Does it ever make sense to ignore pension contribution tax relief?

EmmDee

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Hi,

I am wondering if there are scenarios to ignore the tax relief on pension contributions. I have a well funded DC employer pension with significant company matching / contributions which mean it makes sense for me to exceed the threshold for tax relief. In effect for every €2 contribution I make I get €5 benefit to pension. So maxing the matching irrespective of tax relief makes sense.

My partner is essentially self employed with an income which isn't very significant. I think it would be a good idea for them to have a separate and distinct pension fund - even if small - so was going to look at setting up a PRSA. They have a small DC fund from a previous employment but it won't be that significant but I assume could be transferred in as a start. We can make contributions to max tax relief thresholds but realistically that means fairly small annual contributions (maybe €3k or €4k). Which would mean a fairly small pension fund. We have the ability to invest a lot more than this threshold.

I am wondering if it makes sense to establish a PRSA and make contributions (or lump sum) that exceed thresholds to build up a reasonable pension fund. While there wouldn't be much tax relief benefit, I was thinking the gains and income within the PRSA would (a) be tax free and (b) would remove a lot of tax reporting burden if the same investments were held directly.

If relevant - we are in our mid 50's so time is a factor here.

Appreciate any thoughts
 

RedOnion

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6,198
Yes, there are circumstances where it makes sense. In retirement your wife has her own tax credits / band. There's an amount over the state pension she can earn completely tax free, so it makes sense to use a pension vehicle to utilise that as you've gross rollup.

Above that, it might still make sense in certain circumstances.

There was a recent thread, although not clear it talks about some scenarios.

Just remember, there's always a risk that tax rules could change.
 

EmmDee

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Yes, there are circumstances where it makes sense. In retirement your wife has her own tax credits / band. There's an amount over the state pension she can earn completely tax free, so it makes sense to use a pension vehicle to utilise that as you've gross rollup.

Above that, it might still make sense in certain circumstances.

There was a recent thread, although not clear it talks about some scenarios.

Just remember, there's always a risk that tax rules could change.

Thank you
 

RedOnion

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6,198
Here's another thread on the topic. You'll see plenty of different opinions.


It's something I've been looking into myself, but my wife isn't working at all at the moment.
Personally I'm thinking we would only make contributions now if we thought my wife would return to work and we'd get relief in future. I haven't gone through the full thought process yet, but might start a thread with my thoughts when we get to it.
 

SPC100

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1,014
I'm also very interested in this question.
I like the simplicity of the add it into a pension solution and the tax free roll-up, and less paperwork.

There are a lot of variables though. They at least include... Her future income levels. (Have to include potential inheritances too in the calcs) how you would invest the money if you didn't put it in pension (and the taxation that would apply to it). When do you need access to it. Future dividend yield and capital appreciation. Tax treatment on death. Future regulation changes. Future tax changes. Easier access to diversification. Harder to access/more likely to not sell at market lows.

Maybe hedging 50-50 is reasonable. Although then you lose most of the simplicity benefits.
 

NoRegretsCoyote

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@EmmDee

Thanks. I had assumed otherwise as you said "partner" instead of "spouse".

You don't provide specifics but does a high joint income essentially mean at drawdown that your spouse's pension income will be taxed at the higher rate?
 

Gordon Gekko

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In retirement, both spouses have their own tax bands once the tax free limit is exceeded.

Yes, but EmmDee’s spouse probably only has €25k of headroom if they’re sharing Standard Rate Cut Off Point and the State Pension is likely to use up a little over half that.

I guess a pension fund with €400k in it at retirement could be quite efficient; €100k paid out tax-free with €300k left in the ARF/AMRF. 4% of that per year would be €12k plus the State Pension of €13k(?) would give €25k of income.

But it depends on other assets and income streams, e.g. rents.
 

RedOnion

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@Gordon Gekko
Yes indeed. I saw @EmmDee mentioned pension contributions of 3 - 4k per annum from age 50, but correct if the existing pension has any size, or if there will be investment income in spouses name it should all factor in.

guess a pension fund with €400k in it at retirement could be quite efficient; €100k paid out tax-free with €300k left in the ARF/AMRF.
This is actually a piece I've started to look at myself as I'm looking at a similar scenario.
If a pension is 'over funded' for the level of income (i.e. you're making contributions that don't get tax relief) are there restrictions on taking 25% tax free?
Say for example income is 20k per annum, and pension is funded to the extent it grows to 400k at retirement, can you still take 100k tax free?
 

Gordon Gekko

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Hi RedOnion,

They’re independent of one another.

e.g. someone with €1m of income and €400k in her pension fund can still get €100k tax-free by virtue of the 25% lump sum.

Or someone with €20k of income in your example could do so.

Overfunding and the associated rules are more of an issue for company owners where the pension is typically employer-funded.
 

EmmDee

Registered User
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743
Yes, but EmmDee’s spouse probably only has €25k of headroom if they’re sharing Standard Rate Cut Off Point and the State Pension is likely to use up a little over half that.

I guess a pension fund with €400k in it at retirement could be quite efficient; €100k paid out tax-free with €300k left in the ARF/AMRF. 4% of that per year would be €12k plus the State Pension of €13k(?) would give €25k of income.

But it depends on other assets and income streams, e.g. rents.

Thanks and thanks @RedOnion and @NoRegretsCoyote (sorry - I should have said spouse). Other income is pretty clear at the moment - we have no rental income

I have to dig out the value of the pre-existing DC pension pot. But it can't be that large as it relates to 3 or 4 years employment from maybe 20 years ago. But these numbers are a good measure of where it might make sense to get to. You are correct that my estimated pension would bring us into higher tax band but setting up an independent pool (if it's not tax inefficient) would be good. And obviously using up any available relief on her side.

Will also need to look at state pension - and where they stand. Might need to see if we need to make additional voluntary contributions
 

NoRegretsCoyote

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3,963
Will also need to look at state pension - and where they stand.


Check out the homemaker's scheme if your spouse took time out of work to care for children under 12. Many people don't apply for many years after and administratively it's probably a bit harder to prove longer after the fact.

Anyway if she is self employed earning >€5k she is paying Class S PRSI at either a flat rate of €500 or 4% of income, whichever is higher, and therefore accumulating 52 credits a year for pension purposes. This is in my view an extremely good deal actuarially for someone on a relatively low income.
 
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