Thinking of starting a pension at 26

Stabshauptmann

I'm thinking of starting a pension, because it looks like a good way to save money (tax relief and employer contributions) however I really have no long term plan and I'm concerned that I wont be able to access this money once it goes into the pension pot until I retire.

This is essentially correct, right?

D3PO

yep pretty much.

ANXIOUS

Unless you leave the scheme with less than two years service. If you do you'll be entitled to a refund of contributions less 20% for tax.

srsly78

Stabshauptmann wrote: »

I'm thinking of starting a pension, because it looks like a good way to save money (tax relief and employer contributions) however I really have no long term plan and I'm concerned that I wont be able to access this money once it goes into the pension pot until I retire.

This is essentially correct, right?

Makes the most sense if you pay tax at the marginal rate. Adjust your contribution to reduce your income to optimal level (ie just when marginal rate kicks in).

Once you see the amount of levies and fees etc applied to pension you may change your mind.

Stabshauptmann

So if I am taxed at the marginal rate can I do the following:

Pay into a pension and receive relief at 41%, and then exit the scheme within two years and receive a refund of contributions which will only be taxed at 20%?


No pension, get paid 100eur, get taxed 41, net 59.
Pension, contribute 100eur, no tax, withdraw from scheme inside 2 years, get taxed 20%, net 80.

Is that correct?

srsly78

No. http://www.revenue.ie/en/tax/it/reliefs/pension-contributions.html

For starters you don't get relief on pension contributions. Instead you reduce your taxable salary, which in effect may give you 52% relief (income tax +prsci + usc).

There are complicated rules that apply when exiting schemes, really needs professional advice.

Stabshauptmann

srsly78 wrote: »

No. http://www.revenue.ie/en/tax/it/reliefs/pension-contributions.html

For starters you don't get relief on pension contributions. Instead you reduce your taxable salary, which in effect may give you 52% relief (income tax +prsci + usc).

There are complicated rules that apply when exiting schemes, really needs professional advice.

Reducing the amount of tax I pay because I make pension contributions is not tax relief on pensions . Sorry, what?



ANXIOUS
If I contribute 100eur to a pension, that 100eur is not taxed. If I withdraw from the pension inside two years and get a refund, you are saying I will be taxed 20% and so I will net 80eur of the 100eur I was paid.

If I do not have a pension, my 100eur is taxed at 41%*, and I received net 59euro of the 100 I was paid.

Are you saying that if I leave a pension scheme within two years I will receive a refund of my contributions and effectively escape tax of 21%

* maybe PRSI and USC too but lets be conservative - it doesnt materially affect the math

srsly78

Yes there is a tax dodge here. The only question is whether you will also get the employers contribution, this may depend on a vesting period in the contract - it might only "vest" after 2 years of service.

Also, the amount you can contribute is limited by your age, find that limit and max it out if you plan on quitting.

Reducing your salary is BETTER than getting tax relief. 52% is greater than 41%.

Relevant link -> www.revenue.ie/en/about/foi/s16/pensions/chapter-12.pdf

ANXIOUS

Stabshauptmann wrote: »

Reducing the amount of tax I pay because I make pension contributions is not tax relief on pensions . Sorry, what?



ANXIOUS
If I contribute 100eur to a pension, that 100eur is not taxed. If I withdraw from the pension inside two years and get a refund, you are saying I will be taxed 20% and so I will net 80eur of the 100eur I was paid.

If I do not have a pension, my 100eur is taxed at 41%*, and I received net 59euro of the 100 I was paid.

Are you saying that if I leave a pension scheme within two years I will receive a refund of my contributions and effectively escape tax of 21%

* maybe PRSI and USC too but lets be conservative - it doesnt materially affect the math

That's using simplistic workings but basically yes. What I do is put in the maximum avc's as well. You have to leave employment not just leave the scheme.

ANXIOUS

Also don't forget you get the returns as well.

Stabshauptmann

Pension sorted! Now to change jobs every two years

MagicMarker

Why not let us in on the details? So someone with the same question as you had gets an answer?

skippy2

That is all a bit simplistic really..............Dont forget you get hit with lovely management fees etc early on. Not much point really in starting a pension if the intention is to withdraw in that 2 year deadline. The whole idea is to save over a long term........I'm sure there4 are other ways to make a return if you dont want to commit to a pension. Have been contributing over 20 years and now am i glad i have something to protect me in my later life all going well.....But so far so good

ANXIOUS

It's simple really, you need to be in the higher tax bracket to benefit. You can contribute a certain amount of your salary based on your age and to a maximum salary of €115k tax free. You also need to be only a member of the scheme for less than 2 years, you can be in the company for longer but won't get the refund till you leave employment. So say I'm John on €100k and 40 I can pay €25k into my pension and get tax relief at source, I max this out for 1yr and 11 months. So I've contributed 48k, I leave the company I've an option to take a refund of my contributions and any investment growth as a lump sum taxed at 20% rather than getting taxed at 40% odd. So in this instance I would be better off about €9,600 not including any investment growth or losses. This is just a simplistic calculation so nobody jump on me and also it's important to note you lose the employer contributions.

If your doing it make sure you put it in bonds and cash if your worried about a loss, to the poster that mentioned fees most large companies don't have set up charges.

hfallada

OP would you not consider saving for a deposit for a mortgage? I would view that far more important than a pension for someone your age. You wont need a pension for 40 years,but you will need a deposit maybe in 5-10 years. I would save for a deposit before saving for a pension

srsly78

The whole point of this thread is that he can exit the pension fund before 2 years and then have loads of money - which can be used for deposit or whatever.

Liam D Ferguson

srsly78 wrote: »

The whole point of this thread is that he can exit the pension fund before 2 years and then have loads of money - which can be used for deposit or whatever.

While the tax benefit of getting tax relief on a pension contribution and then getting a refund taxed at a lower rate is undeniable, I'd consider it a bit strange to be planning an entire change of jobs just to avail of it.