Pension contribution advice needed

[maddies]

Hi everyone,
Hoping someone can help me here with a question I have about pension contributions. Here goes:
I am self employed and on the advice of my accountant I started a pension about 4 years ago in order to reduce my tax bill.
I have not contributed to my pension in the last two years due to the uncertainty in the pension market. Current pension value is only 10k as a result.
This year (for the tax year 2011) I have been advised by my accountant that my liability for 2011 is either 16K with no pension contribution, or 20k which would include a pension contribution of 9k.
My question here is given the current state of the pension market would this 9k pension contribution be worthwhile doing? Or is it a waste of time in the long run? Would I be better off paying the 16k to revenue and investing the 4k in some form of bonds?
Any advice appreciated. Am finding it difficult to get advice on this as any broker I've spoken to are not unbiased iykwim.
Thanks,
Maddies

 

[leroy67]

Hi Maddies,

tax reliefs are a huge incentive, hard to get a upfront 41% return on your monies anywhere. You can always invest in secure funds. New Ireland have a 5% Gross Fund 4% net after annual management charge of 1% per annum over the next five years. Find an independent broker and haggle over allocation rates etc

 

[Gervan]

If you are paying prelim 2012 tax at 100% 2011 rate, doesn't that mean you'd have to fork out 32K now. None of which you will see a return on.
You say 20K includes 9K pension, plus 11K for 2012 is 31K but you should get some return on your pension.
Pay the pension, but pick wisely where to put it.

 

[Jim2007]

A couple of different observations:

- The value of all types of investment fluctuate from time to time. Bonds tend to do will during a recession and equities at other times....

- Uncertainty is part and parcel of saving for a pension, Irish people seem to have this crazy idea that money invested in pension funds should only go up! Think about it - if you buy a Pepsi share, you know it can go down in value as well as up, so you would expect the same share bought by a pension fund to only go up!!!

- Starting with 9K is always better than 4K, even allowing for fees and levies , you can afford to lose a lot and still have 4K left!

- When it comes to the pension fund itself, make sure you understand the charges involved and that you're getting the best value. Secondly make sure that it is investing in asset classes that are appropriate to your situation in life and that it is a reasonable well diversified portfolio.

At the end of the day, you are the best person to manage your money, but you are going to have to work at it to keep it under control.

 

[marathonic]

I've just watched that program on RTE - 'Too Broke To Retire". If you ended up in their position (one man was a self-employed business owner), every €10 per week makes a big difference. If you consider a 5% annuity rate, every €10 would require a total fund of €10,400.

One thing that struck me about that show and everyone should bear this in mind - with the current state pension of €230, if you ended up with a private pension of €57.50, I wouldn't look at this as only a 25% increase. Pensioners, like everyone else, have bills. Therefore, if your bills are €130 and your pension is €230, your disposable income has actually increase by 57% with this €57.50 private pension.

Add to this the tax advantages and, to me, it's a no brainer. In fact, I'd try to over-contribute to get the fund as big as possible as soon as possible. That way, you can switch to a very low-fee product.

 

[leroy67]

Excellent post Marathonic

 

[marathonic]

Excellent post Marathonic

Thanks Leroy. Although, I have to admit, I'm a big fan of pensions. I also like to take the opposite view of the herd. I'm 30 now and, as the stockmarkets fell, I increased my personal contributions on two occasions - bringing me up to the max allowable contributions.

I'm actually happy to see the value of my pension fall, as long as that fall isn't the result of excessive charges - as this means that any further contributions are buying more units in my chosen funds. I won't be seeing the money for 25-35 years anyway so the more I buy now, the better it is for me. Falls closer to retirement (less than 10 years) are more worrying - but with 10 years left to retirement, most people should be gradually switching away from the more risky investments in their pension.

In my opinion, people spend too much time overthinking it. There are too many posts revolving around:

• Am I too young to start?
• Am I too old to start?
• What should I invest in?

You're never too young as, the longer your in, the more time your fund has time to increase in value.

You're also never too old as, when you're older, you're still getting the tax relief going in and you're much closer to getting 25% of that back tax-free (in addition to paying a lower tax rate on money coming out than what you have saved in tax on the money going in).

I may get stick over this one but if it's the choice of investment that's causing you to put off investing in a pension, just invest in anything - shares, bonds, property funds, etc. In the beginning, it's the contribution levels that make the big difference, not the investment returns. Anyone asking this question should start with anything and, only then, start investigating whether they would be better off switching to a different asset class/fund type.

 

[DerKaiser]

I'm actually happy to see the value of my pension fall, as long as that fall isn't the result of excessive charges - as this means that any further contributions are buying more units in my chosen funds. I won't be seeing the money for 25-35 years anyway so the more I buy now, the better it is for me.

I agree with your direction other than the point above.

Cheap units are a myth. You are implicitly expecting that there is some ultimate pre-determined value to each unit purchased that is fixed at your particular retirement date.

As an example, if you owned €10k of AIB shares in 2002 there was a genuine prospect they were worth €10k. Now, they are worthless. The fall in value did not represent an opportunity for better future investment returns, but rather a mismanagement of existing shareholder investment.

 

[ashambles]

Cheap units are a myth. You are implicitly expecting that there is some ultimate pre-determined value to each unit purchased that is fixed at your particular retirement date.

There’s a difference between buying units in individual companies and buying units in a fund or index tracker. A company can go bust, however you’d expect that over time most reasonably balanced funds to at least keep growing along with inflation.

If you’re committed to investing in pension funds and you see that unit prices are say 20% “cheaper” than they were previously, then it makes sense to try to increase purchasing at this new lower level.

I’m only talking about well balanced funds, it’s quite possible that a highly specific fund such as in Irish property, or a particular commodity could drop and never recover to previous levels.

 

[orka]

If you’re committed to investing in pension funds and you see that unit prices are say 20% “cheaper” than they were previously, then it makes sense to try to increase purchasing at this new lower level.

This is only true if you felt that they were fair value at the higher price and so now represent very good value. If they were previously over-priced, they may now only represent fair value - and they could still be over-priced (it's like saying houses are now cheap/good value because prices have fallen value so much...)

I bought some pension units at a high price in 2006-2008 and my pension continues to buy lower-priced units. I am unhappy that my higher priced units fell so much but I am indifferent to the current units being purchased - I don't look on them as cheap or good value.

 

[marathonic]

This is only true if you felt that they were fair value at the higher price and so now represent very good value.

Whilst your point is valid (obviously, technology stocks were overvalued 13 years ago and, after a 20% drop, were still overvalued), the point I’m trying to make is that, if you are prone to changing contribution levels, you should be increasing them on the way down and decreasing them on the way up as opposed the opposite – which is what the majority are inclined to do.

There are many posts on various forums when the markets have plummeted and, as a result, people are posting about their plans on stopping contributions or, worse again, pulling all funds out of the market and remaining in cash.

Whilst pulling out may be prudent for someone approaching retirement who, in reality, should have already pulled a lot of their stock investments out and redirected them to more stable investments, it simply doesn’t make sense for someone with 10+ years left to retirement.

 

[DerKaiser]

There are many posts on various forums when the markets have plummeted and, as a result, people are posting about their plans on stopping contributions or, worse again, pulling all funds out of the market and remaining in cash.

I agree that people place too much empahsis on recent historic returns in deciding whether to invest for longer terms.

 

[DerKaiser]

If you’re committed to investing in pension funds and you see that unit prices are say 20% “cheaper” than they were previously, then it makes sense to try to increase purchasing at this new lower level.

Unless you understand the underlying reason for the fall, you cannot make any inferences as to whether further investment is a good idea e.g. if the possibility eurozone breakup has caused your fund to fall 20%, then loading more money into the fund would be a successful strategy only if the fears of break-up subsided.

 

[kennyb3]

Some good points above. However the problem for me with pension funds at this point in time is two fold:

1. The uncertainty in relation to the pension levy - currently 0.6%, could easily end up being 1% and more 10 years down the line. Does anyone really think it will be revoked in a few years time given we are running a 14bn deficit just to the end of October? This plus charges of at least 1% mean 2% of your fund is eaten each and every year.

Coupled to this you are buying in based on current legislation, legislation that may change in time, given the pension crisis facing the country around 2020, i've no doubt by the time I retire there'll be no TFLS - making pensions decidedly less attractive now.

2. Add in that tax relief may be reduced to 30% or even 20% in the next couple of years. If that happened I would doubt i'd want to contribute further - meaning my fund is effectively left to float for the next 30 years. The expense and time gone into setting it up may be a waste. The money is locked away until i'm 60 and I have to make 2% per annum just to break even. Circa 4% if we assume inflation is 2% (which I believe is a fair assumption)

To me there are just too many unknowns at this current point in time.

The government need to take a long term view and develop a policy in relation to pensions because at present there is no certainty and how can you plan for 30 years time with so much up in the air?

 

[marathonic]

Unless you understand the underlying reason for the fall, you cannot make any inferences as to whether further investment is a good idea e.g. if the possibility eurozone breakup has caused your fund to fall 20%, then loading more money into the fund would be a successful strategy only if the fears of break-up subsided.

And that’s exactly where the problem lies. The timescale for investing for retirement should be the whole of ones working life - which could last 40+ years. There is likely to be many issues with the economy over that 40+ years and they’re almost impossible to predict. For that reason, you’re better to just contribute as much as possible for as long as possible and ignore the “background noise” which, over a 40+ year timescale, is likely to be what the stockmarket movement over the past few years is going to be seen as (I’ll be called out on this one too J).

Under current rules, a 20-year old could invest nothing, live their lifes and expect to retire at 68 (although this is likely to increase with increasing life expectancy).

The state pension, to me, is designed such that you work until old age means you are no longer able to do so and then you get a payment of enough to survive until death. Under auto-enrollment, the government will have more scope to reduce the payment levels of the state pension – because people can afford some of the costs of survival under the pension they’ve built up under the system.

For this reason, at the age of 30, I’m assuming NO state pension will be available and planning accordingly. If it’s there, it’ll be a bonus for me. By contributing to a private pension, the retirement age can potentially be reduced, under current rules, from 68 to 50. That’s a lot more time available to spend with grandchildren J

Of course, you could invest outside the pension but that’s outside the scope of this thread, offers no tax advantages and you’re more likely to dip into the investments over your working career.

 

[mtk]

Auto enrolment is in uk not Ireland marsthonic isn't it

 

[marathonic]

Auto enrolment is in uk not Ireland marsthonic isn't it

Sorry, my mistake.

I'm living in the Republic but working in Northern Ireland. I try to make my posts applicable to the Republic but slip up every now and again.

There are other UK specific things applicable to me, like Pension Salary Sacrifice, that I do not discuss on this forum as it is irrelevant.

 

[orka]

tax reliefs are a huge incentive, hard to get a upfront 41% return on your monies anywhere.

The tax relief is not free money - it is deferred taxation. And you can be doubly taxed - USC now and then tax and more USC when the pension is drawn down. You need to consider your tax position now and in retirement before deciding that a pension is the best way to save for your retirement. I personally am never putting another cent of my own money into a pension again (the pension contributions referred to above are from my employer and I'm going to ask for this to be paid to me as salary instead from next year). Even on the current tax regime, there's not much incentive to invest in a pension. Take away some or all of the tax-free lump sum, increase marginal tax rates, prolong the pension levy ~ and the incentives disappear completely and the pension will be a worse investment than saving net cash. Pension are too tempting a target for the government - lots of locked away cash that the owners can do nothing about rescuing from the likes of the pension levy. The tax-free lump sum has to be an easy target too - I can't see the 25% rate surviving until I retire.

if you are prone to changing contribution levels, you should be increasing them on the way down and decreasing them on the way up

If you could confidently predict the ups and downs of the market, I think you would be rich enough to not have to worry about pension savings...

 

[marathonic]

If you could confidently predict the ups and downs of the market, I think you would be rich enough to not have to worry about pension savings...

I think you're misunderstanding my, "if you are prone to changing contribution levels, you should be increasing them on the way down and decreasing them on the way up" quote. I'm not talking about changing contributions based upon future performance of the stockmarket. I'm talking about changing them based on recent, past performance of the stockmarket.

Even on the current tax regime, there's not much incentive to invest in a pension. Take away some or all of the tax-free lump sum, increase marginal tax rates, prolong the pension levy ~ and the incentives disappear completely and the pension will be a worse investment than saving net cash

That's a lot of things that need to happen before the incentives are gone - and does this, or any future, government want to disincenticise providing for our own retirement?

Another question you need to ask yourself is 'what would happen if I decided to invest in cash alone up until the recent crisis and the governments DIDN'T bail out the banks or provide any kind of deposit guarantee?

In my opinion, the riskiest asset is cash - all of the above are speculations, inflation is a guarantee!

 

[kennyb3]

That's a lot of things that need to happen before the incentives are gone - and does this, or any future, government want to disincenticise providing for our own retirement?

Have they not done this already - see the pension levy. Have they not reduced the maximum amount of relief available? Have they not signed up to an EU/IMF program to reduce pension tax relief further? Are income taxes not increasing in the form of the USC, lower credit etc? (what planet have you been living on?)

Do you really think the lower rate wont be 30% or more in 20/30 years time? As Orka said tax relief isn't the free money its cracked up to be.The problem is your locking in your money until age 60 with so many taxation unknowns.

The government don't have a long term policy for pensions - they are running a 14bn + deficit - so it's about getting cash from every available source - pension funds are an easy target. Most governments only worry as far as the next election and won't be too worried about 30 years time (unfortunately)