PRSA, company pension, and more

[Thoie]

Background
Age: mid 30s
Single


I have three pensions:
1. A company pension from when I started work. Current value approx €14k. Hasn't been paid into in roughly 8 years
2. A PRSA, current value approx €20k. Hasn't been paid into in the last 12 months
3. A new company pension: monthly contributions of 4% of salary. Current value irrelevant (as it's new).

Currently no available cash for AVCs, but hope to be able to able to make some this year (2009) or next.

Questions:

• Does it matter if the PRSA and the old company pension are just sitting there? AFAIK the PRSA charges are based on contributions, so is it fair to say that there are no charges while there are no contributions?
• Should I try and move the balance of one or more to the other (depending on which is performing best)?
• Is 5% too small an amount to be paying in at my age (with another 5% from the company)? Should I make more of an effort to reach the 20% limit (through AVCs)?
• I asked last year about transferring the balance of the old company pension into my PRSA, but was told I'd have to pay capital gains tax because it was over €10k - where on the Revenue site can I find out the current limits/details? If I just phoned the PAYE phone number could someone there answer, or is there another number for pension-type questions?
• What should I be looking at if I do try to consolidate the pensions, or is there any point?
• If I leave the three as they are (and possibly pick up another one or two pensions over the coming 30odd years), what happens when I retire - can you lump all the pension money together to buy an annuity, or would you have to buy 3 or 4 separate annuities?

I have no good reason for thinking I should have just one pension, other than for the sake of neatness

 

[ClubMan]

• Does it matter if the PRSA and the old company pension are just sitting there? AFAIK the PRSA charges are based on contributions, so is it fair to say that there are no charges while there are no contributions?

PRSA should have no ongoing charges. The occupational one may have a monthly policy fee even when paid up. Check the charges applicable on both while they are paid up. Also check the fund options available. In some cases it may make sense to keep such pensions separate - in others it may make sense to do something else with them (e.g. move the occupational fund to a buy out bond with lower charges and/or better fund options).

• Should I try and move the balance of one or more to the other (depending on which is performing best)?

I'm not sure that you can merge a PRSA and an occupational fund in this situation although it may depend on specifics such as the value of the occupational fund etc. There are existing threads on this topic.

• Is 5% too small an amount to be paying in at my age (with another 5% from the company)? Should I make more of an effort to reach the 20% limit (through AVCs)?

Depends on your current financial commitments, target retirement fund value etc. 5% (+ 5% employer) sounds on the light side to me all things being equal.

• I asked last year about transferring the balance of the old company pension into my PRSA, but was told I'd have to pay capital gains tax because it was over €10k - where on the Revenue site can I find out the current limits/details? If I just phoned the PAYE phone number could someone there answer, or is there another number for pension-type questions?

The CGT issue sounds wrong to me. Who told you that? However there are limitations on when and how you can merge an occupational fund with a PRSA so you may not be able to do this anyway.

• What should I be looking at if I do try to consolidate the pensions, or is there any point?

See above. Get independent professional advice if necessary.

• If I leave the three as they are (and possibly pick up another one or two pensions over the coming 30odd years), what happens when I retire - can you lump all the pension money together to buy an annuity, or would you have to buy 3 or 4 separate annuities?

Your pension cover is fragmented but other than the slight additional administrative hassle this may or may not be a bad thing. In simple terms you can merge the benefits from all pensions when you retire.

 

[StevieC]

PRSA should have no ongoing charges. The occupational one may have a monthly policy fee even when paid up. Check the charges applicable on both while they are paid up. Also check the fund options available. In some cases it may make sense to keep such pensions separate - in others it may make sense to do something else with them (e.g. move the occupational fund to a buy out bond with lower charges and/or better fund options).
I'm not sure that you can merge a PRSA and an occupational fund in this situation although it may depend on specifics such as the value of the occupational fund etc. There are existing threads on this topic.
Depends on your current financial commitments, target retirement fund value etc. 5% (+ 5% employer) sounds on the light side to me all things being equal.
The CGT issue sounds wrong to me. Who told you that? However there are limitations on when and how you can merge an occupational fund with a PRSA so you may not be able to do this anyway.
See above. Get independent professional advice if necessary.
Your pension cover is fragmented but other than the slight additional administrative hassle this may or may not be a bad thing. In simple terms you can merge the benefits from all pensions when you retire.

Sorry to correct you Clubman but PRSA's do normally have an ongoing charge, that is the 1% management fee which the pension provider charges each year. This covers their admin costs in managing your pension fund, issuing annual statements and any bank charges etc they have for taking direct debits etc.

Performance is always relative and different companies will outperform others at different times and also over different time periods, there is no harm in having pensions with several companies, some would actually argue this is a good thing as it means not all your eggs are in the one basket and it diversifies your risk.

You normally cannot transfer PRSA monies into an occupational pension scheme but checking the scheme rules will tell you for sure.

In regard to pension contribution levels, you can only really decide this yourself or with the help of an independent qualified financial advisor as we have no idea of your personal financial circumstances such as salary level, tax relief level (based on salary), loans, other commitments and to be honest some of this information you probably dont want to post on a public board. As a general rule the more you can afford to contribute without leaving your self financially stretched the better, but remember once the money is put in you are not going to be able to access it again till retirement.

The Capital Gains information you recieved was incorrect. Pension funds grow tax free and then your benefits from them (with the exception of a tax free lump sum) are liable to normal income tax in retirement. If your transfer one fund to another, the company will work out the current transfer value of your fund and this will be what is moved. The only thing I can think of is that maybe you have a very old type of pension product that contained what were called Capital Units, if this is the case then you will want to leave this product paid up with that company till retirement as if you move it, you forfeit these Capital Units. No newer types of product use these to the best of my knowledge but double check before you move anything.

Once you reach retirement you have an open market option to purchase your annuity with whatever company you wish (this is often not advertised as most companies will want you to take out the annuity with them). In effect this means that you can find out the maturity value of 4 or 5 or however many pensions you have at that stage and pool the full amount of them to purchase an annuity with whatever company will give you the best rate.

Hope the above helps.

Stephen

 

[ClubMan]

Sorry to correct you Clubman but PRSA's do normally have an ongoing charge, that is the 1% management fee which the pension provider charges each year.

Sorry - you are obviously correct. I was mistakenly focusing on monthly charges like policy fees and forgot about the annual management fee!

You normally cannot transfer PRSA monies into an occupational pension scheme but checking the scheme rules will tell you for sure.

Correct again - I was thinking of the limits on going the other way - occupational to PRSA.

 

[DerKaiser]

Is 5% too small an amount to be paying in at my age (with another 5% from the company)? Should I make more of an effort to reach the 20% limit (through AVCs)?

This is one area that I think should be discussed more.

If you invest your fund in risk free assets (government bonds) you can fairly accurately work out what you'll need to put away to fund your retirement income.

Say you are aged 35 and intend to retire at 65. You have 30 years to build up a fund. On average you might expect to draw down for about 20 years in retirement.

If you want to target a money amount (linked to inflation), say €30k a year in retirement (for 20 years), you'll need to put away €20k a year whilst you work (for 30 years).

Most pension calculators will work out a much lower contribution than this as they assume you can earn 3% per year more than inflation.

Provided you have the disposable income, the best practical thing you can do is
1: If your employer matches your contributions up to a set limit, contribute up to this limit
2: If this level of contributions is still below the limit on which you can contribute tax free to your pension (20% of salary for a 30 something) you should increase your contributions to this level

 

[Thoie]

I've just scared myself with the pensions board calculator - apparently I'm going to live out my old age eating catfood.

Where do you (generic you) draw the line at what is disposable income? Say at the end of the year, after savings, mortgage, pension and general day to day expenses, I've got €1000 left over. Do you lodge that as an AVC, or take a holiday and replace the washing machine? I suppose I'm finding it difficult finding a balance between living life now (on the offchance that I don't make it to retirement age) and spending my final days in a bedsit being eaten by Alsatians.

 

[StevieC]

I've just scared myself with the pensions board calculator - apparently I'm going to live out my old age eating catfood.

Where do you (generic you) draw the line at what is disposable income? Say at the end of the year, after savings, mortgage, pension and general day to day expenses, I've got €1000 left over. Do you lodge that as an AVC, or take a holiday and replace the washing machine? I suppose I'm finding it difficult finding a balance between living life now (on the offchance that I don't make it to retirement age) and spending my final days in a bedsit being eaten by Alsatians.

Its a good idea to have rainy day money, once credit cards are cleared etc, try to have €5,000 or so on deposit so that god forbid you became redundant, you have some room aside from any redundancy package to live on while you hunt for another job. This can be an emergency fund for unexpected stuff like the tiles flying off your roof in a storm so you can get it fixed before the insurance claim is paid etc, if you catch my drift.

Dont let a calculator scare you, its predictions will most probably be all wrong anyway as no one knows what annuity rates will be, what investment growth will be, what state benefits will be etc. Its only an indicator and if you buy an annuity its income for however long you live. If you are concerned about inflation, buy an annuity at retirement age that is indexed and will increase each year.

Remember, you are mid 30s now, you have another 30 years to fund for retirement, in that time you will most likely get payrises, pay off your mortgage. The income you will need in retirement to have a decent standard of living is a fraction probably of what you have now in relative terms, as your mortgage is most likely your biggest outgoing cost and this will be gone.

Plan as best you can, stay healthy as you can, live your life (take a holiday now and again), there is no point living like a monk just cause a calculator said something that is based on assumptions no one can predict.

Find a good independent advisor and talk to them about your concerns and dont have nightmares about your pets eating you. The fact you are planning now means you have a headstart in this matter over a lot of people in the country.

 

[Thoie]

I currently have multiple savings accounts (drives my bank nuts, but I'm happy with it ). Sadly, due to unexpected redundancy last year, they're all pretty empty right now, but normally, here's what they're for:

1. 7 day notice account: Emergency money for major house repairs, disasters, whatnot. It's in a 7 day notice account on the basis that if I need to pay for something right NOW I can scrounge the money off friends and family (if any of my friends are reading this - SURPRISE!) if they know they can get it back in a week.
2. A generic deposit account. Theoretically using it to save for (part of) a car at the moment, also use it as a place to dump any spare cash (to stop me spending it from my current account, or while I think about where it's to go). I could theoretically merge this with the 7 day notice account, but it's handy to have instant access if, say, I stuck 500 in there, but then remembered I'd forgotten to pay a bill or something.
3. A savings account that earns bonus interest if you make a max of one withdrawal a year. Usually try to keep that for a holiday once a year. As I take holidays at different times each year, I usually pay for the holiday on the credit card (gives extra travel insurance and protection), then use the savings money to pay off the credit card at the appropriate time.

None of these have any annual charges or fees associated with them, so I find it as handy to keep the three of them, as well as my current account, which is where most money comes in and out of. There's another current account as well, associated with my mortgage. I pay a little bit more than the mortgage DD into this, on the basis that it's a cushion in case of an emergency, and also against interest rate rises. There's about two month's mortgage built up in there now which gives me time to try sort things out if things go wrong.

I'm not sure why I'm telling all you strange people this. I suppose by writing it down I'm reassuring myself that my current situation is a bit of a blip, and that as I'm sorting out the pension stuff I can relax a bit. In a couple of years I should hopefully have more disposable income that can top up the pension fund then.

 

[StevieC]

Dont worry Thoie I'm not strange, I'm just a regular guy like you!!!

Sounds like you have a wise head on young shoulders to be honest and are doing everything right. The whole reason why you are allowed to put more into your pension to get tax relief as you get older is that the government realise that we all have less outgoing bills and more income in our 50s to top up our pensions.

Take care

Stephen