3k extra payment - put into pension

Bulmers

Hi,

Looking for some advice, i am due a 3k extra payment from my job this month ( related to a large project we done and hit targets ) anyway we have the option to either take the payment or put all or some of it into our pensions.

I know pensions are in a bad place but if i put it into pension, it's all tax free + my pension payments are down as i missed a few yrs having one due tio a previous job.

So would it be wise to just put it into my pension fund, or just take the payment and get hit with the tax?

cheers

homer911

Putting money into a pension is always a good idea - especially if you have neglected it in the past. Can you afford to manage without this extra cash?

Be aware that if you put the whole amount into your pension, you will still receive an element of it due to the tax relief - depending on your marginal rate and your total net relevant earnings, you could pay quite a bit more than this into your pension and still have a neutral impact on your net pay - You should ask your payroll dept to do the calculations for you and they can advise, if this is the option you choose.

With the depressed state of the investment market, it could be a good time to maximise future returns (equally markets could still go down..)

Bulmers

tks..yes i can do without it at the moment so that's why i'm thinking of putting it into the pension, as i said i missed a year paying pension due to another job i had so am trying to make up that year, the 3k would more or less make this up for me

I've been told aswell that because stocks and property etc are so low, that when you invest money in a pension now, you can accumulate more of these in your pension fund, so that when the recovery happens, the pension will be have more value?..is this true, or am i half right!..

tks

kmick

Yes put it in. Without going into too much detail its tax efficent.

eagle_i

My advice is put it into your pension, you get full tax relief on that money going into the plan.

If you were to take the bonus as income it will be taxed, assuming you are on the top PAYE tax rate of 41% plus PRSI and Levies your overall tax deduction will be c. 47%, in other words after tax your €3,000 bonus will be €1,590 into you hand. Whereas, by putting it into the pension plan, you will get a €3,000 investment into your pension and receive PAYE/PRSI tax relief of €1,410.

Homer, is correct in that you could increase that contribution with little effect on your take home pay. Effectively, what Homer is saying is that you could gross up the €3,000 by the tax relief to bring the €3,000 investment up to €4,410. The additional €1,410 can be paid the same time as the €3k, the best way of doing this is by salary sacrifice of the €1,410 this way you get the tax relief at source and saves you claiming the relief back later. Here are the steps:

1. Instruct the €3,000 bonus to be paid to your pension plan.
2. At the same time instruct the salary sacrifice of the tax relief element of c.€1,410 for that month, which is to be paid into the pension plan with the €3k, therefore you have a total payment of €4,410 going into the plan.
3. You will now receive tax relief at source on the €4,410 at c. 47%.
4. Therefore to get €4,410 investment the effect on you take home pay is as follows:

a. The €3,000 has no effect on you take home pay, this is a once off payment and in effect you never had this as it goes straight to your pension plan.
b. The salary sacrifice of €1,410 is deducted from your salary before you are assessed for income tax, this way you get the tax relief immediately in respect of the PAYE and PRSI, which for someone on the higher tax bracket total c.47%. Therefore, the cost to you to put the additional €1,410 is €747.

In summary by gross up the contribution of €3,000 to €4,410 the effect is your salary for that one month will be down €747!

If you are on the lower tax rate, the same principle applies only that it is more advantageous to those at the higher tax rate.

The above assumes that your contributions do not exceed the revenue contribution limits which are age based. Also, I assume your employer is willing to allow the salary sacrifice; you should discuss this with your employer before instructing. In addition, it is probably best to sit down with the pension scheme adviser, to check the investment options and also to confirm the cost of entry for this once off single premium. The adviser will be able to confirm that you are not exceeding the revenue limits on your contributions.

Going back to you other query regarding the fact investment funds may be down. Your proximity to retirement will as such dictate the investment area you should be looking at, rule of thumb is that in the last 10 - 5 years to retirement you should be gradually directing your funds to a safe investment area. Those with 15, 20 or more years to retirement have time on their side to invest in medium to high risk areas, but one should be prudent and spread the risk, obviously not all eggs in the one basket. With regard to investment performance in an ideal world we would love to pay into our pensions and investments when the fund is suppressed, allowing one to buy at a low price. Then as we get close to retirement, for that price to rocket straight up and reap the benefits of having bought at low price. That is an ideal world, last time I check Ireland is far from ideal, although S&P certainly has an optimistic view in the news this morning. Sorry for the waffle in short the answer to query about buying when funds are down is yes, buy low and sell high!

Hope that hasn’t confused you too much?

Bulmers

tks for the answer, honestly am a little confused as my knowledge in the pension area is small, even though been to company presentations, never really understood it, but i do pay into pensions and have 3 different ones from different companies from my working life, but i need to look into it more now, 33, getting old!

appreciate the feedback, i'll have to re-read it few times to get the penny to drop but much appreciated.

cheers

eagle_i

eagle_i wrote: »

In summary by gross up the contribution of €3,000 to €4,410 the effect is your salary for that one month will be down €747!

Bulmers, let me put it another way. If you were offered an investment totalling €4,410 but it is going to cost you €747, will you buy?

I appreciate it is confusing that is why it is best to get some advice either from your employer's pension consultant or an independent adviser. The employer's pension consultant is your first port of call, as there is no fee for their advice. If you are not getting any joy from him/her, then perhaps seek the advice of a independent pension adviser, there will be a small charge, but you will get independent advice and personalised plan to achieving your future goals/requirements.

Kennie1

Bulmers wrote: »

Hi,

Looking for some advice, i am due a 3k extra payment from my job this month ( related to a large project we done and hit targets ) anyway we have the option to either take the payment or put all or some of it into our pensions.

I know pensions are in a bad place but if i put it into pension, it's all tax free + my pension payments are down as i missed a few yrs having one due tio a previous job.

So would it be wise to just put it into my pension fund, or just take the payment and get hit with the tax?

cheers

If your employer pays you this bonus through payroll they will have to pay employer PRSI of 10.75% on the 3K. If you put it into your pension your employer will not have to pay the PRSI on it if you pay a pension contribution through the net pay system. A lot of employer's encorage employee's to take bonus through their pension as it costs them less. So I would ask your employer to contribute €3322.50 to your pension as it would cost them the same as if they were to pay it through payroll. Regardless of this I totally agree with all the other posters...put it in your pension as you will be glad you did when you retire!!!

Kennie1

eagle_i wrote: »

1. Instruct the €3,000 bonus to be paid to your pension plan.
2. At the same time instruct the salary sacrifice of the tax relief element of c.€1,410 for that month, which is to be paid into the pension plan with the €3k, therefore you have a total payment of €4,410 going into the plan.
3. You will now receive tax relief at source on the €4,410 at c. 47%.
4. Therefore to get €4,410 investment the effect on you take home pay is as follows:

Your under selling it again eagle_i, don't forget that PRSI/health levy is now 8% so total tax reliet at source is 49%:D

eagle_i

Kennie1 wrote: »

Your under selling it again eagle_i, don't forget that PRSI/health levy is now 8% so total tax reliet at source is 49%:D

Thanks Kennie, was in too much of a rush to look up the precise % figure, rather than over playing it I worked on an example of c.47% (as in circa/approx.). It was really just show how you can work the tax relief system to your advantage with little affect on your take home pay. Nothing new in the concept, just something which is not widely used! Anyway I know I can rely on your good self to keep me on my toes!;)