Pension Contributions (Maths check)

Alkers

I'm trying to work out how much of an AVC I can afford and would appreciate someone checking my maths for me:

I earn €37,000 pa currently so €3,200 of my income is taxed at 40%.

I understand I can get tax relief on my pension contributions up to 15% of my income this year (I'm 29) and up to 20% next year.

I currently pay 2% of my salary into my pension and my employer pays 4%. Next year this will change to 3% and 6%. This leaves 9% and 11% before I hit the tax relief ceiling.

Assuming I want to max my contributions for both years, I would need to put in an additional €3,330pa this year and €4,070pa next year (€277.50 & €339.17 per month).

Am I correct in that the noticeable decrease in my pay check would be (€3,330-€3,200)+(€3,200*0.6)=€2,050pa or €170.83 monthly this year and (4,070-€3,200)+(€3,200*0.6)=€2,790pa or €232.5 monthly next year?

What are peoples thoughts on AVCs - am I better off just making enough of a contribution to get the max contribution from my employer and investing the extra each month myself? Pension is with Irish life (consensus plus fund), fees are 1% of contributions and and annual charge of 1%.

Thanks

Alkers

Hmmm, I've just worked out that over 35 years that those charges would equate to Irish Life taking 17.12% of the value of my combined contributions. What a rip!

coylemj

Irish Life's charges would need to be far higher in order to justify walking away from the tax-free benefits of an AVC. There are people you will meet in the staff canteen or in the pub who will bad mouth AVCs and their principal gripes are poor stock market returns and/or management charges. In most cases they are people who have adjusted their lifestyles to spend every penny that they get in their pay packets so they can't afford to pay into an AVC. The reality is that the tax benefits far outweigh any other considerations, especially when your marginal tax rate is 40%.

Alkers

If I were to invest the same amount each month (ie cost to me after tax breaks), even with the employer contributions (but excluding growth of the pension fund) I would only need to earn 5.3% year on year to keep pace with my PRSA (allowing for Capital Gains Tax of 33% on all returns).

I can afford to max my AVC from Christmas onward but wonder if I'd be better trying a few different avenues...

coylemj

If you invest the net money into an independent savings fund, all of your returns will be subject to DIRT (savings accounts), CGT (gains on the sale of shares) and dividend witholding tax on dividends. Whereas dividends and capital gains within an AVC fund are free of tax. With a pension fund, the taxman only gets his slice when you start withdrawing the money which you can only do when you reach retirement age. With a self-managed fund, there is the risk that you start to dip into the fund after a few years, with the intention of topping it up later, something you probably will not do.

jive

Plus having a managed fund is almost worth it in Ireland giving that investing yourself is such a pain in the arse due to our tax system. AVCs are definitely the best way to invest if you are in the higher tax rate (and probably lower for that matter), anything you have left to invest after AVCs then go for a low cost well diversified non-UCITS fund with a low cost broker (and enjoy the tax complications of it!).

Merowig

Simona1986 wrote: »

What are peoples thoughts on AVCs - am I better off just making enough of a contribution to get the max contribution from my employer and investing the extra each month myself? Pension is with Irish life (consensus plus fund), fees are 1% of contributions and and annual charge of 1%.

Thanks

Make the necessary contribution to get the employers max contribution.
Open then a seperate PRSA which doesn't have a contribution charge with a different provider for your remaining AVCs.

Any contribution charge I see as robbery.

Alkers

Merowig wrote: »

Make the necessary contribution to get the employers max contribution.
Open then a seperate PRSA which doesn't have a contribution charge with a different provider for your remaining AVCs.

Any contribution charge I see as robbery.

Sounds a plan, any recommendations?

Merowig

http://www.labrokers.ie/pensions/

Or
http://www.prsa.ie/terms.htm

or if you want to invest yourself:
http://www.davyselect.ie/pensions/personal-retirement-savings-account-prsa.html