25yr old-How much should I contribute to pension

A

aishling

Registered User
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Hi,
I recently changed jobs, I have a pension from previous employment 3% salary, employer matched contributions. There should be 4-5k built up. Nobody contacted me in relation to pension when I handed in notice, should I move it?

I now earn 42K, employer has a plan but doesnt contribute to pensions at the moment. So how much should I put in? Had to fill in forms when I started so put down 5%, is that enough?

Thanks!
 
The Pensions Board have a calculator [broken link removed].

While it is important to make provision for your retirement, in your case that's a long time away (lucky thing). Make sure you also have short and medium-term savings, for more immediate needs.
 
Hi, Aisling.

The answer to your question is simple. Nothing. (That is, until the pension companies provide products that are decent value for money and are more transparent)
This week say yet another massive loss of pension value by the geniuses in the pensions industry. And just in case you think this loss is confined to equity based funds, here is a dose of reality. Last year I or any other mug could have put our cash in a perfectly safe cash deposit account and obtained 4% interest on our money. Last year (a year of fairly stable exchange-rates) Irish Life fund-managers managed to generate earnings of 0.6% (Yup, that's right - ZERO point 6!) on their cash fund having first deducted 3.5% of the fund to pay the management charges demanded by their brilliant fund-managers. In other words, their cash fund is down a net 3% for the year. You or I would be stretched to produce such incompetence, even if we tried.
I have written to Irish Life for an account of their stewardship of my pension fund. I have not even had the courtesy of an acknowledgement.
 
Would agree entirely with LD but yet again i will have to disagree with pconsidine.

pconsidine. May I point out a number of inaccuracies in your post, this info should help you understand how these funds work. A cash fund is considered as a holding account while the person decides which fund he/she would like to invest in. A cash fund is not like a deposit account at all. It invest money in up to hundreds of different instutions as short term corporate deposits through out the world so as to devirsify risk. The instutions must have top credit ratings, as a result the return is very low. So to be fair you are not comparing like with like.

Cash funds returns are gross so management charges are deducted after the declared rate as fund charges are different from product to product.

If I am not mistaken (not very familiar with CS PRSA) there is a "self invested fund" in the PRSA which you could have invested in a deposit account and you could have got the best rate in the market at the time.Poor form of Irish Life not to acknowledge your letter, perhaps a phone call to their complaints department with a follow up letter after?

I do think that it is unwise to advise someone not to prepare for their retirement. Perhaps the best advise a person should give the OP is read and understand the paperwork and documents that they receive! If a person does, they will never be disappointed or feel aggrieved.
 
Hi Aisling

You should save for your retirement.

But you should not contribute to a pension fund anymore.

At the end of this year, the tax relief is being reduced from the tax rate, so you will get tax relief at lower than the top rate and when you retire you may be taxed at your top rate.

The government has just raided pension funds which sets a very dangerous precedent.

Set aside a percentage of your net income and invest it by reducing your mortgage or other borrowings. If you have no other borrowings, invest it directly probably in equities.
 
It is wise to prepare for retirement. But one needs to understand the costs of investing in pensions and the likelyhood of getting something or relatively nothing back. There are no guarantees in life. If you are unlikely to save, then maybe a pension is the correct way to go.
 
Brendan Burgess said:
You should save for your retirement.

But you should not contribute to a pension fund anymore.

At the end of this year, the tax relief is being reduced from the tax rate, so you will get tax relief at lower than the top rate and when you retire you may be taxed at your top rate.

The government has just raided pension funds which sets a very dangerous precedent.

Set aside a percentage of your net income and invest it by reducing your mortgage or other borrowings. If you have no other borrowings, invest it directly probably in equities.
Click to expand...

Thats a very sweeping statement Brendan! Youre saying we currently get tax relief on pension contributions at top rate but thats going to drop and then you'll get taxed at top rate on cashout?! What the heck?!!

I have a pension in work with 5% salary and 5% matched by employer. What would your advice be in relation to this situation (OP has no matchd % so its not quite the same). Should one continue with a pension in this scenario? Im 29....
 
I'm with Mr Burgess on this one! I'm taking a holiday from pension contributions next year, bringing the kids to disney and the wife away for a few weekends. Might as well see some benefit for my hard work rather than watch the state pick over the corpse that is my pension fund.
 
Brendan Burgess said:
You should save for your retirement.....But you should not contribute to a pension fund anymore.
Click to expand...
It's not my intention to hijack this thread (and I hope I'm not!) but would it be wise then to cut my AVC's back to the percentage level that my employer matches the contribution? Currently have 9% AVC.
 
username123 said:
I have a pension in work with 5% salary and 5% matched by employer. What would your advice be in relation to this situation (OP has no matchd % so its not quite the same). Should one continue with a pension in this scenario? Im 29....
Click to expand...

I'm 35, paying in for last 8 years, same setup as above.
Very disillusioned with both the pension and the government's raid on these funds. When I heard about the levy I thought about cashing in to reduce the mortgage but this is not possible apparently.

What do you suggest Brendan?
 
TheFatMan said:
I'm with Mr Burgess on this one! I'm taking a holiday from pension contributions next year, bringing the kids to disney and the wife away for a few weekends. Might as well see some benefit for my hard work rather than watch the state pick over the corpse that is my pension fund.
Click to expand...

Just to make it clear. I am not suggesting that people should squander their money instead of saving for retirement.

I strongly recommend that people should save for retirement. I just don't recommend using a pension fund anymore.

I feel a Key Post coming on...

If your employer is matching your contributions, then it is worth contributing to a pension fund.

Brendan
 
Brendan Burgess said:
At the end of this year, the tax relief is being reduced from the tax rate.
Click to expand...

Is this a certainty? I think not. The Finance Minister who made this proposal is not only no longer in office (ditto his party) but he is also, sadly, deceased. There is no indication that his successor agrees with him.
 
Brendan Burgess said:
Hi Aisling

You should save for your retirement.

But you should not contribute to a pension fund anymore.

At the end of this year, the tax relief is being reduced from the tax rate, so you will get tax relief at lower than the top rate and when you retire you may be taxed at your top rate.

The government has just raided pension funds which sets a very dangerous precedent.

Set aside a percentage of your net income and invest it by reducing your mortgage or other borrowings. If you have no other borrowings, invest it directly probably in equities.
Click to expand...

Hi Brendan,

You already did a Key Post on this which wasn't nearly as sweeping.

In reality, only a certain percentage of the population will have pensions that are big enough to put them into the higher rate when they retire. And even those that do won't be paying the high rate on ALL their pension - only on some of it. The rest will be either exempt or taxable at the lower rate.

So only those lucky ones who know their pension is already big enough to knock them into the top rate of tax should consider ceasing contributions IF tax relief is reduced on contributions in the future. Everyone else should look at their own circumstances.

Key Post
 
You are 25 now so current tax rates should not feature at all in your long term retirement plans.

Things will change a lot more in the 30 or 40 years ahead.

You currently receive a tax deduction on contributions albeit probably reduced in the future.

You pay only 0.6%pa on profits both income and capital gains compared to 27%pa in a gross roll up fund or 25% on capital gains tax with dividends and rent also subject to marginal rate tax on investments outside a pension.

In retirement currently 200k is tax free as a lump sum with a couple able to earn 40 grand every year before paying any income tax. So currently there are plenty of tax incentives associated with traditional pension planning.

A rule of thumb on contributions is a percentage of your gross earnings which is half your age so a 25 year old should be paying about 12.5% of top line earnings.

Another rule of thumb is the amount you need to save doubles every 5 years just to get the same result.

So
If you could have managed on €100pm at age 20 you would now need to save €200pm just to catch you aged 20. By age 30 the amount will be €400 pm just to get the same retirement fund as you aged 20.

Cost of delay and inadequate contributions are the real problems with retirement planning.

Marc Westlake CFP
CERTIFIED FINANCIAL PLANNER
 
Thanks for all the advise guys! I went ahead and transfered my pension to my new employers fund & went with 5% contributions. My salary has increase quite a bit so I dont really notice the difference at the moment.

I will certainly re-access if the government change the relief. Im building at the moment so have half a mortgage and no other debts, I would consider myself a saver rather than a spender. Maybe when Im paying a full mortgage Ill consider lovering pension and increasing mortgage repayments as suggested.

I know pension have taken a big hit over the past couple of years with the markets crashing but I guess Im trying to take a long term view on this, not retiring until 2050 apparently!!! Surely a fund manager has more hope of making a return than I can? If investing in shares directly Ill have to pay capital gains taxs etc, hold it in cash and have to pay DIRT, tax man gets his money either way, no?
 
Perhaps I missed something but I thought that reducing tax relief to 20% was a proposal that fina fail were going to bring in? It was my understanding that Fina Gael said that, instead of reducing the tax relief that they would bring in a temp pension levy for 4 years which they did (agree with or not as an alternative measure) Now I know all bets are off and all that, but has anyone heard that the proposal to lower tax relief to 20% is definately going ahead because I haven't? At the moment a person can get up to 41% tax relief and that a fact, therefore if affordable a person should continue to fund their pension until such time as there is a change, when that time comes sit down and review that pension again and then if need be, explore other ways to fund for retirement.

Ashling. You would expect that a fund manager would get a better return than you or I would and you expect that they would get a better return than the market as well. But the reality is that fund managers rarely beat the index that they are tracking over a rolling 10 year period.

If you have a high risk to reward tolerance you would be best advised investing a portion of your pension in indexed funds. The advantage of this is that the charges are generally lower and you are getting the true market return.

And yes to your other questions you will have to pay CGT on shares and dirt on deposits etc..
 
Hi Ashling,

I am 28 and have been paying into my pension since i moved back to Ireland last year. My employer currently pays 8% of my monthly salary into my pension pot(this includes any bonuses i may earn, my car allowance etc.) and i top up an additional 7% to utilise the 15% i can currently put into a pension given our age.

I am relatively new to pensions, and to be honest i still don't understand it fully. However, i currently see it that for every €1 i put in it only costs me around €0.58 due to tax relief. This is a great deal, i feel. I am a bit peeved if tax relief cuts back, but unltimately we are still getting money into the plan that is costing us nothing.

We aren't going to be retiring for a while, and things will change so much in that period of time that i wouldn't worry about it too much. Perhaps in future when more of our salary is being contributed then we could look into reducing contributins depending on the situation at that time, but i think we should be holding steady.....
 
Brendan Burgess said:
Hi Aisling

You should save for your retirement.

But you should not contribute to a pension fund anymore.

At the end of this year, the tax relief is being reduced from the tax rate, so you will get tax relief at lower than the top rate and when you retire you may be taxed at your top rate.
Click to expand...

The removal of 41% relief on contributions is looking increasingly likely but not yet decided.

I am curious as to why your advice is not to take advantage of tax relief whilst it still exists?
 
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