Key Post Should you contribute to a pension fund if you are in danger of breaching the €2m limit?

Fergal19

Registered User
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58
I think the pension option should be the preferred choice even if above the limit and the contributions will be subject to the CET. I don't understand why it is so clear to stop funding the pension.

For example look at a 100k contribution to a pension vs a 100k in salary payment. After the CET there will be 60k in the ARF. Now this will be subject to the drawdown say at 4%. So gross drawdown of 2400 with circa 1200 in tax and 1200 in net income. This however can be offset by say 4% growth in the fund annually. So at the end of the year the ARF is worth 60k and I have 1200 in my personal bank account. In effect this happens each year with my personal bank account increasing by 1200 and the ARF balance staying at 60k. In essence the tax of this option is the 40k CET?

If I take it as income I will have 48k net. Invest this again at say 4%. We will say income generating assets so this will be a net 2% growth annually or 960. So here I have 48k and my personal bank account is increasing by 960 each year. Again in essence the tax of this option is the 52k PAYE?

In option 1 I have paid 40k tax, receive an amount of 1200 annually and have a 60k asset while in option 2 I have paid 52k tax, receive amount of 960 annually and have an asset of 48k.

Surely this means that the pension is still the way to go even above the 2.15m limit? Am i missing something?

Also there is a 10.75% employer PRSI saving with the pension option.

Finally if we delay crystallisation of the pension we get to invest the CET at 4% tax free. This growth further reduces the effective tax rate.
 

Gordon Gekko

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3,644
Very interesting analysis Fergal19. However, you are not comparing like with like. It’s €48k in one’s back pocket versus €60k trapped in an ARF. That’s the key point.
 

Fergal19

Registered User
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58
But is it not just an asset either way?

The majority of ARF holders wont or don't want to "untrap" their ARF. This is especially the case for people that are at the maximum limits. Ultimately it just forms part of their estate so I don't understand the "trapped" logic.
 

SBarrett

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3,096
And if an Employer is contributing, then it probably makes sense to keep accumulating even if this exceeds the €2.15m.
I wouldn’t have thought so. Better to just take extra salary, if your employer allows it.
I think the approach here is it's free money anyway, so even if you get an effective tax rate of 70% of it, you are still getting 30% net. Of course, if they will pay you the salary, then go for it.


Steven
www.bluewaterfp.ie
 

SBarrett

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3,096
Business owners will also have the CGT option to consider.

Business owners should be planning lots of ways to get excess cash out of the business. Retirement relief being one of them, if applicable. Getting a spouse and children on the payroll and getting pensions in place for them.

The €2m threshold shouldn't be sneaking up on you, so there is ample time to plan for these things.


Those in the public sector have a lovely option of paying the excess through what is effectively a 20 year interest free loan. And if they die within the 20 years, the debt dies with them.


Steven
www.bluewaterfp.ie
 

EmmDee

Registered User
Messages
189
What happens with the pension limit in a situation where a couple separate? So for example, if there is a pension pot of €3mm in one person's name and as part of a separation agreement the pot is divided equally (€1.5mm each), does each person still have a €2mm limit on retirement or does the limit get split as well?
 

Fergal19

Registered User
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58
What happens with the pension limit in a situation where a couple separate? So for example, if there is a pension pot of €3mm in one person's name and as part of a separation agreement the pot is divided equally (€1.5mm each), does each person still have a €2mm limit on retirement or does the limit get split as well?
The BCE of the pension scheme is calculated as if no PAO took place. ie you add back the amount that was transferred out. Divorce in some cases can also solve the SFT problem :)
 
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EmmDee

Registered User
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189
The BCE of the pension scheme is calculated as if no PAO took place. ie you add back the amount that was transferred out. Divorce in some cases can also solve the SFT problem :)
Could I get a translation of the TLA's :)
 

Gordon Gekko

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3,644
Could I get a translation of the TLA's :)
BCE is Benefit Crystallisation Event - When you access pension benefits or transfer them overseas

PAO is Pensions Adjustment Order - When during a marital breakdown part of one spouse’s pension is allocated to the other spouse

SFT is Standard Fund Threshold - The maximum total pension benefits someone can accumulate nowadays, €2m
 

EmmDee

Registered User
Messages
189
BCE is Benefit Crystallisation Event - When you access pension benefits or transfer them overseas

PAO is Pensions Adjustment Order - When during a marital breakdown part of one spouse’s pension is allocated to the other spouse

SFT is Standard Fund Threshold - The maximum total pension benefits someone can accumulate nowadays, €2m
Thank you
 
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