Pension Risks

AnswerIs42

I'm reading up on starting a pension and want to make sure I understand the risks. Can someone in the know confirm the following with regards to pension:

1. Although your pension contribution is tax free up to a point now (dependent on age), you will pay the tax on it when you withdrawn it decades down the line?
2. If 1 is right, the tax you pay decades down the line could be higher than the tax you would have paid now had you not put it into a pension?
3. Your pension contributions could make loses or be completely wiped out?
4. It's fair to say that if the markets/higher taxes go against you, you would have been better of without a pension and just putting the money in a savings account with no risk?

Thanks for any help, there is a lot to understand with pensions.

Amirani

AnswerIs42 wrote: »

I'm reading up on starting a pension and want to make sure I understand the risks. Can someone in the know confirm the following with regards to pension:

1. Although your pension contribution is tax free up to a point now (dependent on age), you will pay the tax on it when you withdrawn it decades down the line?
2. If 1 is right, the tax you pay decades down the line could be higher than the tax you would have paid now had you not put it into a pension?
3. Your pension contributions could make loses or be completely wiped out?
4. It's fair to say that if the markets/higher taxes go against you, you would have been better of without a pension and just putting the money in a savings account with no risk?

Thanks for any help, there is a lot to understand with pensions.

1. You get tax relief at your marginal rate on pension contributions (limited based on age as you say). You will pay tax on it when you withdraw, but the tax rate you pay will likely be lower (your marginal rate will be lower) and the current rules allow you to take 25% of your final fund tax free.
2. Not really no, you're going to pay less tax overall if you invest the money in a pension.
3. Yes your pension could make losses and technically be wiped. However this would require some abysmal investing. If you put your money into a broad fund that tracks world equity then history has shown that you will gain money across any long time horizon.
4. Savings accounts do have risk, they lose money due to inflation. You will almost certainly never be better off putting money in a savings account versus a pension.

AnswerIs42

Amirani wrote: »

1. You get tax relief at your marginal rate on pension contributions (limited based on age as you say). You will pay tax on it when you withdraw, but the tax rate you pay will likely be lower (your marginal rate will be lower) and the current rules allow you to take 25% of your final fund tax free.
2. Not really no, you're going to pay less tax overall if you invest the money in a pension.
3. Yes your pension could make losses and technically be wiped. However this would require some abysmal investing. If you put your money into a broad fund that tracks world equity then history has shown that you will gain money across any long time horizon.
4. Savings accounts do have risk, they lose money due to inflation. You will almost certainly never be better off putting money in a savings account versus a pension.

Thanks for taking the time to reply, Amirani. That's cleared it up for me

FastFullBack

AnswerIs42 wrote: »

I'm reading up on starting a pension and want to make sure I understand the risks. Can someone in the know confirm the following with regards to pension:

1. Although your pension contribution is tax free up to a point now (dependent on age), you will pay the tax on it when you withdrawn it decades down the line?
2. If 1 is right, the tax you pay decades down the line could be higher than the tax you would have paid now had you not put it into a pension?
3. Your pension contributions could make loses or be completely wiped out?
4. It's fair to say that if the markets/higher taxes go against you, you would have been better of without a pension and just putting the money in a savings account with no risk?

Thanks for any help, there is a lot to understand with pensions.

I suggest you read this thread end to end. It's good:
https://touch.boards.ie/thread/2057962215/1

Some answers to your specific questions:
1. Yes tax on drawdown
2. No. You can get a one time lump sum tax free upto a quarter of your pension pot (upto a limit of €200K). The remainder is then used to buy you an income in retirement and that is subject to standard income tax. Also worth nothing all investment gains on your pension are tax free, this can have a huge impact when compounding interest takes effect.
3. Yes correct. You could invest in less risky assets like bonds but the returns are modest. If you are <10 years from retirement you really should be heavily invested in equities. Yes there will be years your pot goes down but long term equities always go up.
4. No. Pensions are long term investments and hugely tax efficient. Here's a good blog on the exact question you ask
https://www.informeddecisions.ie/blog102-how-best-to-accumulate-e1m-savings-account-or-pension/

One final point, if where you work offers to match your pension contributions its madness to not at least put that amount into a pension, its literally leaving money behind.

AnswerIs42

FastFullBack wrote: »

I suggest you read this thread end to end. It's good:
https://touch.boards.ie/thread/2057962215/1

Some answers to your specific questions:
1. Yes tax on drawdown
2. No. You can get a one time lump sum tax free upto a quarter of your pension pot (upto a limit of €200K). The remainder is then used to buy you an income in retirement and that is subject to standard income tax. Also worth nothing all investment gains on your pension are tax free, this can have a huge impact when compounding interest takes effect.
3. Yes correct. You could invest in less risky assets like bonds but the returns are modest. If you are <10 years from retirement you really should be heavily invested in equities. Yes there will be years your pot goes down but long term equities always go up.
4. No. Pensions are long term investments and hugely tax efficient. Here's a good blog on the exact question you ask
https://www.informeddecisions.ie/blog102-how-best-to-accumulate-e1m-savings-account-or-pension/

One final point, if where you work offers to match your pension contributions its madness to not at least put that amount into a pension, its literally leaving money behind.

Thanks for the link, I'll add it to my reading list. Unfortunately, I've never worked anywhere that made pension contributions, hence I've never thought about it before. I know the government is bringing in legislation around this area in the next few years, so I'll almost certainly have a pension then anyway. Thanks again

Jim2007

Amirani wrote: »

4. Savings accounts do have risk, they lose money due to inflation. You will almost certainly never be better off putting money in a savings account versus a pension.

This is actually a major risk item. Savings alone will not generate sufficient wealth to give you a decent pension at retirement and it is the primary reason why women in particular often struggle with finances in retirement - they did not take the necessary risks in the early years but took low risk options that of course did not deliver the required return.

There is not risk free option every alternative has it's risks. All we can say that experience has shown that following the gerernal rules on investing usually works out OK.