Early Retirement: Non-EU accumulating ETF's or Pension Funds?

lukesfinops

Registered User
Messages
3
Hello all,

Looking for your opinion in my retirement plan below, if it makes sense, or if I'm totally wrong :)

A quick introduction. I'm 25, have recently moved to Ireland, and want to start my retirement plan. Currently, I can save up to 50% of my salary (~2K EUR) monthly, and as a FIRE follower, want to retire earlier (before my 50s). There's another important information, I don't know whether I'll be in Ireland when time for retirement comes (probably not).

I've been looking for the most tax efficient investments, and after some time reading, I've come up with two options: Pension Funds, and Non-EU ETFs.
Why not Irish/UCITS ETFs? Well, my goal is to accumulate, I will not withdrawn any dividends, and the plan is to save for 20-25 years. With that in mind, paying 41% every 8 years due to deemed disposal is not a good idea, and will impact the magic of compound interests (might be wrong here, what do you think?).

So, let's compare Pension Funds, and Non-EU ETFs (AFAIK).

Pension Funds

Advantages
  • No CGT/Deemed Disposal/Dividends taxes.
  • Can contribute from my salary before taxes (and even get the benefit of my company pension match, which is 5% today).
Disadvantages
  • Need to follow the product rules for retirement age. 50 is the minimum, and 65 the normal (PRSA).
  • After retiring, can only withdrawn 25% of my capital tax free.
  • Will be taxed for further withdraws (can even be double taxed if living in a country with no bilateral tax agreements)
Non-EU/UCITS ETFs (e.g. US ETFs)

Advantages
  • No tax on dividends if it's an accumulating ETF (note that if it's distributing ETF, dividends are charged up to 52% of taxes as it's considered regular income).
  • Only 33% of CGT when selling the position.
  • No withdrawn tax
  • Can retire earlier, no need to wait until my 60s.
Disadvantages
  • Depending on the ETF location, may have withholding taxes (for example 15% for US).
  • Haven't found a way to invest in US ETF's from European brokers.
  • Need to manage my tax returns (not concerned, as will not withdrawn).
Considering the above, my opinion is that Non-EU/UCITS ETFs is the best (capital growth/tax efficient) option to retire. Do you guys agree?

Thanks!
 
Yes, apart from the fact that is not very easy to invest in them as most reputable broker will not sell them as they don't conform to EU rules!

So, as you pointed out in line 2 above, it's a lost cause

Anyway, about the only thing I know with certainty, is that the rules governing pension funds today (25% tax free, etc) will not be the same in 25 years time - could be better, worse but certainly different
 
I thought that Accumulating ETFs were only an EU thing and that in the US that are obliged to give Dividends in the majority of cases?
 
The pension fund vs personal fund argument is nonsensical.

Critics of the pensions regime love to cite the idea that the rules could be changed but, in reality, if the pensions world comes under attack the personal investing world is likely to also.

I earn €100; I end up with €48. I can invest that in an accumulating fund. The State takes 41% of my gain every 8 years.

Instead, I give up the €48 and €80 goes into my pension. That €80 grows tax-free. Then at retirement I can tax 25% of what’s there, largely tax-free. The balance is drip-fed out to me as taxable income and the underlying monies continue to grow tax-free. Because I’m old and no longer working, the tax rate on my retirement income is far less than 41% and I don’t pay PRSI at all or much USC.

It’s no contest.
 
The pension fund vs personal fund argument is nonsensical.

Critics of the pensions regime love to cite the idea that the rules could be changed but, in reality, if the pensions world comes under attack the personal investing world is likely to also.

I earn €100; I end up with €48. I can invest that in an accumulating fund. The State takes 41% of my gain every 8 years.

Instead, I give up the €48 and €80 goes into my pension. That €80 grows tax-free. Then at retirement I can tax 25% of what’s there, largely tax-free. The balance is drip-fed out to me as taxable income and the underlying monies continue to grow tax-free. Because I’m old and no longer working, the tax rate on my retirement income is far less than 41% and I don’t pay PRSI at all or much USC.

It’s no contest.

Hi Gordon, I agree, pensions are superior vehicles.

Given this, why do you believe there is so much interest in ETFs/indices/property as investments and comparatively little talk of pensions...especially amongst younger people.
 
Hi Gordon, I agree, pensions are superior vehicles.

Given this, why do you believe there is so much interest in ETFs/indices/property as investments and comparatively little talk of pensions...especially amongst younger people.

I think there are a lot of different reasons. The whole thing is overly complex. The fact that the money is locked away turns people off. The public don’t trust people in financial services. The topic is considered boring. People are rightly worried about charges and bad investment advice. In reality, young people’s priorities tend to be housing and childcare and they feel they simply can’t afford to make pension contributions. Our schools don’t educate people on personal financial planning. Parents may not have instilled a retirement planning culture in their children.
 
I’m reminded of the old joke about the person who’s asked for directions saying “well if I was trying to get there, I wouldn’t start here”.

If you wanted to design a pensions landscape, it wouldn’t look like our current one.

Personally, I’d:

- Have one type of pension structure
- Cap charges
- Allow everyone to backfund, not just company owners
- Allow people to access a certain portion of their fund at any time or borrow from their fund
 
Hi Gordon, I agree, pensions are superior vehicles. Given this, why do you believe there is so much interest in ETFs/indices/property as investments and comparatively little talk of pensions...especially amongst younger people.

I think the problem is where people get their information these days. When I started to learn about investing \ ETFs \ Indices etc. it was all American sites where I got my information from. I listened to American podcasts, read their blog posts and follow them on YouTube etc. It was simple all I had to do was a) get my finances in order, save more than I spend, b) get an emergency fund in place and c) invest in an all-world ETF and just let the money ride for 20 years. It all sounded so easy to implement.

Fast forward 2-3 years and I have finally had my finances in order and could afford to start investing albeit at a modest rate (250 or so a month). However now I have learnt (still learning) that the US approach doesn’t work at all for Ireland really and instead of investing in an EFT \ Index I should be maximising my pension contributions. Right so next step was to learn about how pensions work and see if I can maximise them. Fast forward another 6 - 9 months and I think I have learnt that my pension fund is already at the limit (Public Sector post 2004) so now I *think" I'm going back to just investing in ETFs \ IT etc. and \ or paying down mortgage. It is all confusing.

I don’t think I am unique, and out of my group of friends I am the only one who is even half interested in trying to figure it out. The problem, as I see it, is that people doesn’t understand the importance of financial planning until too late, they miss out on the good years (20-30) to save towards a pension. When you start to learn there is a mountain of information to climb before you figure out what you should do or more importantly what you should not do (pay high % charges on pension) or which pension fund should I pick?

This is not a dig at all but the Financial Advisors I have looked into seem to deal with people who have a lot of money saved and who cost ~€1500-2000 to work with. Again, not a dig, I completely understand that they need to earn a living. In fact, most of the ones I follow are very generous and give away for free a lot of their hard work and expertise.

It would be fantastic, for everyone, if you could get a grant or tax incentive towards seeing a Financial Advisor once a year. Imagine if everyone could go to someone they trust and get independent financial advice on their exact situation at that time for a low cost. How better off would society be?

On the other hand, one can easily get a mortgage, buy a property and rent it out. Easy to understand and relatively easy to manage. It is not like you have virtually sell the property every 8 years and pay tax on any gains…

Until there is a simple way to understand pensions and for everyone to get financial advice, I don’t think things are going to change. Perhaps if they brought in saving schemes like those in the UK, ISA and Junior ISA, people would use them as stepping-stones to greater savings and pensions but again something would need to change first.
 
Thanks all for your comments.
I've learnt a lot here. What I can tell now is that for Irish investors, maximising their pension contribution to get the advantages of a company match, and tax reliefs is indeed lucid. For example, my company matches 5%, so I'd ended up contributing 10% (note that the tax relief for my age is up to 15% of contributions). Even if I don't count the interest rate, I would have at least 233% of capital growth comparing my original contribution with the tax relief, and matching benefit. No discussion here.
So I'm still studying/deciding which other investments (after maximising my pension contribution) is the best tax-efficient for retirement.
 
I think the problem is where people get their information these days. When I started to learn about investing \ ETFs \ Indices etc. it was all American sites where I got my information from. I listened to American podcasts, read their blog posts and follow them on YouTube etc. It was simple all I had to do was a) get my finances in order, save more than I spend, b) get an emergency fund in place and c) invest in an all-world ETF and just let the money ride for 20 years. It all sounded so easy to implement.

Fast forward 2-3 years and I have finally had my finances in order and could afford to start investing albeit at a modest rate (250 or so a month). However now I have learnt (still learning) that the US approach doesn’t work at all for Ireland really and instead of investing in an EFT \ Index I should be maximising my pension contributions. Right so next step was to learn about how pensions work and see if I can maximise them. Fast forward another 6 - 9 months and I think I have learnt that my pension fund is already at the limit (Public Sector post 2004) so now I *think" I'm going back to just investing in ETFs \ IT etc. and \ or paying down mortgage. It is all confusing.

I don’t think I am unique, and out of my group of friends I am the only one who is even half interested in trying to figure it out. The problem, as I see it, is that people doesn’t understand the importance of financial planning until too late, they miss out on the good years (20-30) to save towards a pension. When you start to learn there is a mountain of information to climb before you figure out what you should do or more importantly what you should not do (pay high % charges on pension) or which pension fund should I pick?

This is not a dig at all but the Financial Advisors I have looked into seem to deal with people who have a lot of money saved and who cost ~€1500-2000 to work with. Again, not a dig, I completely understand that they need to earn a living. In fact, most of the ones I follow are very generous and give away for free a lot of their hard work and expertise.

It would be fantastic, for everyone, if you could get a grant or tax incentive towards seeing a Financial Advisor once a year. Imagine if everyone could go to someone they trust and get independent financial advice on their exact situation at that time for a low cost. How better off would society be?

On the other hand, one can easily get a mortgage, buy a property and rent it out. Easy to understand and relatively easy to manage. It is not like you have virtually sell the property every 8 years and pay tax on any gains…

Until there is a simple way to understand pensions and for everyone to get financial advice, I don’t think things are going to change. Perhaps if they brought in saving schemes like those in the UK, ISA and Junior ISA, people would use them as stepping-stones to greater savings and pensions but again something would need to change first.

Thanks for this. Do you have any good resources for understanding Irish pensions?
 
A quick introduction. I'm 25, have recently moved to Ireland, and want to start my retirement plan. Currently, I can save up to 50% of my salary (~2K EUR) monthly, and as a FIRE follower, want to retire earlier (before my 50s). There's another important information, I don't know whether I'll be in Ireland when time for retirement comes (probably not).

Not pension advice, but at 25 you haven't a clue how the rest of your life will pan out. You'll never get your youth back so don't forget to enjoy it! In my late 20s about 10% of my income went into a pension and eventually I got up to about 20% saving for a house. The rest I squandered, but thoroughly enjoyed myself in the process.

Otherwise you will always need a roof over your head. Once you have a stable career buying a house is the most tax-efficient way of providing shelter. It already makes sense to put some of your income into a pension, but if you really want to save half of what you earn then save faster for a house.
 
Do you have any good resources for understanding Irish pensions?
 
Thanks all for your comments.
I've learnt a lot here. What I can tell now is that for Irish investors, maximising their pension contribution to get the advantages of a company match, and tax reliefs is indeed lucid. For example, my company matches 5%, so I'd ended up contributing 10% (note that the tax relief for my age is up to 15% of contributions). Even if I don't count the interest rate, I would have at least 233% of capital growth comparing my original contribution with the tax relief, and matching benefit. No discussion here.
So I'm still studying/deciding which other investments (after maximising my pension contribution) is the best tax-efficient for retirement.

Im in a similar situation, actually considering if I should join pension funds as my company also matches it. The problem, or trick I have encountered is, there may be limits about if you can move your pension with you when you are moving to another EU country. I couldn't get much info as I had to talk with sales person of the funds, but let's say you want to go to France (as EU country) you need to be sure that you can move your pension fund with you so when you are at France, you can continue contributing to your pension fund. I assume your company is offering pension fund match with a company like Zurich etc. so you should ask them if/how you can move your pension fund with you when you leave Ireland. If you are planning to move to a non-EU country, then afaik you can't take the fund with you, then you will have to cash out the money and pay tax for it.
 
Im in a similar situation, actually considering if I should join pension funds as my company also matches it. The problem, or trick I have encountered is, there may be limits about if you can move your pension with you when you are moving to another EU country

It is madness to even give this a second thought. If your employer matches contributions, avail of it. It’s as simple as that.
 
Im in a similar situation, actually considering if I should join pension funds as my company also matches it. The problem, or trick I have encountered is, there may be limits about if you can move your pension with you when you are moving to another EU country. I couldn't get much info as I had to talk with sales person of the funds, but let's say you want to go to France (as EU country) you need to be sure that you can move your pension fund with you so when you are at France, you can continue contributing to your pension fund. I assume your company is offering pension fund match with a company like Zurich etc. so you should ask them if/how you can move your pension fund with you when you leave Ireland. If you are planning to move to a non-EU country, then afaik you can't take the fund with you, then you will have to cash out the money and pay tax for it.

If for some reason, you move out of Ireland, the question of moving your fund is a bit of a red herring. If you can't move your fund to a new employers scheme in another country you don't have to liquidate the existing Irish fund and pay tax. You can leave it (or move it to a personal pension in Ireland) and start a new fund in the new country.
 
Thanks all for your comments.
I've learnt a lot here. What I can tell now is that for Irish investors, maximising their pension contribution to get the advantages of a company match, and tax reliefs is indeed lucid. For example, my company matches 5%, so I'd ended up contributing 10% (note that the tax relief for my age is up to 15% of contributions). Even if I don't count the interest rate, I would have at least 233% of capital growth comparing my original contribution with the tax relief, and matching benefit. No discussion here.
So I'm still studying/deciding which other investments (after maximising my pension contribution) is the best tax-efficient for retirement.

The tax relief is on your personal AVC contributions, not the total including your companies, so you can put in 15% and your company 5%
 
Hi all, bumping an older thread here as I've a simialr query..


So this article explains well the tax implications.

US domiciled ETFs would seem best but you basically cannot buy them in EU anymore so I'm ignoring those.

Irish/EU domiciled pay 41% on income and 41% exit tax when sold

EEA and other OECD domiciles:
Tax on gains: CGT 33%
Tax on income: Income tax + PRSI + USC

Someone retired early now has 0 earned income from a job. So your margainal Income Tax rate from your ETF distribution is 20% and your tax credits will cover the first €8,250 (single person credit)

You could also sell €1,270 per year worth of ETFs via the annual CGT threshold.

Domiciled outside the EU, EEA or OECD:
Tax on gains: Income tax + PRSI + USC
Tax on income: Income tax + PRSI + USC

Even better as now paying <33% on gains . But finding a non OECD domiciled ETF sounds tricky and risky.

So it looks like an EEA/OECD domiciled ETF one is best option (so UK as of 2021?) if this will be your sole income (before drawing any others like a State Pension/private pension/AVC at 65)
 
Back
Top