Key Post My pension pot has reached €800k - should I stop contributing ?

Cicobr

Registered User
Messages
11
I am starting a new role in a company that does not have a pension scheme. They will offer a PRSA as they are legally obliged to do but they is no offer of contribution.
I am aged 51 and I have other pensions that mean that all my future income will be at the higher rate of tax.
Am I correct in saying that it does not make financial sense to start as I will get 40% relief upon investing but will pay 52 % when I take it out so I am behind from the start.
I will not be able to get a tax free lump sum through this PRSA as I will use elsewhere.
 

Conan

Registered User
Messages
1,494
If you effect a PRSA you get tax relief on your personal contributions. On retirement. You can take 25% as a retirement lump sum. Currently up to €200,000 can be taken tax-free (including any lump sum from your previous scheme).
As regards income in retirement (including any income arising from the 75% of the PRSA thst might be invested into an ARF) is potentially liable to Income tax plus USC. Once over age 66, there is no PRSI deduction.
So the tax effectiveness of the PRSA is :
- potentially 25% tax free (depending on the size of your lump sum from your previous scheme)
- the income from the 75% being taxable at a max of 44% currently (40% +4%)
- you get up to 40% tax relief on contributions
So overall, it may still be tax effective.
 

Cicobr

Registered User
Messages
11
Thanks Conan but I will have reached the tax free lump sum elsewhere so at best it’s 40% relief versus 44% taxable and will have fees etc so might just invest the net privately or forget about it...or else get the new employer to contribute
 

Marc

Registered User
Messages
1,638
There are no zero cost and zero tax options so you need to make a comparison between some different scenarios all of which could leave a financial benefit.

1) pay in and obtain the 40% tax relief. Defer the pension to age 75. If you die before you reach age 75 your spouse or civil partner receives the whole value of the fund tax free. No income tax, no capital gains tax, no CAT and no penalty tax if you exceed the lifetime €2m allowance.
Conclusion: life insurance with tax relief on the premium

2) gross roll up.
Let’s say you invest in equities and the return is say 7.2%pa net of charges to keep the maths easy.
Now let’s say a fund held directly also pays 7.2% net of charges but is subject to personal tax.

Your pre-tax €10k will be worth €20k in 10 years time.

Whereas if you invest the net income that’s going to be about €5000 which if you invest today you will have €10 in the fund (rule of 72)

You will then lose a further 41% in exit tax so €2,050 in tax. Net position €7,950 vs €20,000.

So let’s assume that you always have a marginal rate of tax of 50% and that you’ve used up all your lump sum entitlement. Taking that €20,000 as a lump sum fully taxable at your highest marginal rate is still going to leave you with a net €10,000 compared to €7,950.

In effect you received an interest free loan from Revenue and the difference is the gain on the income tax deferred.

If you invest in something that’s subject to CGT you will be taxed at 33%

If you pay income tax you will lose your marginal rate of tax (up to 55%)

So a pension gives you gross roll up relative to any other option you will have a larger gross fund in the future and the longer you leave it the more this will compound in your favour.

3) taxable lump sum

Even if you have a pension fund of €800k and can use up the tax free lump sum the next €300,000 of lump sums is only taxable at 20%

4) not all of your pension is taxable.

Imagine you have an ARF with €1m and you are forced to take an income of 5% which is subject to income tax at your marginal rate of 40% plus USC

In this example ; 95% of your ARF is not subject to tax. See earlier argument about gross roll up.

Assume your ARF grows every year so the value rises back to €1m.

Effectively your ARF hasn’t paid any tax it’s constantly deferred. You are only paying income tax on the income distribution not the original tax deferred capital.
When you die your spouse or civil partner inherits the ARF then adult children inherit at a rate of 30% which doesn’t count towards the CAT thresholds so these are also available.

Had you held those assets personally and the CAT thresholds had been used up then the kids would pay an additional 3% tax €30,000 tax saved

5) match withdrawals with medical expenses

Imagine you have an ARF with a million and in your 70s you incur €100k of medical expenses. That year you should take a larger withdrawal from the ARF partially to meet those expenses but partly because you can claim 20%tax back on medical expenses. That’s a €20 grand tax rebate

Marc Westlake
Chartered Certified and European Financial Planner
www.globalwealth.ie
 
Last edited:

Cicobr

Registered User
Messages
11
This is great ..thank you
The 20k gross is only useful versus the 7950 if I can get it out of the fund and I see your points regarding medical and giving to my children. I think my plan needs to look at the tax free lump sum side of things to maximize and prevent the 20k being taxed at 52%.
I need to look closer at what I have to see where I am with my current schemes .
Thanks for pointing out the fact that that there are more things to consider.
Regards
 

elacsaplau

Registered User
Messages
892
Cicobr,

As other have said, Marc's comments are all completely valid. As this should become a "sticky", there are probably two more considerations which may be relevant to you or to someone in similar circumstances to you.

1. The Personal Fund Threshold (PFT). Gordon Gekko outlined many of the considerations in a thread that didn't get the traction Gordon's post deserved.
https://www.askaboutmoney.com/threads/navigating-the-standard-fund-threshold.205113/

2. Because of the PFT and because of tax individualisation, if you have a spouse/partner, then his/her pension sityawation (I was travelling with a Northerner this week) may be relevant - i.e. that as a couple, pension contributions are directed into his/her pot.
 

Conan

Registered User
Messages
1,494
If you die your spouse or civil partner inherits tax free then adult children inherit at a rate of 30% which doesn’t count towards the CAT thresholds so these are also available.

Two points Mark:
- “If you die” .....(if only we had a choice).
- The spouse does not quite inherit “tax free”. The ARF transfers into the spouse’s name and continues to be taxed as normal on drawdown. Subsequently children can inherit any remaining funds on the death of the spouse.

Btw, excellent post, a great way to look at the process.
 

Sarenco

Registered User
Messages
7,312
I think my plan needs to look at the tax free lump sum side of things to maximize and prevent the 20k being taxed at 52%.
It's probably worth bearing in mind that, as things stand, PRSI is not payable on income once you reach 66 and the 8% USC rate only applies to income over €70,044 (and there is no USC payable on social welfare payments (including the contributory State pension)).
 

garbanzo

Registered User
Messages
84
Great thread. Late to the party but want to pose a question please?

If someone was looking at hitting the €800,000 with their pension fund at retirement age would it make sense to divert any AVCs they were making now to their partner’s pension scheme. Their partners would be at €230,000est at retirement. The logic being the partner would be able to take a greater amount tax free. 25% of anything over that €800,000 amount would be liable for 20% tax.

Hope this makes sense.
 

Conan

Registered User
Messages
1,494
Technically you cannot transfer contributions to a partner’s pension. However if you reduce your contributions but your partner increases theirs , then as a couple you end up in a better position in that both of you can maximize your tax-free lump sum.
 

garbanzo

Registered User
Messages
84
Technically you cannot transfer contributions to a partner’s pension. However if you reduce your contributions but your partner increases theirs , then as a couple you end up in a better position in that both of you can maximize your tax-free lump sum.
Yes, reduce one and increase the other was the idea Conan. Thanks for the clarification.

With the passage of time I presume at some point the government would probably increase the €200,000 tax free limit. I imagine there are no guarantees so probably best to plan as things currently stand TFA allowance-wise at the €200,000 level.
 

Conan

Registered User
Messages
1,494
There is no compulsory AMRF. You only need to invest DC funds into an AMRF if you do have a guaranteed income of €12,700 pa
 

DazedInPontoon

Registered User
Messages
291
You should also factor in pension fees. For example if your pension's fees are 1% (which they probably are, at a minimum) you're currently paying 8k a year in fees, which you will not be paying on money you invest yourself. This adds up when you have a large pension pot as you do, Large enough that it should be factored into any calculations your are doing at least imho.

Your money is also out of your custody. If the will of the people is to 'tax the rich' you may be considered the rich and have some of it 'levied'. Maybe this matters to you, maybe it doesn't but it should be considered at least.
 

ArthurMcB

Registered User
Messages
285
Thats an interesting point dazedinpontoon.

So pension pot fees are typically 1%? So if your pot is of a certain value you could be paying a huge annual fee for someone else to be managing your pot either well or badly.

Balanced against that though you do get tax relief in contributing to a pension pot so with that in mind isnt it still wise to keep building up ones penson pot? There isnt really a better alternative?
 

Marc

Registered User
Messages
1,638
Just an observation but pension fees are available at 0.4%pa or 0,5% for a PRSA.

This shields you from income tax at up to 52% capital gains tax at 33% dirt at 35% and exit tax at 41% what’s not to like?
 

NotMyRealName

Registered User
Messages
69
Imagine you have an ARF with €1m and you are forced to take an income of 5% which is subject to income tax at your marginal rate of 40% plus USC

In this example ; 95% of your ARF is not subject to tax. See earlier argument about gross roll up.

Assume your ARF grows by 5% net pa every year so the value rises back to €1m every year.

Great post Marc, but I'm not sure this part is mathematically correct.
5% of 1m = 50,000 so this leaves 950,000
Assumed growth of 5% on 950k returns 47,500 returning the pot to 997,500........
Rinse and repeat......

Anyway, in my case it looks like I'll make the 800k @ my NRA of 60. (Currently 2 years away)However due to a positive change in financial circumstances and Notherrealname still working and probable retirement relief on sale of business to other 2 partners I may not need to access benefits then. I had been planning to lump sum and ARF as I wanted to "protect" the lump sum. What to do? If things play out as it now looks, it would mean finding an investment home for circa 200k. We're mortgage free and have significant rainy day liquidity. Notherrealname would have lump sum and public service pension in 6years.
 

Marc

Registered User
Messages
1,638
You are of course correct. I wasn't focusing on the exact mathematics more the practical principles.

We like to paint pictures to illustrate the points. This is a real client's ARF account over the last 5 years. The original capital is the red line showing the annual distributions coming off each year and the blue line is the account value. Working perfectly...

1624189924054.png


Best options for short term liquidity is still State Savings I recently updated my analysis here

to reflect the new less attractive, but still relatively good (compared to the bank) terms

Longer-term taxable investment accounts are best managed with a pure equity portfolio of non-EU ETFs and dial down the risk in the pension accounts to compensate

 
Last edited:
Top