Start a pension now (32 year old) or wait until financial situation more stable?

Woogie

New Member
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2
I'll try to keep this as short as possible.
I am 32 years old (33 in October) and 2 years into a small business that is established as a Ltd. company. I own a 50% stake in the company. 2021 will be the first profitable year (small profit) and to date I have taken no income from the business. Due to some contracts that were recently signed the business will start making more money from now on and I expect my salary from this company to rise to about 25K in 2022 and up to about 50K in 2023. There is significant growth potential for the business but for long term planning purposes I am keeping my figures very conservative.

Separately I do freelance work online as a sole trader. Income c. 30k but took a hit due to covid in 2020 down to 20K.

So in terms of combined income from freelancing and the ltd. company, in 2021 I will make about 30K, 2022 about 55k, and 2023 onwards about 80K.

I have been so focused on getting the business off the ground and keeping it alive through covid that I am only now starting to think about planning for the future and AAM has been a great resource because it all seems very complicated/lots of jargon etc. that I need to wrap my head around.

One thing that comes up again and again is the maxim of "the earlier you start your pension the better" so I don't want to let another few years slip by without setting something up. Right now my income is low and not guaranteed (i.e I don't make a set amount each month) so I am anxious about setting up some complex pension structure only to run into a rough patch with the business and I can't make the necessary contributions. Having said that, I don't want to miss out on long term growth because I waited and waited for the perfect time to start a pension.

I know that the executive pension via the ltd company has lots of benefits but as far as I can make out you really need to be making a large salary for it to be worth the effort. I am planning to get to a sizeable salary as the business grows over time but right now I am operating in the 30 - 80k range over the next 3 - 4 years so I suppose my question is - Do I set up something small and straightforward now like a PRSA and put in a few grand for my 2020 tax return and another few grand for 2021 when the time comes and then maybe switch to an executive pension if/when my salary gets to a suitable level? Or should I hold off for a couple of years, put the cash in savings and start the pension when my financial situation has stablised?

Thanks!
G.

PS. Other info that might be relevant: Single, no debt, c. 20k savings, no mortgage.
 

Brendan Burgess

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Forget about a pension until your business is well established and resilient.

In the early stages of a business cash is king. You will have some difficult patches and during that time, you will be glad to have cash. If you have some personal savings, you won't need to take money from the company.

The earlier you start investing the better. But that goes for investing in your business as well. If you need to invest e.g. to take on an employee who won't contribute to profits immediately, you will be able to do so if you have cash. If that cash is tied up in your pension scheme, then it will be no use to you.

You say you have no mortgage? Is that because you own your home mortgage-free or because you don't own a home. If you don't own your own home, then that is the next priority after your business.

Whenever you do set up a pension, it should be set up via pension contributions from the company. No Employee PRSI - much better than taking out a net salary and then claiming tax-relief on your pension.

Brendan
 

Woogie

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You say you have no mortgage? Is that because you own your home mortgage-free or because you don't own a home. If you don't own your own home, then that is the next priority after your business.
Firstly, thanks for the advice Brendan.
To answer your question above, I don't have a mortgage because I don't own a home - it is definitely at the top of my list of priorities alright.
 

Zenith63

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833
I was in a similar situation at your age and chose to invest in the business and then a home, putting a pension on the long finger - basically Brendan’s advice above. It was the right decision I believe.

When you do decide to setup the pension, an executive pension is the way to go. There’s nothing big/complex about them compared to a PRSA, you can literally ring the likes of Zurich, fill in a form and have it setup a week later. One of the benefits is the company will be able to make special contributions for the service you’ve built up. In my case (had the company had the money) it could make a frankly astounding contribution of €750k in one go. So while you will have missed out on the growth in the pension by waiting, you won’t have missed out on yearly contribution limits really.
 

Brendan Burgess

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So while you will have missed out on the growth in the pension by waiting, you won’t have missed out on yearly contribution limits really.

That is a really important point which I had forgotten to mention and another good reason for not starting a pension.

When I recommend to PAYE employees that they should not start a pension until they have bought a home and got their mortgage down to a comfortable level, the objection is always "Well they are limited to contributing 20% each year. If you don't use it, you lose it." I don't agree with this objection, but in any case, it does not apply to limited companies.

Brendan
 

NotMyRealName

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54
I took exactly the same approach as Zenith63..
As business improved I invested in exec pension by lump sums before year end so it minimised corporation tax for the company after we knew our cashflow and profit/loss position.
 

Marc

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I started paying into a pension when I was 22 and it was by far the best financial investment I have ever made.

so you are already 10 years behind me.

I set out some mathematical arguments, you could almost call them proofs for early contributions in this post



another very important factor to consider is that a very high percentage of small businesses fail. Taking money from your own business and moving it off balance sheet and into an independent pension is extremely prudent.

buying a home to live in is one thing but it’s important to make the distinction between a home to live in and a house as another source of wealth creation.

i bought my first house aged 24 and sold it 6 years later with a modest increase of about 16k having spent at least that much on it.

My second home required a very substantial increase in mortgage (3 times as large) and over the next 10 years netted me a 100k equity but again only after spending around 50% of that on repairs and improvements

my conclusion is that a home is somewhere to live whereas a pension is somewhere to invest.

we need both in life and the sooner you start saving into a pension the more financial security you will have in later life.

its really not a binary either or decision
 
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Brendan Burgess

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Marc

The OP has set up a new business. That will be the source of his wealth.
i bought my first house aged 24 and sold it 6 years later with a modest increase of about 16k having spent at least that much on it.

My second home required a very substantial increase in mortgage (3 times as large) and over the next 10 years netted me a 100k equity but again only after spending around 50% of that on repairs and improvements

I don't know where you lived. But in Ireland for most of the time, the cost of renting property is much higher than the cost of renting money. And that is before the return from the increase in house prices. In other jurisdictions, renting property may well be better than buying property, but not in Ireland.

I set out some mathematical arguments for early contributions in this post

I have repeatedly pointed out that you will be richer if you invest your money rather than spend it.

But that does not mean that you have to invest in a pension. Investing in a business or investing in a house is a much higher priority for people.

Brendan
 

NoRegretsCoyote

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That will be the source of his wealth.

There is a huge range of likely outcomes for the value of an own business in 20 years. OP could be a billionaire or bust.

Years ago I worked for a family business (related to construction) in the early 2000s. They lived the high life and didn't see the bust coming. They lost the business and it wasn't pretty.

But that does not mean that you have to invest in a pension.

OP would be wise to invest a small share of his income already in a pension, even just three figures a month.
 

Brendan Burgess

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Hi Coyote

There is a huge range of outcomes. But the biggest risk to a successful outcome is what causes many businesses to fail, a lack of capital. If he locks away his cash in a pension fund, he increases the risk of failing.

It really is that simple.

Investing in a pension at this stage is wrong. And the folk wisdom of "invest a small amount" is wrong as well. It's better to use reason and analysis instead of folk wisdom or custom and habit.

Brendan
 

Brendan Burgess

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OP would be wise to invest a small share of his income already in a pension, even just three figures a month.

That is a conclusion. You have provided no rationale for it. If you have an argument, then by all means, make it.

If it's wrong to invest in a pension, it's wrong to invest a small amount.

By the way, it's a common error. Do a little bit of everything. It has a comforting sound to it. But there is no rationale behind it.

Brendan
 

NoRegretsCoyote

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If you have an argument, then by all means, make it.
Sure, read here.

People are wise to adopt a diversified investment strategy. Own business is extremely high risk (and high reward), a pension much more predictable returns. If I had 10 eggs in OP's situation I would put nine into the business and one into a pension.
 

Brendan Burgess

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44,150
People are wise to adopt a diversified investment strategy.

Why? To reduce risk.

In this case, the way to reduce risk is to make sure he has enough cash to survive the early years of his business.

Diversification is not a god and is not always appropriate. For example, a young person with a regular income has an absolute priority to buy a home. "diversifying" into a pension is completely the wrong idea. Even 10% of his savings. The risk they face is the very high cost of rent and the risk of not being able to get on the housing ladder. "Diversification" into a pension increases risk instead of reducing it.

Brendan
 

Zenith63

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833
FWIW in my case I invested every penny I had in the business over 10 years, even a small pension contribution would have made a real difference in my ability to support and grow the business.

I was well aware that most new businesses fail and this was a risky strategy, so my 'rule' was to hold off on a pension, health insurance and other niceties until the company was generating enough profit to do it or I hit 40, at which point if the business was successful I'd have the money to load the pension up quickly or if not I would get a job and start a pension that way.

There's simply no low risk way to start a business unless you are already wealthy, so with that option off the table I felt this was the best way of managing the level of risk. It worked out well, I wouldn't do it differently if I had to again.

Years ago I worked for a family business (related to construction) in the early 2000s. They lived the high life and didn't see the bust coming. They lost the business and it wasn't pretty.
I'm only suggesting that in the growth phase of a new business you can take the risk of not contributing to a pension to build wealth in the business. As soon as the business is out of that initial growth phase and making profit, I think you should start putting money into your PPR and a pension just as a non-business owner would. One side benefit of doing so in this scenario is that PPRs and pensions are easy to carve out of any personal guarantees you take on to support a growing business.
 

Brendan Burgess

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edit: Crossed with Zenith who is saying something similar.

Just to be absolutely clear about the different stages of business development.

After 5 years, when the OP's business is up and running and very profitable, he should diversify.

I am astonished at how many people with very successful businesses have all their eggs in it. At that stage, they should allow for the fact that something might go wrong, and they should have assets outside the business.

This investing outside the business is not that easy to do. You have a profitable business. You think you are in control. You borrow a lot to expand the business. Then a recession hit, and you go bust.

Brendan
 

LS400

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663
I think Marc is right, starting a pension at 22 is great.

10 years on though, and building up a company, while also being mindful of getting on the property ladder, it doesn’t make an iota of sense. You either commit 100% into the company or it risks failure.

If you’ve the confidence in the company to put 10 eggs into it, put in the 10. Dropping one out will have little to no benefit in making its own omelette.
 
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time to plan

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Messages
113
I was in a similar situation at your age and chose to invest in the business and then a home, putting a pension on the long finger - basically Brendan’s advice above. It was the right decision I believe.

When you do decide to setup the pension, an executive pension is the way to go. There’s nothing big/complex about them compared to a PRSA, you can literally ring the likes of Zurich, fill in a form and have it setup a week later. One of the benefits is the company will be able to make special contributions for the service you’ve built up. In my case (had the company had the money) it could make a frankly astounding contribution of €750k in one go. So while you will have missed out on the growth in the pension by waiting, you won’t have missed out on yearly contribution limits really.
Same here. I'm 50 and this year set up an Exec Pension. I am putting 3.5k per month in and plan to increase this next year or pay off mortgage (that is an Ecumenical Matter...) I should end up with a decent set of pension pots but I have no regrets for delaying pension while building up business.
 
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