Pension if retire early

Sarah1916

I have a pension with my job (through New Ireland). If I was to retire early (50 or younger) could I drawdown the €200k tax free lump sum when I turn 50 and still allow the remainder to compound until I’m 60?

I know I will have to have minimum €800k in the pension to be able to get the €200k.

I presume if I was allowed to take the €200k lump sum that the balance could not grow to more than €1.8m afterwards without being liable for penalties?

I am only in my 30’s but would just like to know that if I continue to max out my pension now it will be worth it!!

Jim_Hodge

You need to check the terms of your particular pension.

Happyhouse22

As said depends on individual pension rules

But theoretically should be possible to “retire” at 50 , take the lump sum and keep the rest in an ARF, then at age 60 yiu would have to start drawing 4% a year

Sarah1916

Ok thank you - I will request more information about my particular pension scheme.

homewardbound11

Is this a windup having 800k minimum in your pension in your 30s.

Happyhouse22

https://www.boards.ie/discussion/comment/121900120#Comment_121900120

Nah I think they mean having 800k by about age 50 - which I imagine is quite doable if you have a high salary, make the max contribution and experience decent growth.

Happyhouse22

https://www.boards.ie/discussion/comment/121900038#Comment_121900038

The main thing to find out is what type of pension it is, if it’s a pan occupational pension there should be no problem taking the lump sum aged 50 and then leaving the rest to grow.

amacca

What is a pan occupational pension do you mind me asking?

Sarah1916

I should have been clearer - if I had €800k in my pension already, I think I’d nearly retire now!! The aim is to have this by 50. I’m lucky to have a high enough salary and plan to max out annually if I can. I’m also invested into high risk funds which if it goes my way, over the long term (15 years approx.) should make me hopefully around 10% return. That’s how I’ve estimated having €800k+ by the age of 50.

masterboy123

Consider maximising AVC.

Nody

https://www.boards.ie/discussion/comment/121906787#Comment_121906787

Why would you accept 10% return average on a high risk fund? 10% is what you get from a standard global index/S&P500 fund and on top of that high risk funds tend to be expensive (1.5% - 3% annual fee) which then require an even higher return to offset the fee and the additional risk (an index fund should be 0.5% at highest and most are .1% to .2%).

Jim2007

Well we don't know what the OP has actually invested in nor their perception of risk...

The general consensus for a well balanced portfolio, including rebalancing is between 6% and 8%, so I think the projections are probably off in any case.

Sarah1916

I am invested in the Ifunds equities S12 fund which has an average return of 11.4% over the last 10 years and the Prime Equities S12 fund which has had an average return of 10.5% over the last 5 years. These have been categorised as high risk by New Ireland but they basically do track the stock market. I am hoping for similar returns over the next 10 years. Obviously that is no guarantee. I don’t have to retire early but it would be nice to be able to access my pension lump sum if I do decide to retire early. I have been reading up a lot about FIRE lately.

I’m paying 0.88% in charges annually.

Jim2007

https://www.boards.ie/discussion/comment/121910433#Comment_121910433

Just for clarification, is this the fund you are talking about: https://www.newireland.ie/view-document/302866-302866_iFunds_Equities_v29.01.24_(3960910).pdf

Sarah1916

Yes. That is one of them. I am 50% in that and 50% in this one:

https://www.newireland.ie/view-document/303344-PRIME_Equities_Flyer.pdf

bilbot79

This sounds like my own situation. I'm hoping to get similar returns, maxed out on AVCs too.

I think it can go either way too. Some years you could have 21% growth while for others it could be minus figures. If there are some good growth years towards the end it might be an idea to then throw in some bonds.

I have a question about ARFs. Once you take your lump sum and leave the remainder to grow tax free in the ARF, is the tax free growth dependant on you being tax resident in Ireland for eternity?

My pot will far out size that of my partner so I will effectively be supporting them and thus forced into the higher income tax bracket annually. However I saw recently that the difference in tax bracket in Malaga was 21% jumping to 23% or something like that, compared to 20-40% here. It would be much better for my situation then to be tax resident there however I'm trying to weigh up the impact to tax free growth in the ARF.

Peregrinus

I have a question about ARFs. Once you take your lump sum and leave the remainder to grow tax free in the ARF, is the tax free growth dependant on you being tax resident in Ireland for eternity?

As far as Ireland is concerned, it will be tax-free within the ARF whether you are resident here or not.

Whether it is tax-free in your country of residence depends, of course, on the laws in your country of residence. Not every country is as generous with regard to the taxation of retirement savings as Ireland is. You'll have to take local advice on that.

If you're still living abroad when you "retire" (i.e. when you take the money out of the ARF) then, as far as the Irish Revenue are concerned, that's Irish-source income, and you are liable to Irish tax on it. It may also be taxable in your country of residence. And, if it is, then relief from double taxation may be available under the applicable Double Taxation Agreement between Ireland and that country, if there is one. So you'd want to do your homework on that, too, before you make any commitment to moving.

bilbot79

https://www.boards.ie/discussion/comment/122553188#Comment_122553188

Surely it can't be taxed as income in Ireland if you are properly tax resident somewhere else? Would it be the same with an annuity if you changed tax residency?

Henry Ford III

https://www.boards.ie/discussion/comment/122553110#Comment_122553110

Have you considered deemed distributions?

bilbot79

https://www.boards.ie/discussion/comment/122556076#Comment_122556076

Not yet. I'm fifteen years away and still in the 'learning from internet forums' phase :)

Is that like deemed disposals?

Peregrinus

https://www.boards.ie/discussion/comment/122555391#Comment_122555391

Basically, Irish residents are subject to Irish income tax on their worldwide income. Non-residents are subject to Irish income tax only on their Irish-sourced income. So if you reside in (say) Mongolia, but own a property in Ireland which is rented out and own shares in an Irish company, the rent from the property and the dividends on the shares in the Irish company are subject to Irish income tax.

This isn't a uniquely harsh Irish rule; most countries have similar rules.

Which means that, as a Mongolian resident, you'll probably be liable to Mongolian income tax as well on the Irish rent and the Irish dividends.

Which is why we have Double Taxation Agreements. A Double Taxation Agreement between Ireland and Mongolia will seek to agree that only one country will tax any particular kind of income — so the Irish and Mongolian governments might agree that, say, income from an Irish employment will be taxed only in Ireland and not in Mongolia. Or, that income from investments in Ireland will be taxed in Ireland but not in Mongolia. And if that is the agreement, then whether you regard your income from your pension fund as employment income (which is the Irish view) or as investment income (which is the view some other countries take) then it will be subject to Irish income tax and not to Mongolian income tax.

But note that this crucially depends on (a) whether there is an Irish/Mongolian Double Taxation Agreement at all, and (b) if there is, what it actually says about this. These are the questions you need to research before buying a home in Mongolia for your declining years.

Henry Ford III

https://www.boards.ie/discussion/comment/122556203#Comment_122556203

Not really.

You'll be taxed on a deemed distribution at 4% p.a. or higher depending on your age.

Jim_Hodge

https://www.boards.ie/discussion/comment/122556203#Comment_122556203

I would suggest you invest in a session with a financial adviser. Money well spent.

bilbot79

https://www.boards.ie/discussion/comment/122557444#Comment_122557444

Undoubtedly ill do that closer to the time. At the moment I'm just slowly formulating ideas.

I hadnt realized the ARF would be taxed as 'Irish Source' income until now. Is it impossible then to avoid the funds in our private pension being considered as Irish sourced? Can you purchase an annuity from a foreign provider and then it's not Irish sourced for example? Are there options to draw down the whole pension in a foreign jurisdiction before opting for annuity or ARF?

Peregrinus

Basically, no. This is Irish-source income, after all; there's no magic wand you can wave that will make it suddenly not be.

Plus, Irish taxation on retirement savings arrangements is remarkable generous by international standards; if you did succeed in getting this subjected to a foreign tax regime, you'd quite likely end up worse off.

A key issue here is the tax-free lump sum. If you get this arrangement taxed in a foreign country it won't be tax-free there; it will likely be taxed at your marginal rate of income tax in the year in which it is paid (or, possibly, in the first year in which you could opt to take it, whether or not you do take in that year). If that happens, it will more than offset any other tax advantage you might hope to accrue.

So, bottom line; even if you do have a choice, you're probably better off choosing to have your retirement savings taxed in Ireland rather than in another country.

Which is not to say that you shouldn't look into this, and maybe take advice from a tax specialist in the country you are considering moving to.

Bass Reeves

Looking at the @Sarah1916 looking to retire at 59 ir even early 50's an 800k pot is nowhere near enough. 800k pot in 15 years time is equivlent to about 550k in today terms assuming an average inflation rate of 2-2.5%.

In today's terms that is a lump sum of 120-140k or 13-14k a year to take you to 60. You woukd want substantial other investments to fund your retirement as well.

Retiring at 50 would require a pot of over a million even at present IMO. Average life expectancies are rising. An average person at 50 will live towards 90 years of age.

bilbot79

https://www.boards.ie/discussion/comment/122560771#Comment_122560771

Yeah I had a look at the DTA between Ireland and Spain which makes it pretty clear.

Screenshot_20240830_104618_Drive.jpg

In fairness Ireland is pretty good on pensions and if I were to spend significant time somewhere where the cost of living is lower I could save a lot on tax under our joint assessment by needing less withdrawal per annum.

Peregrinus

Yes, but you'd need to look into whether Spain considers all payouts from an Irish retirement savings arrangement to be "pensions and other similar remuneration paid in consideration of past employment", rather than just payouts in the form of periodic instalments. The Irish tax regime will let you take out a generous chunk of your fund as a tax-free lum sum; the rest is taxed as income as and when it is paid out. But Spain may — I don't know this — tax both the lump sum and the instalments as income. If so, that's like to more than offset any advantage you get from a lower marginal rate of income tax in Spain.

The other point to bear in mind is that retirement savings are a long-tailed affair. What matters here is not what current Spanish tax practice is, but what it will be at the time when you retire. That's unknowable, since you're only in your 30s. So the most you can do at the moment is make provisional plans; you'll need to review those — and be ready to change them — as you're coming up to actual retirement.

If Ireland changes the tax treatment of retirement savings arrangements, they will usually do so on terms that respect the expectations of people who have already paid in under the old rules, at least in relation to amounts they have already paid in. (Not always; it depends on the nature of the change and the circumstances in which is is made. But usually.) Most other countries take a similar approach. But most governments are much more cavalier about the impact of legal changes on the expectations of people who live in other countries, or who have invested in other countries. They don't take responsibility for having created those expectations in the first place, so aren't concerned about disrupting them. So any tax planning that depends on the dovetailing or co-ordination of the tax regimes of two different countries always has to be a bit provisional; it's more vulnerable to disruption by events that most tax planning is.

One way to approach this is to stress-test your tax planning by asking what happens if it doesn't work out. If, when retirement is upon you, it becomes apparent that your Spanish tax would actually be heavier than your Irish tax, would that affect your plans to retire to Spain? If it would, then don't buy the villa just yet, and make sure that you're contributing enough to your retirement fund so that, if you did retire in Ireland and pay Irish tax, you'd still have enough for the kind of retirement you'd like to have.

Jim2007

https://www.boards.ie/discussion/comment/122559031#Comment_122559031

Consult a financial adviser as soon as possible so that you have a proper financial plan and any issues can be addressed up front because it is almost impossible to make corrections later.

Tax is a fact of life and you are using widely used financial products, so and tax loops have been found and closed down a while a go. Again an early session with a financial advisor should help you to optimise your tax situation going forward.

bilbot79

https://www.boards.ie/discussion/comment/122562007#Comment_122562007

What sort of fees does that involve? I heard of charges like '1% of the portfolio' which I just wouldn't do..

Jim_Hodge

https://www.boards.ie/discussion/comment/122563298#Comment_122563298

Not at all. We're talking about a session with a financial advisor, not handing your pension fund to an investment manager. Check a few out and ask what their rate is. I feel you really need to have this conversation sooner rather than later,

Happyhouse22

https://www.boards.ie/discussion/comment/122560771#Comment_122560771

isn’t it theoretically possible to move your pension to Spain? Maybe you would need to work in Spain for a year or two first before retirement, but I definitely feel like I’ve heard of people moving their pensions within the EU.

Wouldn’t this then no longer be considered Irish source income when drawing down?

*This probably only applies when it is still a pension and not yet an ARF as in the opening question,

Jim2007

https://www.boards.ie/discussion/comment/122563298#Comment_122563298

The fees for consulting aren't based on assets under management, but either hourly or fixed.

As for how much you might lose in moving your portfolio to another jurisdiction, best of course would be zero, but I have had people come to me after the fact having lost 20% or even 25%! There are many vultures out there offering all kinds of services in this area, so get good advice and move slowly.

In terms of growth, realistically you are probably looking at 4% to 6% on an annualised basis over the long haul.

bilbot79

https://www.boards.ie/discussion/comment/122564249#Comment_122564249

Why 4-6% growth? If stocks deliver circa 10-11% annualized growth and the pensions is invested in high risk equities why would it not be 10%?

cute geoge

https://www.boards.ie/discussion/comment/122564973#Comment_122564973

Did you go to the same school as seanie fitzpatrick

bilbot79

https://www.boards.ie/discussion/comment/122565013#Comment_122565013

Genuine question. You can get nearly 4% in a bunq savings account and probably 5+% on t-bills, all risk free. Why on earth would a pension fund offer risky equity options if not chasing higher returns?

I'd say folks from Seanie Fitz' school might be looking for 40% returns.

Edit: I understood the 4-6% suggestion to mean pre-retirement growth of a pension fund but perhaps Jim is referring to ongoing growth in e.g. an ARF.

cute geoge

Has the Celtic tiger crash given us any lessons if you are expecting annual growth in high risk pension investments of 10-12% .I am not going to be that sucker anyway,everyone would be multi millionaires if life was that simple!

Jim_Hodge

https://www.boards.ie/discussion/comment/122564973#Comment_122564973

Jesus Bilbot! For the umpteenth time, go and talk to a properly qualified independent financial or pensions advisor. It's becoming clearer with every post that you need one.

Jim2007

https://www.boards.ie/discussion/comment/122564973#Comment_122564973

Because stocks don't deliver anything like 10% - 11% for the average punter over the long haul, 8% would be considered exceptional. Calculating annualized returns is a complex exercise which most investors and many professionals get wrong.

bilbot79

https://www.boards.ie/discussion/comment/122565297#Comment_122565297

Well I will at some point but I'm interested in drawing on the experience of learned Boardsies too.

Perhaps you're overreacting just a smidge?

E.g. In Vanguards recent quarterly report they indicated an expectation that Emerging Market growth would be 6-8% so it would make sense to me that a high risk equity fund targeting that market could easily produce 8%.

Its a discussion forum, for discussion..

Jim2007

https://www.boards.ie/discussion/comment/122565077#Comment_122565077

Pension funds can't offer real high risk exposure, it's regulated to ensure they don't.

Jim2007

https://www.boards.ie/discussion/comment/122565414#Comment_122565414

That is a theoretical return that you are extremely unlikely to achieve - you don't even understand how it is calculated! There are probably a couple of hundred books on the subject of say 20 - 25 are worth reading to start with, then you need access to the market data which runs a couple of hundred dollars a month plus have the ability to build or buy the necessary computer models. At which point you'd be on a par with the professionals from a technical point of view when they try to achieve the market return in their portfolios and most don't do very well!

Whether you have the mentality for it is something else…. The only people I would bet on when it comes to achieving market returns is people with Asperger's Syndrome (my son is one), they are the only people I know who don't let their emotions interfere with their investing decisions and that alone gives them an incredible advantage. For the rest of us it is almost guaranteed that we'll let our emotions in and that will be expensive.

celtic_oz

https://www.boards.ie/discussion/comment/122565586#Comment_122565586

I've gone through 3 different emotions just reading this thread.. I'm doomed!

Jim2007

https://www.boards.ie/discussion/comment/122565711#Comment_122565711

You are not doomed, but you do need to recognise that transferring pension savings between jurisdictions is complex and people do tend to suffer unexpected losses when doing so both because they don't understand the complexities or unfortunately the somehow manage to team up with a transfer agency that takes a bigger than expected slice of the pie.

I personally can't think of a single good reason to move pension savings between first world jurisdictions before maturity unless there are legal obligations to do so or you have a very significant amount that you intend to put under active management (maybe).

bilbot79

https://www.boards.ie/discussion/comment/122565586#Comment_122565586

This reads more like direct stock-picking which I won't be doing.

And on the 4-6% projection for pension funds in equities I'm not sure I agree on that, reason being that when I left my last job 8.5 years ago I had 30k in the pension and it was left in the 'Do it for me' safe but low growth blend of equities, cash and bonds yet today it's worth 52k.

If the 'safe' choice gets the 4-6% then I have to be confident that a 100% equity choice will reflect higher returns in the long run.

Jim_Hodge

https://www.boards.ie/discussion/comment/122568624#Comment_122568624

I give up.

It's called 'safe' for a reason. And it isn't because people just prefer a lower return.

cute geoge

https://www.boards.ie/discussion/comment/122568728#Comment_122568728

Let him at it cause all he is missing is winkers I would say!!

Jim2007

https://www.boards.ie/discussion/comment/122568624#Comment_122568624

One thing I have learnt over the last 35+ is that you can't protect people from themselves. Looks like the thread has run it's course, you have received some good insights here, but at the end of the day you will do what you are going to do.

bilbot79

Ok. But just to note, this is one of the equity funds that I am in and the 10 year annualized performance is 8.56%

https://www.morningstarfunds.ie/ie/funds/snapshot/snapshot.aspx?id=F00000SKJL&tab=1

cute geoge

https://www.boards.ie/discussion/comment/122570172#Comment_122570172

That is excellent return but you must bear in mind past returns are no guarantee in the future, AFAIR the ftse tracker gained 0 in the period 2000 - 2020 so nearly all them funds are guesswork, you can get lucky or end up losing your shirt.

AndrewJRenko

https://www.boards.ie/discussion/2058341206/pension-if-retire-early

At risk of stating the obvious, you can only retire at 50 if you've left the employment of the pension in question.