Investing in a solar install as a pension option.

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DingDing

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Hi,

I will be retiring in a couple of years and recently invested 20K in home heating / insulation upgrades and a solar panel and battery installation.

I also purchased an hybrid car the last time I changed car and I charge this on the night rate at home.

With my current electricity rate the difference per two months with or without the solar about 420.
I am saving about 900 in Oil per year with the heating upgrades or about 150 euro every 2 months.
With the Hybrid vehicle I am saving approx. 300 per 2 months on diesel.

So every 2 months (less in the winter) I am saving 420 + 150 +300 about 900 or about 450 per month, The electricity savings will be less in the winter.

Say the total savings are 4K per year and I am a higher paid public servant so my deductions on the higher portions of my pay are as follows.

Tax 39%
USC 8%
Pension 10%
Additional Pension Contribution 7.325%
PRSI 4 %

Total 68.325%

So for every 1,000 euro Gross pay I get 316 euro take home pay.

The 4K for energy would require a gross pay of almost 13K

So for an investment of 20K, I am saving 13K gross which would cost about 250K to fund by an annuity.

I know the deductions will be less when I retire and will fall as I get older, however it looks like investment in energy saving is a no brainer as a retirement investment.

What do people think,
 
Surely you shouldn't include the Pension or Additional Pension Contribution like that.

Though your overall point is well made. Will the upgrades need maintenance, or renewal.
 
Not that it makes much difference but as Cremeegg pointed out, you're over counting the rate of deductions from your wages, as the pension and ASC are tax deductible. Your figure of 68.325% should be 63%.

An easy way to confirm (as I have for my own pay), is to compare two payslips from this year, before and after the changes in pay, and calculate the relative increase in net : gross when the pay agreement kicked in.
 
Thanks both. Points well made, The system has a 25 year warranty on most of the components and it is its design life.

The deductions probably are a bit overstated, however 63% now and when I retire I will be below the higher thresholds for USC etc... and not paying the pension contributions. I will still be paying the higher Tax on some of my income and USC, I think at 66 I will no longer pay PRSI.



I suppose the point is that when the repayment times are counted, looking at tax in the equation makes upgrades like these a no brainer.

I just wanted to prevoke some discussion on it as a possible investment strategy.
 
As discussed above, I think it will be your tax situation in retirement that is relevant here and not your tax now.

Periodic upgrade/replacement costs should probably also be considered. The solar panels might last 25 years but the battery, hybrid car and possibly some of your home upgrades may not (depending on what you fitted.)

I am not sure that I agree with your logic of comparing the savings with the cost of an annuity which would give you an equivalent after tax income. The annuity is an income for life which is entirely predictable and virtually risk free. Investing in your home to save money involves using various components some of which will need to be maintained, upgraded or replaced during your life; and some of which might outlast you. Stuff breaks and suppliers go out of business.

It's a bit like me buying a coffee machine to replace my barista coffee bill. Based on your logic, if I save €1000/yr, that coffee machine is worth the same as an annuity costing €63k.

By the way, your savings look very substantial - well done.
 
3CC said:
It's a bit like me buying a coffee machine to replace my barista coffee bill. Based on your logic, if I save €1000/yr, that coffee machine is worth the same as an annuity costing €63k.
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Brilliant. I was trying to articulate the flaw in the logic but this does it brilliantly.

Brendan
 
Congrats on the reduced living costs!

For your return numbers, you didn't include the cost of of car in the money 'invested'.
 
SPC100 said:
Congrats on the reduced living costs!

For your return numbers, you didn't include the cost of of car in the money 'invested'.
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I would be purchasing / replacing the car anyway, and the hybrid car I purchased was in the same ball park as Diesel cars I was considering purchasing. The outlay was not that much more expensive.
 
An easy way to confirm (as I have for my own pay), is to compare two payslips from this year, before and after the changes in pay, and calculate the relative increase in net : gross when the pay agreement kicked in.
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I tried this and that's what got me thinking. The difference between my gross and net pay from the resent pay rise was shocking. In my case it was worse as I am purchasing extra pension and have deductions for income continuance. From memory it was up on 73%. I did not include these and I was trying to make an attempt to understand the detail of it.
 
It's a bit like me buying a coffee machine to replace my barista coffee bill. Based on your logic, if I save €1000/yr, that coffee machine is worth the same as an annuity costing €63k.
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Not really, the Solar may have some residual value to my estate, / still generate electricity after I pass. At some point the annuity will run out of benefactors, and is essentially a bet on how long the benefactors will live. Vs how long the solar system will last.

You might have a lesser quality of coffee, but my appliances don't notice the difference between grid and solar electricity.

I suppose the point is that by reducing costs, you need to fund less of a pension to have the same disposable income.
 
As discussed above, I think it will be your tax situation in retirement that is relevant here and not your tax now.
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Indeed but at a minimum I would be expect to be paying the higher tax rate on some of our income, and for a period PRSI / USC.

It was just to look at the payback from the solar system in a different way, Not the generation of electricity, but the cost of funding energy supply over time. And the house is a lot more sustainable, bringing the BER up to B1 as a result.

An interesting discussion and some interesting and valid points. Thanks everyone.
 
I think this is a great way to think about it DingDing. A few of the commentators are getting too hung up on the exact minutia of the details.
Your overall point is solid. You're investment is giving you ongoing Tax free savings for the next 20+ years. And to purchase an equivalent income to match those savings would be much more expensive.
 
Thanks AJAM, Some of the detail may be a bit sketchy, and minor holes in it, but I am happy with the decision.

As an example, I purchased an apartment in early 2000's for 250K and 20K fees and fixtures and fittings. This is in a rent pressure area and I have a rent of about 800 euro.

The market rent is probably 1400 euro a month and the rent cap is essentially replacing the governments need to provide social / affordable housing, but that is an entirely different discussion.

The after tax value of the rent, and other costs, is not making / saving me as much as 20K in solar and insulation.
And with a 25 year old property there are maintenance costs as well. I am changing some of the appliances such as washing machines for the third time.

The apartment has other value for me in that I could sell it and pay very little capital gains, it forced me to save over the intervening period.

I would challange anyone to come up with a better scheme and I am in if they do.
 
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I think this is a great way to think about it DingDing. A few of the commentators are getting too hung up on the exact minutia of the details.
Your overall point is solid. You're investment is giving you ongoing Tax free savings for the next 20+ years. And to purchase an equivalent income to match those savings would be much more expene
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Yes, a lot of the pay back for solar by the companies looks at the electricity generated and the cost to buy that electricity, which gives a pay back time of 6-7 years.

If you look at the gross earnings to pay that net amount, the payback is a lot quicker, probably in my case 2-3 years.

And it is the right thing to do for the environment. I have saved putting 6 ton of C02 into the atmosphere from the solar system and in addition significant tailpipe emissions from the car and oll burner for the heating.

Again the Co2 is not an exact science and there are different ways of looking at it.
 
DingDing said:
I would be purchasing / replacing the car anyway, and the hybrid car I purchased was in the same ball park as Diesel cars I was considering purchasing. The outlay was not that much more expensive.
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Then I think it's reasonable to not include that 'cost' in your investment.
 
A 4K tax-free return on a 20K investment, with 'low' risk, is massive. It's higher than I would have expected.

I think it's great to be investing in solar and insulation to reduce cost, and increase quality of life.

It's normally tricky enough to predict the likely return or calculate the actual return. So It's very interesting to hear your experiences and how you calculated it.

How long ago did you get solar in? How many KW of panels? What size battery?
What home heating/insulation work did you get done?

How exactly did you figure our your electrical savings number?
 
DingDing said:
The 4K for energy would require a gross pay of almost 13K

So for an investment of 20K, I am saving 13K gross which would cost about 250K to fund by an annuity.
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Surely if you are considering gross pay when calculating the savings you you should also be grossing up the 20k investment - in this case it would be about €62k pretax income which was invested?
 
Mrs Vimes said:
Surely if you are considering gross pay when calculating the savings you you should also be grossing up the 20k investment - in this case it would be about €62k pretax income which was invested?
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But if you do this, then you also have to do it when calculating for purchasing the equivalent annuity, pushing it to 775K!
 
I had a pension product from a previous employer (25 years ago) that I cashed in that funded the Solar install. I reconned at the time that the return on the solar was better than the investment that was loosing money.
 
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