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Pension question

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  • 10-05-2013 9:38am
    #1
    Baby Brain
    Registered Users Posts: 10 ✭


    I'm setting up an execution only pension.

    Just going to pay 100pm by DD into it (in paye employment).

    Will this mean 169.49 will actually go into the fund assuming I'm paying tax at 41%.

    Or does it mean I'll be paying 1,200e p.a then claim tax relief on this getting a 492e tax refund at the end of the year (assuming i don't alter credits)


    So what i'm getting at is to I change the DD to €170 if i want to really cost myself €100 per month out of my net wages?


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    #2
    roro2
    Registered Users Posts: 412 ✭✭roro2


    If you specify €100pm to go into the fund, this will be what happens - the effective cost to you will be lower after the tax relief. If you want to put a net €100pm (after tax relief) into the fund - you need to specify a higher monthly payment.


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    #3
    coylemj
    Registered Users Posts: 25,437 ✭✭✭✭coylemj


    Baby Brain wrote: »
    So what i'm getting at is to I change the DD to €170 if i want to really cost myself €100 per month out of my net wages?

    If the money is not going straight from your payroll into the pension fund before tax is calculated, the answer is 'yes'. You claim the tax & PRSI relief afterwards and note that it's two separate exercises.


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    #4
    Alan152
    Registered Users Posts: 61 ✭✭Alan152


    Hi Baby Brain

    If it is by direct debit what you specify will be apid in. Then you will have to claim all the tax back in bulk. Presuming you do this for a year, €1,200 will go into the fund. You would get back €492 from the revenue assuming your a 41% tax payer.

    Hope this makes sense?

    thanks

    Alan


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    #5
    Bren157
    Registered Users Posts: 44 ✭Bren157


    Hi Baby Brain. Is it mandatory from your employment that you take this action? I assume as you are paying by debit that it is not? If so, you are probably wasting your time opening a pension account at €100.00 per month. No disrepect to the budget at all; but it will buy you nothing at retirement.


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    #6
    coylemj
    Registered Users Posts: 25,437 ✭✭✭✭coylemj


    Bren157 wrote: »
    Hi Baby Brain. Is it mandatory from your employment that you take this action? I assume as you are paying by debit that it is not? If so, you are probably wasting your time opening a pension account at €100.00 per month. No disrepect to the budget at all; but it will buy you nothing at retirement.

    We all know about management fees and all that but why are you suggesting that he will have absolutely nothing from that fund when he retires?


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    #7
    Bren157
    Registered Users Posts: 44 ✭Bren157


    Hi Coylemj; not that he would absolutely nothing; I said it would buy him nothing at retirement. If Baby Brain is thirty yrs old and pays €100pm to 65yrs, that is total of €42k. Less charges, and maybe some growth...in 35yrs time, inflation, lifestyle, etc would suggest his pension fund would not even buy his weekly groceries.


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    #8
    roro2
    Registered Users Posts: 412 ✭✭roro2


    Bren157 wrote: »
    Hi Coylemj; not that he would absolutely nothing; I said it would buy him nothing at retirement. If Baby Brain is thirty yrs old and pays €100pm to 65yrs, that is total of €42k. Less charges, and maybe some growth...in 35yrs time, inflation, lifestyle, etc would suggest his pension fund would not even buy his weekly groceries.

    You can't make no allowance for growth over a 35-year horizon, but talk about inflation eroding purchasding power in the same sentence. In what previous 35-year period has inflation exceeded investment growth?

    It mightn't be enough for a full retirement income at that payment rate, but the OP's still much better off than doing nothing or putting the €100 in a deposit account.


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    #9
    Bren157
    Registered Users Posts: 44 ✭Bren157


    If you were to assume that net growth after all charges, comissions etc was around 4-5% pa and inflation was around 2-3% which is where ECB would like under normal conditions, that gives the pension a true net growth uplift of 2pa...IF the fund did a steady consistent annual growth. But it wont, it never does because we know from history that fund values fall and rise in any given year, let alone over 20-30yrs. Annual net growth of 2-3% consistent for 4-5yrs could and in the past has been wiped out within weeks if there is an event. So in practice, if you balance out inflation against net growth or pehaps allow for a reasonable net growth marging of 1-2% over costs and inflation, the fund (I am guessing here...) may be worth perhaps €60-70k after 35 yrs and having paid €42k. Today based on interest rates, that would buy about €2k a year in pension and that is taxed. Hence it would not even pay for your groceries...


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