significant roll up difference.

Also, transaction fees can be significant on the small amounts you are investing net .......... investment via pension are lighter fee wise. There are of course managment fees but 1% is easy to find.

apologies......... I just saw this.....

S.M.B. wrote: »

I wasn't aware of the extent of the taxes and charges on investing outside of a pension in Ireland right now. That's pretty significant when you break it down to that level..........

S.M.B.

Yeah, talking through this scenario has highlighted how difficult it would be to meet the assumption of getting the same 5% return both inside and outside the pension wrapper in Ireland given there's no alternative tax free investment vehicle.

Makes the pension a more obvious choice in most scenarios.