Pensions vs. other forms of investment

Was listening to this discussion between 2 lads only yesterday, They were laughing at an older lad here at work who was said to be over subscribed on avcs past his max lump sum limit, he had pot of 260k in dc pot along with DB Care pension we all have. I made the point he can put any extra into ARF, but they said he will be taxed at high rate no matter what so he is mad to go over 200k in avc pot. Are they not completely missing the point of tax free compound growth in the pension pot and say he didn't contribute any more and just took the money as taxable income(52%) and invested outside of pension wrapper he would then have 33% tax to pay on gains outside pension wrapper too. Is it not a no brainer to invest max amount in pension and anything over lump sum limit into ARF rather then investing taxed income outside pension? These lads were in their 50s so a lot closer to retirement then me but seemed to have the understanding all wrong. Lot people here seem to think get avc pot up to 200k limit and leave it at that.
 
ClubMan said:
What does this mean?
Click to expand...
Apologies, poor grammar. The2 lads were talking about an older guy at work who had gone past 200k in his avc pot and were saying how stupid it was as he would be taxed at higher rate any monies above it. Essentially, train of thought with a lot of people here is to get avc pot up to 200k limit and stop contributing then.
 
confused87 said:
he had pot of 260k in dc pot along with DB Care pension we all have.
Click to expand...

Maybe your colleagues think that "older lads" DB pension will put him into the higher 40% tax bracket already and so any drawdowns he makes from the ARF will be taxed at 40% rather than 33% if he made the extra contributions toward a pension into a fund taxed at CGT rate instead?

I'm only getting my head around this at the moment myself. I'm trying to catch up with my pension fund and am considering over-paying beyond my tax relief into AVCs but have read on this site that doing so is a terrible idea. Although I can't quite understand why. There's tax free compounded growth for one. Currently in Ireland Index funds outside a pension wrapper are highly taxed in ETFs.

Having read through this useful thread according to this post by @Sarenco:
"the blended, or effective, tax rate on drawdowns from a pension will always be less than the marginal tax rate, right up to the point where your pension reaches the standard fund threshold."
Click to expand...

This makes it sound like over-paying can make sense as long as your pension fund (DB + DC in your colleagues case) doesn't reach the SFT?
 
Yes but even if he has to pay higher 40% rate of tax on ARF drawdowns , he will have got compounded growth free from 33% cgt. If he invested outside pension he would have to pay 40% high rate on income first then 33% on any gain on his investments outside pension, that's why i am not understanding the 2 lads stance on the older chaps strategy.
 
Let's say this chap chose to invest additional money outside a pension wrapper and the fees and returns are the same as what he is getting inside his pension wrapper.

Depending on what he chose to invest in outside a pension wrapper (e.g: Berkshire) he might not pay ANY tax on that investment either until he withdraws money from it... only then would he pay CGT and only on whatever he takes out.

But as discussed at length in this thread, by continually max'ing out your tax relief in to a pension wrapper the tax relieved portion can also generate tax free growth. If he invested in something outside the tax wrapper he won't benefit from any additional tax relieved money that could also generate returns.
 
CharlieMac said:
doing so is a terrible idea. Although I can't quite understand why.
Click to expand...
Pay tax at 40% on the way in, then pay income tax (probably 40%) and USC on the way out. More than offsets the benefit of tax free growth (Which would also be available from an ETF or life assurance investment).
 
CharlieMac said:
Currently in Ireland Index funds outside a pension wrapper are highly taxed in ETFs.
Click to expand...
These funds are only taxed on the growth, whereas pension/ARF withdrawals are taxed on the whole amount. If you aren't getting tax relief on the way in, it's much less attractive.
 
im in the Gardai with DB pension. I had same issues with understanding the point of AVCs as I will be retiring with full service.

it's tax free growth. I get 40% relief on way in and will likely only be 20% on way out. it will be in ARF and I will use the pot to supplement my DB pension
 
The only thing you’d have going for you investing in a pension without tax relief would be the tax free compounding.

Your investment horizon would probably have to be 20/25+ years and you wouldn’t want to have any other worthwhile long term investment options (paying off mortgage early etc.). Even then I think it’d probably be a bit mad.
 
confused87 said:
Yes but even if he has to pay higher 40% rate of tax on ARF drawdowns , he will have got compounded growth free from 33% cgt.
Click to expand...

If he is paying 40% tax on his drawdowns, that's also 40% tax on the growth is it not?
Might be why the older guys weren't keen on it?
 
So essentially max out contributions to age limits and anything after lump sum into ARF. Only scenario where maxing out contributions not most effective investing strategy if a person managed to be reach SFT. Almost anybody here i talk to about avcs in this big multinational has it in there head to stop contributing when 200k lump sum limit from dc portion of pensions reached. It's actually with derision people who are over the 200k limit are talked about. I find ARFs are never considered.
 
CharlieMac said:
I'm trying to catch up with my pension fund and am considering over-paying beyond my tax relief into AVCs but have read on this site that doing so is a terrible idea.
Click to expand...
It’s a highly risky idea because, to the best of my understanding, you would lose the right to claim the relief if/when you cease employment with your current employer. Obviously, doing so is not always at the employees discretion.
 
but it's tax free growth. also if somebody contributing avcs are getting 40% tax relief on thr way in and on their retirement could also be in lower income tax bracket. they could use arf for extra income. outside of property there is nothing else that comes close for long term investment in ireland
 
@conor_mc Since I'm only starting with AVCs my idea was to put a lump sum in to the same pot I use for AVCs. I wouldn't try to carry forward tax relief on that lump sum to future years since I will be maxing out AVCs every year until I retire anyway.

What I gather from comments here, no matter how big your pension fund would grow you can still never be better off putting non tax relieved money in to it. If you are going to be in the 40% tax bracket all the contributions and all the gain on them are taxed at 40%.

I'm reading that putting money in excess of maxed out AVCs in some fund outside the pension wrapper taxed at CGT rates is the way to go.

But a few comments earlier in this thread made the point that you wouldn't be paying 40% tax on the full amount of your ARF draw downs. Only the amounts above 42k or whatever the cut off is now, and are there other tax credits too maybe?

Is there really no way it could work out better to just put all my savings in to one big index fund in a pension wrapper?

If I set my ARF drawdowns (e.g 45-50k/yr) so I only pay 40% tax on a small amount then wouldn't it have been better to have a larger pot earlier on to maximize the years it can have to compound?
 
CharlieMac said:
Is there really no way it could work out better to just put all my savings in to one big index fund in a pension wrapper?
Click to expand...
Say you earn an additional €100. We'll ignore PRSI and USC. You've maxed you pension contributions for the year, and will for all future years. You decide to either invest it in your pension, or in shares of companies that do not pay dividends (I'm too lazy to calculate the tax on those right now).

For the pension option, the investment is after tax so €60 is invested. Assume the investment grows by 20% over the whole investment term. That's €72 in an ARF for you. To get your hands on that, you'll have to pay tax, either at 20% or 40% meaning you'll get either €58 or €43.

If you invest in shares, you'll also have €60 to invest. Assume it also grows by 20% to €72. The CGT payable would be (72-60)*33%= €4, meaning €68 on your hand. Far better than investing Inna pension where there is no tax relief.
 
You must log in or register to reply here.
Menu
Log in
Register