If you max out your PRSA tax relief threshold...

M

MysticX

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Hi,

Assuming that you have maxed out the tax relief available on your PRSA then there's no further incentive to contribute more is there (whereby the extra is subject to normal taxation)?

I was just trying to determine whether there would be any advantage in pumping more of your salary into a PRSA once you're reached the maximum tax relief in comparison to putting it into a separate Savings / Investment policy with e.g. Zurich or Standard Life (assuming the charges are identical)?

So far I've determined that no there isn't... If I was older I'd have a higher threshold for tax relief in the PRSA but sadly that isn't the case.
 
I've often thought about the upside of "front loading" contributions (which one could do as the relief carries forward). You'd need certainty around future income though (to soak up the relief). Say there's a market correction of 40%...that might be a great time to lump in a sizeable amount of money.

Contributing above and beyond what's relievable doesn't make sense though.
 
Does anybody know if the income and any capital gains on any assets acquired with an amount contributed in excess of an annual allowance roll-up tax free within the pension pot?
 
Sarenco said:
Does anybody know if the income and any capital gains on any assets acquired with an amount contributed in excess of an annual allowance roll-up tax free within the pension pot?
Click to expand...

Yes it does. You just can't claim tax relief on the premiums.

Pensions don't grow tax free either. Other countries will deduct tax if you buy in their countries e.g. if you buy Swiss companies, the tax is 15%.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 

Thanks Steven.

To the OP's original question, would the fact that the investment income and gains can compound within the fund without any (Irish) tax drag not constitute an incentive to contribute to a PRSA over and beyond the annual allowance (rather than investing outside a pension wrapper)?

Also, I would welcome your views as to whether this strategy would be advantageous from a succession planning perspective and whether it would offer a degree of protection in a bankruptcy scenario.
 
There's pros and cons to both.

Both are invested in a gross roll up environnement, so the tax paid within the fund is the same.

Under the pension scenario, you can take 25% out tax free. If the withdrawals under the pension still have you at the 20% rate, you can pay tax at a lower rate. But...

...you can't access the fund until 60 (or 50 in a company paid pension).
If you purchase an annuity, the fund dies with you.
If you invest in an ARF, you have the AMRF requirement.

On the investment side, you can obviously access your money at any time but the exit tax is 41% or CGT at 33% if you buy shares.

From succession planning, the ARF is taxed at 30% and does not form part of the estate for CAT calculations, so it would be beneficial in that regard. I don't know about bankruptcy.

I don't come across people who overload their pension, the restrictions on access to the fund is usually an overriding factor.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Thanks for all the replies.

I'll probably put the excess over the relief into a separate policy with Zurich or Standard Life for best flexibility.
 
The flexibility to withdraw funds whenever you see fit is certainly a strong consideration but the 1% insurance premium levy and the 8 year deemed disposal really make these unit-linked products unattractive in my opinion.

One option that might be worth considering is investing PRSA contributions primarily in equity funds and placing any excess medium term savings in State savings bonds or certificates (which look like relatively good value to me at the moment as a fixed interest investment). Obviously paying down a high interest loan would be better again.
 

The 1% insurance levy can be easily avoided by investing in funds run by a non-insurance company provider. The 8 year deemed disposal, not so easy but it is tax that you are going to pay anyway. If your fund subsequently falls in value and you cash it in, you can claim back the overpaid tax.

The return on a 3 year savings bond is 0.83% AER and 1.24% on a 5.5% savings cert. You could use them as a substitute for fixed interest but the returns are still rubbish. I'd prefer to pay the 41% tax and have equity exposure.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 

Fair enough but I suppose my point was really that if you decided to maintain a certain allocation to both equity and fixed income investments it might make sense to locate your entire equity portfolio within the pension wrapper and to invest in tax-free and commission-free savings bonds/certs as your fixed income allocation. Obviously if you want to be 100% in equities then this is all irrelevant!
 
I think the yield on the State Savings are just too low to lock into. The 5.5year Cert gives you a return of 1.24% AER if you stay for the full term. If you leave after 3 years, you get 0.66% AER.

While bond markets are very low now, do you think they will stay that low for that long?

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 

Hi Steven

Well, I obviously can't predict future interest rates but there has certainly been a pretty dramatic spike in yields in recent weeks, which has obviously caused bonds to tank in value (bond prices fall when yields rise).

The yield-to-maturity on the Citigroup 5-7 Year Euro Government Bond Index (effective duration of 5.5 years) is currently 0.58%. When you net out an index fund's TER, portfolio trading costs and taxes on gains and distributions, you start to see that tax-free and commission-free annual rate of return of 1.24% on the 5.5 year State Savings Certificate actually looks like a very attractive option for an individual investor.

The rate of annual inflation (CPI) currently stands at -0.7% so the real rate of return on Savings Certificates is actually closer to 2%. That is higher than the average real rate of return on UK Gilts of around 1.5% over the last 100 years.

I'm certainly not saying State Savings Certificates will make anybody rich but that's not the role of fixed income in a portfolio.
 
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