Key Post "Should I just save money or contribute to a pension?"

Discussion in 'Pensions' started by LDFerguson, Jul 12, 2012.

  1. SBarrett

    SBarrett Frequent Poster

    As long as you have something to live on when you retire, it doesn't really matter what method you use to save.

    The big advantage of pensions is the tax relief on personal contributions and large company contributions can be made into a plan on your behalf without any tax consequences for you. One of the terms and conditions of those massive tax breaks is that it is supposed to be savings for retirement so you can't touch it until age 60. I think that's fair enough.

    Unless you have a very large pension fund (the average pot is just €80,000 :eek: ), you can manage the withdrawals to reduce your tax to 20% or even nothing. The big problem is the AMRF, which scuppers control for a lot of people, especially those with a small pension pot. For those with large funds, they tend to have other income and are quite happy to have money kept out of imputed distribution.

    If having access to your money is more important, pay your tax and invest it yourself. With tax on growth at 41%, profits are pretty heavily taxed. As I said, it doesn't matter if you have a pension or not as long as you have something to live on. People who say they will continue to work assume that they will stay healthy and the work will always be there.

    For people who complain that their pension did crap, it's not the pension, it's the investment strategy you picked and the charging structure. If you pick a low risk strategy, you will struggle to make money. If you go to a salesman, he will give you a poorly structured contract, that will make it difficult for you to make money. Pay an advisor a an implementation fee to get everything set up correctly and stick with your investment strategy.

    Merowig, rgfuller and Gordon Gekko like this.
  2. North Star

    North Star Frequent Poster

    Hi Fella , Dub Nerd, can we look at some of the various issues which influence your preference for investing via net funds i.e you have already paid your income tax?

    1. Liquidity - yes this is a fair point in that pensions are by design a long term savings plan. With a bit of ingenuity an adviser might in most cases be able to arrange access from age 50 but on balance I fully agree that liquidity is valuable and that not all your funds/savings should be directed to pensions
    2. Govt theft via the pensions levy - Yes agreed that this was a hugely damaging decision. However I wouldn't take a decision that wasn't in my best interests just because of this. To explain - unfortunately any future Govt. if required can attack savings/wealth/income and assets via the tax system. They always have this right - just look at the level of DIRT tax.. So in an extreme case my funds could be hit by a future Govt. irrespective of whether it is in pension, bank deposit or stock broker account. If we open up a foreign bank deposit for clients we are required to inform Revenue so I dont think there is any reasonable way to avoid the tax net
    3. Poor investment returns - I cant accept this as a reason not to invest in a pension if you are comfortable investing your own net funds. You can select either a self administered pension or indeed a self directed pension with a life company and manage your own pension via EFTs directly held equities property etc. Only with the pension as opposed to net funds you have a tax benefit i.e you get more invested now to compound up to a larger amount over time and you defer paying tax for many years i.e. the gross roll up effect.
    4. What about costs? - well there are costs in a pension wrapper but compare and contrast via non pension investing. You can get pensions with 100% net allocation and 0.5% annual charges ( subject to meeting certain criteria) , some self directed pensions will have an annual charge of say between 0.75% to 1% but this is offset by very low trading costs where you can trade equities/etfs for a max cost of €75 per trade. For active traders this low transaction costs offsets part/all of the annual charge. Self administered schemes can cost as little as 0.25% per annum. So yes there are costs but given the tax benefits the cost/benefit analysis in my opinion comes down strongly in favour of pensions when the tax break/tax deferral is added to the mix
    5. Lack of transparency across the pensions industry - well you have a fair point here and I cant argue with you. However you can deal with this - either do your own due diligence and keep asking the hard questions of any adviser and use a fee based adviser if you need advice. Having looked at bigger markets such as the UK and U.S a pension wrapper for a 0.5% annual charge is competitive. If you dont need on-going advice from an adviser then just dont pay for any.
    6. Paying tax at marginal rate in retirement - well you have the tax free cash element which is valuable on its own. You may also have the ability depending on your circumstances to pay little or no tax on pension income you draw down. However even if you pay top rate tax on all income taken in retirement - you still have had the benefit of tax fee growth in the fund whilst contributing, you can enjoy tax free growth in your fund ( ex income drawdowns ) in retirement and for generational planning you can pass on these assets at either 30% or CAT levels of tax i.e well below marginal tax rates.
    7. Annuity rates are unattractive - agreed and the combination of financial repression and increased longevity means that this isnt likely to improve soon. However you can move your pension to an ARF/AMRF and are not forced to buy an annuity.
    8. You didnt mention this - but due to bail in risks any deposits in banks above the guaranteed amount are at risk of haircuts. This is not theoretical and there are recent precedents in both Cyprus and Denmark
    So I fully accept the liquidity preference, but once you have adequate liquid investments then in my view pensions are attractive/preferable.

    There is a negative perception in regard to pensions, but attractive low cost options are available and the clear and compelling risk that we may have to provide more/all of our income in retirement due to unsustainability of the State pension arrangements means that you really need a good reason not to invest in a pension.
    AAM is a great resource to get different views and add to all our knowledge so we can hopefully make well informed choices.
    All the best Vincent
    mtk, Merowig, Firefly and 2 others like this.
  3. dub_nerd

    dub_nerd Frequent Poster

    It's a bit like building a house or any other big endeavour that you don't get to do very often, and probably aren't very well educated about when you first set out. Looking back it's easy to think of things you might have done differently. Personally I'm just happy I noticed the pension didn't pass the "smell test" and contributed as little as possible to it.
  4. Gordon Gekko

    Gordon Gekko Frequent Poster

    Which is absolutely the wrong thing to do.

    A pension should be the cornerstone of any family's wealth.
    mtk and Merowig like this.
  5. Merowig

    Merowig Frequent Poster

    People are responsible for their own happiness/future.
    In my opinion having a pension is a necessity unless you want to risk later poverty.

    The advantages are obvious and the illiquidity even protects against using the money against holidays etc...

    If people want to behave differently - c'est la vie.
    mtk likes this.
  6. dub_nerd

    dub_nerd Frequent Poster

    That amounts to saying that people's money needs to be withheld from them for their own good. I don't need to be "protected" from spending money on a holiday I can't afford. And I'd prefer not to be "protected" from having the money in case of an emergency. There are different ways to avoid poverty when you are no longer earning. A pension is just one of them -- one which is particularly inflexible and bad value for money at present, in my opinion.
  7. Merowig

    Merowig Frequent Poster

    Fees? There are low fee options available (0.75% + x or 1% AMC and no contribution charges)
    Performance? I am happy/ok so far with the performance - if you are holding cash or bonds instead of equities and you have 20-30 years still time till reaching pension age it is your own fault
    Annuity? Yes they are generally bad here - but you don't need to buy from the pension provider - you can shop around - or transfer the whole pension pot at a later date to a different country where the annuities are better...
    The withholding of money is a trade off as you get tax relief - otherwise it wouldn't make sense to give here the tax relief in my opinion.

    For emergencies I have a seperate fund. Tapping into retirement savings/investments because you need emergency money and were too lazy to have a seperate emergency fund is reckless. (though it is your money not mine)
    If you want to invest yourself - this is possible through self administered funds.
    If you hold an investment portfolio outside a pension wrapper you are taxed "to death"
    Liquidity: people in Greece and Cyprus were not able to tap in easily in their cash / move it around at the height of the crisis. Return on investment on saving accounts is as well really bad (plus 41% DIRT)
    As said in other threads here there are options to move your pension pot abroad (PRSA easier / Occupational Pension Schemes more difficult).

    Man forges his own destiny.
  8. TrundleAlong

    TrundleAlong Registered User

    Back in 2000 through my employer I invested €30k in an AVC when taking a redundancy package.
    Today, this is worth €54k.

    The An Post Savings Certs/Bonds were paying attractive rates back in 2000, until a few years ago.

    Would anyone have any idea, how much my €30k would have roughly earned me with An Post over the same period.

    I understand that I received some tax relief on the lump sum that I invested at the time.
  9. dub_nerd

    dub_nerd Frequent Poster

    Last edited: Nov 7, 2016
    I found the best place to look up historical state savings rates was where I searched for Savings Certificates. You can
    find rates going back to the foundation of the State (and some of them are eye-watering, e.g. 40% after 5 yrs 9 months as recently as 1994). Here are the last seven issues:


    Buying €30k of Savings Certificates in 2000 and reinvesting the return would have looked something like this:


    So your €54k from the AVC was significantly better and, if you got tax relief on the original €30k, even better again.
    Last edited: Nov 7, 2016
    mtk likes this.