For a high rate tax payer, this is very bad news

B

Baby boomer

Registered User
Messages
735
The point has been made elsewhere that the employee 6% is taken from gross Income without tax relief. But worse still, it's taxed on the way out! The employee contribution of 6% is fully taxed (plus PRSI USC) when it's earned. Then when it comes out of the AE it's taxed again. So 6% becomes 8% when the government top-up is included. But a standard rate taxpayer gives up 1.6% in tax leaving a mere 0.4% nett contribution by the state.

It's even worse for a higher rate taxpayer pensioner. The 6% becomes 8% but tax takes 3.2% leaving a mere 4.8% for the pensioner out of their original contribution.

This is a dreadful deal and a basic PRSA would be a better option. (Employer contribution and investment performance being equal.)

Or am I missing something?
 
Last edited:
Hi BB

I don't follow your figures.

For a basic rate tax payer, it is as follows - ignoring the employer contribution.

Contribution : €6
Top up: €2
Total: €8

For a person who pays 20% tax when they retire
When they draw down a pension on retirement:
Tax-free 25% : €2
Subject to PAYE : €6 @20% €1.2
So the net is €6.8

The investment will grow tax-free

For a person who pays 40% tax when they retire

Tax-free 25% : €2
Subject to PAYE : €6 @40% €2.4
So the net is €5.6

The investment will grow of tax-free
 
Last edited:
Hi BB

But it's interesting that a 40% tax payer close to retirement is getting back less than he is putting in!

Or he would be better exiting the Auto-enrolment and switching to a private scheme where get gets 40% tax relief on his contributions.

Brendan
 
Correction to #2 investment will grow gross of tax
In the roll out of the Strawman it was stated that AE pensions would be outside the tax net. It was a SSIA type scheme. That was easily exposed as a nonsense.
 
My reading of the AE system suggests:
- for 20% tax payers, the AE proposal is best (assuming their Employer would not be contributing more than 6% to a traditional Occupational Pension).
- for 40% taxpayers, they are better off in a traditional Occupational Pension scheme (assuming Employer is at least contributing 6% to such a scheme)
But the underlying assumption for AE is that it is aimed at getting mainly (though not exclusively) lower paid to start pension funding. On the basis that both AE and the current system will run side-by-side, it is unlikely that many (if any?) members of an existing Occupational Pension will switch to the AE proposal (unless some Employers try to close an existing OP on the basis that the AE proposal might result in a lower Employer contribution).
 
Duke of Marmalade said:
Correction to #2 investment will grow gross of tax
In the roll out of the Strawman it was stated that AE pensions would be outside the tax net. It was a SSIA type scheme. That was easily exposed as a nonsense.
Click to expand...

Thanks Duke

Poor wording on my part. I was trying to point out that while it was taxed on the way out it would grow tax-free in the fund.

Brendan
 
The optimum scheme for a young person who expects their salary to increase is

1) Have a flexible employer who will contribute to a scheme without requiring you to match their contributions.
2) Stay out of auto-enrolment
3) When you are in the 40% tax band, start contributing

Brendan
 
Brendan Burgess said:
The optimum scheme for a young person who expects their salary to increase is

1) Have a flexible employer who will contribute to a scheme without requiring you to match their contributions.
2) Stay out of auto-enrolment
3) When you are in the 40% tax band, start contributing

Brendan
Click to expand...
why point three when you lose on exit more than you gain on entry?
 
Hi, I have tried looking up answers to the auto-enrollment but cant find it. I'm employed in the private sector. Will I be affected my auto- enrolment? My employer pays up to 10% pension, I earn 80k. With the auto enrollment - does this change?
 
Financequery said:
Hi, I have tried looking up answers to the auto-enrollment but cant find it. I'm employed in the private sector. Will I be affected my auto- enrolment? My employer pays up to 10% pension, I earn 80k. With the auto enrollment - does this change?
Click to expand...
AE is mainly targeted at those not already members of an Occupational Pension scheme. If your Employer operates a pension scheme already then AE won't affect you.
 
Conan said:
AE is mainly targeted at those not already members of an Occupational Pension scheme. If your Employer operates a pension scheme already then AE won't affect you.
Click to expand...

I hope that employers won't view AE as an opportunity to save money by replacing an existing Occupational Pension Scheme paying 10% contributions with an AE arrangement paying less.
 
Dave Vanian said:
I hope that employers won't view AE as an opportunity to save money by replacing an existing Occupational Pension Scheme paying 10% contributions with an AE arrangement paying less.
Click to expand...
Hopefully you are correct. AE contribution levels should be considered a floor not a ceiling.
 
Wrote about this topic this morning, looking at whether the lower amc will offset the lower tax relief for those paying tax at 40%.

www.bluewaterfp.ie

Is the auto enrollment scheme beneficial for those paying income tax at the higher rate - Bluewater Financial Planning

One of the features of the auto enrollment pension scheme is that members will not get tax relief on their contributions. Instead, the State will make a top-up contribution to your pension pot and your own contributions will be deducted from your net salary (the payment amount will be calculated...
www.bluewaterfp.ie www.bluewaterfp.ie

AE is a very bad deal for anyone on €80,000+ as that is the cap on employer contributions to the scheme and there is no scope to make AVC payments into the AE scheme. I am presuming that they can still set up a PRSA AVC plan, which will attract tax relief at 40%, where their contributions into the AE scheme doesn't.

Steven
www.bluewaterfp.ie
 
Steven Barrett said:
Wrote about this topic this morning, looking at whether the lower amc will offset the lower tax relief for those paying tax at 40%.
Click to expand...
I think you're right Steven. AE is really for people who meet some or all of the following criteria: low to average wages, part-time, in and out of work over the years, changing type of job a lot, etc. These are the people who don't have private pension coverage at the moment.

If you are in stable, professional employment a PRSA is probably the better option to avail of relief at 40%, and over €80k. But inertia is a powerful force and my guess is that people will just be signed up to AE in their 20s and then forget about it, even if their income rises a lot over time.
 
Steven Barrett said:
AE is a very bad deal for anyone on €80,000+ as that is the cap on employer contributions to the scheme and there is no scope to make AVC payments into the AE scheme. I am presuming that they can still set up a PRSA AVC plan, which will attract tax relief at 40%, where their contributions into the AE scheme doesn't.
Click to expand...

If you can have a PRSA AVC and your contributions to AE are matched with a gov contribution, then presumably the full tax relief is also available to you (on the AVC contributions)?
 
Itchy said:
If you can have a PRSA AVC and your contributions to AE are matched with a gov contribution, then presumably the full tax relief is also available to you (on the AVC contributions)?
Click to expand...

I don't think there's anything in the AE proposals to allow tax relief on AVCs (including AVC PRSAs) while also a member of the AE scheme.
 
Dave Vanian said:
I don't think there's anything in the AE proposals to allow tax relief on AVCs (including AVC PRSAs) while also a member of the AE scheme.
Click to expand...
Correct, I didn't see anything. I find it hard to believe that there will be no facility for AVC's though. It may end up with something through the AE scheme.
 
You must log in or register to reply here.
Back
Top