Pension in your twenties

[Sarenco]

Brendan

I really don't see why you think we are "regurgitating the conventional wisdom of the pension industry". I didn't argue that Talking Money should increase his AVCs - or even maintain his current level of AVCs. I simply suggested that deciding whether to save within or outside a pension vehicle was a question of balancing medium and long-term financial objectives. That's hardly controversial.

There are certainly a number of advantages to home ownership but there are also disadvantages – primarily a loss of flexibility, which I would have thought would be an important consideration for somebody in their 20s. I strongly disagree with the absolute nature of the "get on the housing ladder ASAP" mantra. Renting is a perfectly reasonable option for people in a variety of circumstances.

I certainly agree with Steven's point that establishing a reasonable emergency fund (having cleared all personal debt, where relevant) should take priority over making AVCs.

 

[Brendan Burgess]

I really don't see why you think we are "regurgitating the conventional wisdom of the pension industry".

The conventional wisdom which is really conventional stupidity is that you can't be too young too start a pension. That is daft.

The OP should save his money to buy a house. He might well decide that renting is preferable to buying because he might move abroad, but he still should not contribute to a pension fund, unless it's to max out his employer's contributions.

He should save his money outside a pension scheme until he is ready to buy in Ireland.

Brendan

 

[Sarenco]

The conventional wisdom which is really conventional stupidity is that you can't be too young too start a pension.

Did anybody say anything that banal? I know I certainly didn't.

He should save his money outside a pension scheme until he is ready to buy in Ireland.

Well, in my view it's a question of striking a reasonable balance between pursuing medium and long-term financial objectives.

I strongly disagree with the absolute nature of your opinion that nobody should contribute to a pension before they have bought a house.

 

[jjm]

Just a pension health check please. I'm aged 27 and have been part of this pension scheme for the past three years. I'm currently paying into a 50:50 risk sharing scheme, DB Section & DC section. Just to note the Salary Cap is €48,000 - I expect to exceed that salary by 2021 - 2023.

Currently these are the figures:

Basic Salary: €36,000
Overtime: €4,000 - 6,000 (not pensionable I understand)
Total: €42,000

Pension: Enrolled since 24
Employer: Contributes 8%
Myself: Contributes 5%
AVC: Paid 2% AVC for two years, raised it to 6% in January.
Total: 19% combined total.

As I'm earning good money for my age, am I doing the right thing by having an AVC? I understand and accept that I won't see this until retirement.

Also my salary will rise to 40K by December of this year. Instead of increasing my AVC this December I was thinking of increasing my debt pay down by the surplus and building a solid emergency fund.

What would you advise?

Talking money
I am not sure anyone has asked you seeing you have a pension fund DB & DC there is a good chance the company has a sick pay scheme along with health insurance schame if so you don't need as big emergency fund going fowdard

,You also need to ask yourself would you have saved the money or used it if it was not locked away in a pension fund ,
I also note youre earnings from overtime is taxed at 40% another good reason to put into a pension avc
can you let us know if you have a sick pay scheme it is something to factor in when you talk about an emergancy fund

 

[Talking Money]

If I may bring this thread back into line - I don't think everyone will agree with Brendan and I don't think Brendan will agree with the other view.

My opinion, taken as a pinch of salt from a young lad is that the approach of Brendan and many others, "that you must buy a house at all costs", got this country into the housing mess during the Celtic Tiger. These sentiments of owning your own home introduced many great people into negative equity, financial insecurity, broken relationships and worse over the past decade. As I mentioned before renting suits our situation best for the next 2-3 years. I do of course understand the pro's and con's of owning your home, but it's not a case that I'm 50 paying into a pension and no home.

I may be wrong, but I thought the figures of a pension pot started in your twenties vs thirties is massive.

@jjm2016 I have a sick pay scheme/salary protection which gives me full pay for 6 months and a lower amount for another year. I also pay into a life insurance policy for death in service ect.

I also have a rainy day fund of €1,000. I'm planning to build up 3 months expenses over the next few months. Although I do have assets of 25K that I could liquidate if I became ill.

Currently save around €200 - €350 per month depending on overtime, could save more but clearing a small loan in the Credit Union to become debt free by 2018.

 

[jjm]

If I may bring this thread back into line - I don't think everyone will agree with Brendan and I don't think Brendan will agree with the other view.

My opinion, taken as a pinch of salt from a young lad is that the approach of Brendan and many others, "that you must buy a house at all costs", got this country into the housing mess during the Celtic Tiger. These sentiments of owning your own home introduced many great people into negative equity, financial insecurity, broken relationships and worse over the past decade. As I mentioned before renting suits our situation best for the next 2-3 years. I do of course understand the pro's and con's of owning your home, but it's not a case that I'm 50 paying into a pension and no home.

I may be wrong, but I thought the figures of a pension pot started in your twenties vs thirties is massive.

@jjm2016 I have a sick pay scheme/salary protection which gives me full pay for 6 months and a lower amount for another year. I also pay into a life insurance policy for death in service ect.

I also have a rainy day fund of €1,000. I'm planning to build up 3 months expenses over the next few months. Although I do have assets of 25K that I could liquidate if I became ill.

Currently save around €200 - €350 per month depending on overtime, could save more but clearing a small loan in the Credit Union to become debt free by 2018.

I would agree with all of the above .sick pay scheme/salary protection is great to have,I have it myself never had to use it TG. when I was your age I was paying AVC later on in life when my kids went to university I was able to stop paying and still watch AVC pension pot grow trough these years, we have a culture where I work of paying into AVC most will tell you including myself when I started paying into a AVC take the income tax out you still will have a good income left out of 42000 euro to enjoy your life, even after paying 11% between matching employers cont you will still be paying 1600 euro at 40% .tax planning is the only show in town.

you should seek advice on how best to grow your pension pot seeing you can take a long term view,good advice here if you ask,

 

[Sarenco]

I may be wrong, but I thought the figures of a pension pot started in your twenties vs thirties is massive.

It certainly can be but I would treat any projections you receive from your pension provider with some caution. They tend to show a very consistent and unduly optimistic rate of return, based on what often turn out to be unrealistic assumptions.

In my opinion, it makes no sense to a contribute to a pension to a point that: (a) it is causing you to live below a modestly comfortable standard of living today; or (b) means you are taking on (or not discharging) expensive personal (i.e. unsecured) debt.

I don't think you are really saving at all while you are continuing to carry a credit union loan - that's just mental accounting.

So, in my view, your priorities should be as follows:-

1. Put €1,000 aside (genuinely aside) as a "bare bones" emergency fund;
2. Contribute to your pension to the minimum level that secures your employer match;
3. Pay off the credit union loan;
4. Build your emergency cash reserve until it equates to six months' expenses; and
5. Start saving for a house deposit and/or make AVCs in whatever reasonable proportion makes sense having regard for your medium-term and long-term plans.

 

[Brendan Burgess]

I may be wrong, but I thought the figures of a pension pot started in your twenties vs thirties is massive.

This is the mistake that everyone makes.

The difference between the final pot is massive if you defer starting saving until your 30s. But if you start saving outside a pension fund in your 20s with a view to buying a house when you are ready, you will probably be in a better position when you retire.

Brendan

 

[Talking Money]

In my opinion, it makes no sense to a contribute to a pension to a point that: (a) it is causing you to live below a modestly comfortable standard of living today; or (b) means you are taking on (or not discharging) expensive personal (i.e. unsecured) debt.

I don't think you are really saving at all while you are continuing to carry a credit union loan - that's just mental accounting.

Apologies if I was unclear, the pension instalments haven't affected living conditions or debt.

Regarding the accounting, I'm not sure how you gather that but yes I've a small loan with the C.U that will be done soon. I'm lucky to be on a decent salary at this age.

 

[jjm]

This is the mistake that everyone makes.

The difference between the final pot is massive if you defer starting saving until your 30s. But if you start saving outside a pension fund in your 20s with a view to buying a house when you are ready, you will probably be in a better position when you retire.

Brendan

There is a good chance you will have the same house and a larger pension pot when you retire ,Lots of people on hear finished up buying an incorrect house when they were single only to find out it did not suit them long term, Anyone who I know who started a pension early never regret doing so later on in life,

 

[RedOnion]

The difference between the final pot is massive if you defer starting saving until your 30s.

This is a very good point, and one where the benefit of pensions can come into play if you're not a disciplined saver.

I lived my early to mid 20's working in banking during the Celtic tiger era. I spent what I earned and didn't save for beyond the next holiday (100% mortgages were still a thing then, so not much need to save!). Luckily I had been putting some money into a pension that I never saw so wasn't able to spend. Roll on to my later 20's / early 30's and I had a purpose to saving, so saving was much easier. Bought a house and prioritised paying down the mortgage as quickly as I could while sacrificing contributing to a pension. I now have a very manageable mortgage, and a job where I'm maxing out employer matched pension contributions.

If it wasn't for the money I'd put into my pension in my 20's, I'd be uncomfortable starting out from scratch in my mid 30's. And if it hadn't been going into my pension, your guess is as good as mine as to what I'd have spent it on but I definitely wouldn't be any better off!

 

[Sarenco]

Apologies if I was unclear, the pension instalments haven't affected living conditions or debt.

That's really my point - your AVCs are not affecting (as in discharging) your personal debt. IMO paying off your credit union loan should take priority over making AVCs.

Why? Because the rate of interest you are paying on that loan is almost certainly higher than expected net return on your AVCs.

"Mental accounting" refers to people treating accounts (debt/savings) as separate pots, without looking at the overall position. There's no point saving at a rate of X% while simultaneously carrying debt at a rate of X+Y%.

 

[jjm]

If it is a credit union loan you have savings/shares against loan wipe out loan with savings/shares once you reach point savings equal loan,

 

[jjm]

That's really my point - your AVCs are not affecting (as in discharging) your personal debt. IMO paying off your credit union loan should take priority over making AVCs.

Why? Because the rate of interest you are paying on that loan is almost certainly higher than expected net return on your AVCs.

"Mental accounting" refers to people treating accounts (debt/savings) as separate pots, without looking at the overall position. There's no point saving at a rate of X% while simultaneously carrying debt at a rate of X+Y%.

You also have to factor in the 40% tax break into your returns,

 

[Brendan Burgess]

You also have to factor in the 40% tax break into your returns,

And the fact that you will be taxed on the pension when it's being paid to you.

Brendan

 

[jjm]

And the fact that you will be taxed on the pension when it's being paid to you.

Brendan

lots of people put there AVC against there lump sum of 25% the bigger the pot the bigger the tax free lump sum
Good chance tax will be at your marginal rate if you have it in the pot early compound interestis your only man

Right now you are getting compound interest on an extra 40% along with the 40% extra in the pot
the houses are not there at present anyway in some parts of the country which needs to be taken to account along with the fact amount you can borrow is capped to your wages,
retirement age will be higher than now . if you have extra in the pot more options you have coming near retirement. nice to have option to go early you never notice two years going at twenty but you will when you are coming near retirement age,

 

[Sarenco]

And the fact that you will be taxed on the pension when it's being paid to you.

Aside from the tax free lump sum (currently capped @€200k), it is certainly true that drawings from a pension fund are subject to income tax.

However, a married couple are currently exempt from tax on the first €36,000 of income once one spouse reaches 65. In other words, as things currently stand, most people won't pay any income tax at all on their pension income, unless they amass a very large pension pot.

They will certainly pay LPT (and a host of other maintenance expenses) on any house they might buy.

Again, I'm not arguing in favour of maxing out pension contributions ahead of buying a house (or making any other consumption choice for that matter).

On the contrary, I'm arguing in favour of taking a more balanced approach to addressing medium-term and long-term financial objectives. I don't think it's helpful to adopt an absolutist, "one-size-fits-all" approach to these matters.

 

[RichardTea]

There is a limit of 15% of net income for tax relief on pension contributions for individuals aged under 30, it looks like OP is putting 19% of income into pension. Am I missing something here? Can the extra 4% (19-15%) still go into the pension pot as net of income tax - and would this still qualify for tax relief on growth (as no CGT etc on money inside a pension)


The fairly strict limits on tax relief are part of why I intend to contribute 15% of my income to pension now living in Ireland, but while living in UK which doesn't have this restriction I would have prioritised saving for a house.

 

[Sarenco]

Am I missing something here?

Yes, 8% of the contributions are coming from the OP's employer.

 

[RichardTea]

Yes, 8% of the contributions are coming from the OP's employer.

Thanks. I was thinking the 15% applied to total pension contributions.

Being similar age and earning similar salary to OP, I have to disagree with Brendan that money should be put towards a house at all costs. Particularly income in the 40% tax bracket (about €6000 of my annual salary) which if put in as employers contribution would save a total of 49% tax, PRSI, USC. Yes it means the money is tied up, but can be taken at retirement, which can be at 50 years old, which I think is worth at least trying to plan for. Plus pension reform may mean that lump sums can be taken while still in employment, like can be done in the UK now.


If I was to take out a mortgage of 140k (the max I could borrow - which would pay for appoximately half of a two bedroom house in the northside of Dublin) the interest alone would be around 5.5k per year - effectively 11k which could be put into pension instead, and there are no guarantees house prices are going to continue to rise. I'm currently living in the west where the market seems very slow and rent is cheap enough to not be a huge concern. I will probably move to Dublin in a few years, so not being tied down to a property is certainly helpful in your 20s.