Rule of Thumb for enrolling in My Future Fund

D

Duke of Marmalade

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All standard rate taxpayers and 40% taxpayers under the age of 36 should enrol in My Future Fund
Additional funding for this constituency and for all other 40% taxpayers should be through a conventional scheme
 
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Dr Strangelove said:
I don’t doubt your advice but your reasoning would benefit us all.
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It's a no-brainer for standard rate taxpayers as they have both a one third higher incentive and lower charges with MFF.
For 40% taxpayers I have taken a typical situation and after30 years the big AMC reduction overcomes the 50% reduction in incentive..
Best thing is that attach the spreadsheet.
 

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  • AE proposed charging system.xlsx
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Hi @Duke of Marmalade. Thanks for posting.
We’ve come to a sorry pass though when a PhD in hard sums (as well as a dukedom) is required to decide whether it’s better to be in MFF or in a standard pension. It goes against everything that AE should stand for, i.e., no need to seek advice on whether it’s right in one’s particular circumstances.
It’s clear from your spreadsheet that there are circumstances where MFF is manifestly the wrong choice, not because of any inherent flaw in the scheme but because of a tax anomaly. The same is true - in the opposite direction - for non-higher rate taxpayers, where the tax anomaly means that pension advisers would be remiss in not advising client employers to undertake fundamental restructurings of perfectly good schemes - at significant cost and effort - in order to take advantage of the anomaly. This can’t be right.
 
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Hi @joe sod The anomaly is that, for a 40% taxpayer who pays €60 net of tax (i.e., €100 before tax) into a standard pension, and assuming a matching employer contributions (i.e., employer also paying €60), their pension account increases by €160 (€100 +€60).
For the same €60 of take-home pay paid into MFF (which is calculated on gross pay but doesn't qualify for tax relief), and the same €60 from the employer, the state gives a €20 top-up (the cherry in the ad), making a total of €140. Thus, the amount added to the account under a standard pension is 14% more (20/140) than under MFF. The @Duke of Marmalade's spreadsheet (which is aimed at the honours student) goes further. It shows that, if the money is invested for long enough, the lower management charge under MFF eventually makes up for the lower amount invested.
The opposite is true for a 20% taxpayer. In this case, though, the lower management charge in addition to the higher net investment means that it's advisable for everyone - including employees in super duper schemes (unless the management charge is around 5 bps, and I doubt if anyone is in a scheme with that low a management charge) - to be in MFF, which means restructuring existing schemes in order to integrate with MFF. That will mean significant advisory costs for employers, even the biggest in the land. That was never the intention.
 
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Colm Fagan said:
Thanks, @Fortune . That's what I was trying to say, but I took the scenic route! I should take lessons from you in how to be succinct!!!
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No thanks alot colm for explaining it in detail. This might be a silly question and not taught out properly but is it not possible to have both auto enrolment pension up to 42K income and then use prsa for pension above that income level of 42K . So you opt for the prsa when doing for example a form 11 return to take advantage of the 40% tax relief but only on income above the 42K threshold. Its easy enough to put a lump sum into a prsa for the previous year when doing the tax return.
 
Will it be possible to start in one and then move to the other? i.e. start working life on lower, standard tax band salary so go into MFF and then move to occupational pension when moving into higher rate tax band & >35?
 
@joe sod @TRS30 You're both on the right lines, but I think it's more complicated. @joe sod, you'd have to allow for the impact of the lower management charge under MFF, which makes up for the lower investment amount when there's longer to go to retirement. @TRS30, the breakeven point depends on whether the assumptions underlying @Duke of Marmalade's spreadsheet are appropriate.
I'm trying to get my head around what all this means for large company schemes like, say Guinness or the banks, other large employers who think that their schemes are offering top DC benefits and low charges. They'll all have to be restructured from top to bottom.
 
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I come back to the point that My Future Fund (MFF) is incredibly complicated. This is the exact opposite of what AE should be.

I wouldn't mind but there were dire warnings of how this might turn out, including from within the establishment itself.
For example, in evidence to the Joint Oireachtas Committee (in February 2023), ESRI representatives warned against going down this road, saying that "it is unclear that such radical reform, which would add substantially to the complexity of Ireland's pension tax regime, is needed to support the initial rollout of automatic enrolment".
The DSP never even tried to answer the criticism. They simply ignored the ESRI.
We've only seen the tip of the iceberg so far in terms of how MFF adds to the complexity of the pension tax regime.
The DSP itself (in a 2020 paper which never saw the light of day - I wonder why) warned about there being "significant pushback if individuals were 'unknowingly' defaulted into a system which was 'knowingly' less attractive to them on the basis of financial incentives, etc." (This refers, I think, to the point mentioned above of high earners being defaulted into MFF despite getting 14% higher investment in a standard pension)
The DSP's 2020 paper also warned that the proposed My Future Fund might "compromise the coherency of the system by creating communication difficulties" (so you're far from being alone, @joe sod, in finding it difficult to understand the ramifications - and I presume that you're familiar with pensions. God help the "real" joe sod!).
The DSP in 2020 also warned of "making it difficult to parallel the systems and provide clarity as to who must be enrolled leading to compliance difficulties" (compliance difficulties - that's a $64,000 question for pension advisers - and for the Central Bank! Anyone want to comment on it?).
I wonder where is the DSP official who wrote that 2020 paper. I doubt if they're still in a position of responsibility within the Department!!!
 
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@Duke of Marmalade thanks for your work here. Just to note, I believe that contributions to AE cease once your Gross pay YTD exceeds €80k. I edited your escalation parameter so noticed that this constraint was not included. Gov.ie Q&A here.

AE is a govt "top up" and not tax relief. If I am a member of AE, I can contribute to another pension pot as long as I am not contributing to it via payroll i.e. PRSA or AVC PRSA. Is there a mechanism though self-employment/second occupation whereby I would be in AE for one (get the top up) and get tax relief on up to €115k from the other?

This note from GT from last year suggests that death benefits will differ i.e. Existing pension schemes subject to CAT, AE taxable under PAYE.
 
Itchy said:
I believe that contributions to AE cease once your Gross pay YTD exceeds €80k
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Ah now! I could argue that I assumed the €80k would increase with inflation. But to be sure if you put in an income of €100k the s/s will not allow for the €80k ceiling.
Itchy said:
This note from GT from last year suggests that death benefits will differ i.e. Existing pension schemes subject to CAT, AE taxable under PAYE.
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This clip of Tim Duggan at the JOC shows him squirming a tad under questioning by Anne Rabbitte but he clarifies that he "has been told that" the DOF will make it clear in this year's FB that it will be treated the same as a PRSA on death.
Itchy said:
Is there a mechanism though self-employment/second occupation whereby I would be in AE for one (get the top up) and get tax relief on up to €115k from the other?
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Interesting question but beyond my pay grade. My guess is that you could have both to begin with though ultimately the top-up on 6% of €80k will be the equivalent of 40% tax relief on €4k (I think, but it is very easy get in a twist when aligning tax relief on gross pay with top-up on after tax pay) Which would hardly need bothering with.
 
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An interesting aside from the Q&A @Itchy posted:

I wonder if that will hold the next time the state looks at levying pensions again
 
Hi Duke

Can I check my understanding of it? I am trying to see how best to explain it to a 20% tax payer.

The EE contributes 60
The ER contributes 60
The state contributes 20

So the State and I contribute a total of 80 to the fund.

Say my employer offers me the option of an Employer scheme whereby they will contribute 60 and I am a 20% taxpayer.

The EE contributes 75
I get tax relief of (15) - so the cost to me is still 60 net.
So the state and I contribute 75 to the fund.

Therefore I am better off in the AE scheme.

That is not easy for most people to follow.
 
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