Terrible pension rates?

Haz619

Hi all, I was looking at signing up for a pension plan through my workplace, they match certain pension contributions so it seemed appealing.. I have since been shopping around various pension companies and the rates seem terrible? Am I messing something big here because when I do the math of how much the pension company will receive from Myself and my company I would have to live till about 105 to only see the money that has gone in. Anyone else found this?

Thanks

No you are probably not missing anything.
You are probably better informed than most of the population.

Have you been putting figures into online calculators?
General things to consider:
Your age - the earlier you start the better.
Your contributions can be tax efficient.
Your employers contribution varies by employer.
Interest rates/annuity rates are very low.
People are living much longer.

Edit - I misread - you feel that you are paying too much?
Use a pensions calculator to figure out how much you want to live in when you retire and then figure out how much that will cost.

beechwood55

How old are you?

bmwguy

With the tax relief available and your company matching contributions it's virtually impossible for there to be less in the fund at retirement than you put in personally. Unless you are about a year out from retirement. Personally my own pension will return far far more than I put in once we don't have a load of 2008 type years.

Henry Ford III

Are you talking about annuity rates OP? They are indeed pretty awful due to rock bottom interest rates.

Haz619

Ok just one example, my employer will match up to 7% of my salary towards a pension fund. Let’s just say I put 150e a month into a pension company. They will receive a total of 300e a month.

I’m just gone 31 so here is my calculation.
I have 444 months left until I’m 68
€300 a month for 444 months = €133,000
The pension company is offering me €5400 annually when I hit 68
€5400 goes 24 times into €133,000
24+68 years = 92
I’d only break even when I’m 92, I don’t reckon I’ll live that long lol
I think that’s a terrible return, if I was to simply save that €150 a month I’d have €66,000 at 68 plus the interest gained on the way, all would be accessible immediatly, tax would have already been paid and if I died it wouldn’t die with me like a pension, it could be left to someone.

My opinion would be why have a pitiful €5400 a year plus the state pension of course when you could have he state pension and 64 grand to spend when I’m still young enough to enjoy it?

I’d love to hear other people’s opinions
Thanks

ANXIOUS

Haz619 wrote: »

Ok just one example, my employer will match up to 7% of my salary towards a pension fund. Let’s just say I put 150e a month into a pension company. They will receive a total of 300e a month.

I’m just gone 31 so here is my calculation.
I have 444 months left until I’m 68
€300 a month for 444 months = €133,000
The pension company is offering me €5400 annually when I hit 68
€5400 goes 24 times into €133,000
24+68 years = 92
I’d only break even when I’m 92, I don’t reckon I’ll live that long lol
I think that’s a terrible return, if I was to simply save that €150 a month I’d have €66,000 at 68 plus the interest gained on the way, all would be accessible immediatly, tax would have already been paid and if I died it wouldn’t die with me like a pension, it could be left to someone.

My opinion would be why have a pitiful €5400 a year plus the state pension of course when you could have he state pension and 64 grand to spend when I’m still young enough to enjoy it?

I’d love to hear other people’s opinions
Thanks

They are just indicative rates, the company isn't guaranteeing you those rates. Generally people will increase contributions as they get older and there are other options rather than taking an annuity. Also you need to remember annuity rates are at historically low levels and that the pension company may have built in you taking a tax free lump sum into that figure.

bmwguy

That's just the annuity rates. Don't mind them I certainly won't be going down the annuity road. They didn't offer you anything, they were just indications of an income for life.
That would be after you took a tax free lump sum of either 25% of fund or 1.5 times final salary. Which based on your age and amounts etc I guess would be in the region of 100k lump sum.


Look at ARF and AMRF, Talk to your advisor. And if, at 31 you put 300 a month in it will be worth far more than 133000 probably significantly more than double if not triple that amount wìth the growth and compounding. You have missed quite a lot of key info here.

Haz619

I sure I have missed some info there, but regarding the lump sum, I’m sure that would have been a pretty big selling point when signing up to a pension, surely they would have disclosed that at this stage

bmwguy

Haz619 wrote: »

I sure I have missed some info there, but regarding the lump sum, I’m sure that would have been a pretty big selling point when signing up to a pension, surely they would have disclosed that at this stage

Well it is alright. I look after organising the pensions in my company as financial controller. My own is going to be a six figure lump sum tax free and I will draw down the rest as i need it, which is taxable. We have a guy come into us he explains it all very well we all know we have a lump sum and then an amount we can use when we need. There is an alternative where they offer you a fixed amount every year for life but I personally don't think i will do it. Get chatting to your advisor. I know some of our staff had a tough time getting heads around it at the start but I think it's an absolute no brainer to get going at 31. I'm mid 30s and have it going 10 years it's building very nicely.

coylemj

Haz619 wrote: »

Ok just one example, my employer will match up to 7% of my salary towards a pension fund. Let’s just say I put 150e a month into a pension company. They will receive a total of 300e a month.

I’m just gone 31 so here is my calculation.
I have 444 months left until I’m 68
€300 a month for 444 months = €133,000

....if I was to simply save that €150 a month I’d have €66,000 at 68 plus the interest gained on the way, all would be accessible immediatly, tax would have already been paid and if I died it wouldn’t die with me like a pension, it could be left to someone.

You're using poor annuity rates to justify not paying into a pension which is not a good idea. I also don't agree with the numbers you are using to compare you simply saving money to putting it into a pension fund.

When you talk about putting €150 a month into a pension and that being matched by your employer then assuming you are paying PAYE at 40% on the top of your income, that gross €150 p.m. is only going to cost you net €90 p.m. because you pay no PAYE on income that goes straight to a pension fund.

So for the same net monthly contribution, either the pension funds gets €300 p.m. or you put €90 p.m. into a savings account but which will carry the risk that you will occasionally dip into it for cars, to help buying a house or anything else that takes your fancy.

If the pension funds achieves an annual (pretty conservative) 3% return on investment, that €300 p.m. will be worth €241K after 444 months. Even if you managed to find a bank paying 1.5% and pay no DIRT, your alternative scheme of putting €90 p.m. into a savings account would be worth just €53,000 after 444 months.

While the money in the savings account would be tax-free, you would still be able to take a sizeable amount of cash tax-free out of the pension fund when you retire and you could leave the remainder in an ARF and draw an income from it if annuity rates are still as low as they are today.

I quoted a 3% return on investment above, the Zurich Balance fund which is a managed fund that has a sizeable equity element has achieved an annualised return of 6.9% over the last 20 years, a period which includes two major market crashes. If that ROI was achieved in your case with with €300 p.m. contributions, it would be worth €581K at the end of 444 months.

737max

reason not to have a private pension:
noonan's ghost might steal it during a crisis between now and retirement. precedent has been set.

jamesthepeach

737max wrote: »

reason not to have a private pension:
noonan's ghost might steal it during a crisis between now and retirement. precedent has been set.

You are not wrong.
This has scared me and many others from putting money into pension funds.
The fact that the govt havent come out and put in bulletproof protection for pensions against raids like this in future speaks volumes. And the next raid will be worse.

Squatter

jamesthepeach wrote: »

And the next raid will be worse.

Source?

jamesthepeach

Squatter wrote: »

Source?

Precedent setting cut is always the worst.
But I'll let you know the source after the next raid. :eek:
Of course it would be much better if there was zero chance of another raid.
As the govt havent moved to protect pension funds against, them, they are on the table.

coylemj

The Govt. dipping into private pension funds was one of the worst pieces of money grabbing I have ever seen. When everyone is saying that we won't be able to afford the current old age pension with an ageing population, giving provide people an excuse not to invest in their own pensions (for fear of a future grab) was a very retrograde step.


But..... what they did take was miniscule compared to the tax break you get for the money you invest so don't cut off your nose to spite your face, it is still the best deal you will ever get from the taxman.

737max

I don't think over 2 thousand euro is miniscule. they took over that from me with no guarantee that if need to bail out the establishment when the next self-inflicted crisis hits they won't do the same or worse again.

I'm still saving for my pension but I'll never save in an Irish pension scheme again. It is just too important for me to risk it.

Regardless of whether you are ignorant or knowledgable of how pensions work the message that the Government sent was crystal clear; you pension is within their gift to you and they'll take it if they want it.

People who never had to worry about financing a pension for themselves made a disasterous decision and made Ireland's demographic timebomb even more explosive.

The pension industry have to paint as good a picture as they can to continue to drum up business but the Public can't view Pensions as necessarily a wise decision any more.

beauf

I wonder how the Govt think people are going to finance old age, if they can't get work, or are unable to work. None of pension, or investment vehicles (like rentals) seem viable anymore. Whats left?

jamesthepeach

beauf wrote: »

I wonder how the Govt think people are going to finance old age, if they can't get work, or are unable to work. None of pension, or investment vehicles (like rentals) seem viable anymore. Whats left?

If the govt made sure a grab was never allowed again may people wouldnt feel so strongly that their pensions are at risk.

As it it they have stolen money from them before and at any time could steal whatever they like.
Once bitten.
Very easy to repair the damage by passing making sure pension funds were legally untouchable, but the fact they don't take this easy step speaks volumes.

beauf

Looks like they are doing the opposite. For both public and private.

coylemj

jamesthepeach wrote: »

Very easy to repair the damage by passing making sure pension funds were legally untouchable, but the fact they don't take this easy step speaks volumes.

There is no point in putting that into legislation because a new Govt. could simply overturn it with new legislation. The only way to absolutely protect pensions would be to write a provision into the Constitution saying that they couldn't go dipping into existing funds as Michael Noonan did but it's highly unlikely that that will ever happen.

coylemj

737max wrote: »

I don't think over 2 thousand euro is miniscule. they took over that from me with no guarantee that if need to bail out the establishment when the next self-inflicted crisis hits they won't do the same or worse again.

Whatever was taken from your fund was miniscule compared to the tax breaks that you got over the years which allowed you to accumulate your fund.

If you were hit for >€2,000 then you probably got PAYE and PRSI relief on your contributions for many years which were worth a helluva lot more than that.

Edit: If you were getting relief on 40% PAYE and 5.5% PRSI (which would have been the case a few years ago), the total relief on just €4,395 of gross pension contributions would have been €2,000. Michael Noonan probably clawed back no more than one year's worth of your tax relief.

jamesthepeach

coylemj wrote: »

There is no point in putting that into legislation because a new Govt. could simply overturn it with new legislation. The only way to absolutely protect pensions would be to write a provision into the Constitution saying that they couldn't go dipping into existing funds as Michael Noonan did but it's highly unlikely that that will ever happen.

Well put it into the Constitution.
It's certainly important enough.

jamesthepeach

coylemj wrote: »

Whatever was taken from your fund was miniscule compared to the tax breaks that you got over the years which allowed you to accumulate your fund.

If you were hit for >€2,000 then you probably got PAYE and PRSI relief on your contributions for many years which were worth a helluva lot more than that.

Edit: If you were getting relief on 40% PAYE and 5.5% PRSI (which would have been the case a few years ago), the total relief on just €4,395 of gross pension contributions would have been €2,000. Michael Noonan probably clawed back no more than one year's worth of your tax relief.

Again. It's the principal. It has been demonstrated that your pension fund is not in any way safe from the govt. Precedent has been set. It has already happened. The govt can go in and take as much as they like from your pension whenever they feel like it.
The only person your pension fun is protected from is yourself.

Peregrinus

jamesthepeach wrote: »

Again. It's the principal. It has been demonstrated that your pension fund is not in any way safe from the govt. Precedent has been set. It has already happened. The govt can go in and take as much as they like from your pension whenever they feel like it.
The only person your pension fun is protected from is yourself.

Although of course that's equally true of any other other savings vehicle you might use to save for retirement; if the government can levy pension funds they they can levy other funds, bank accounts, insurance policies . . .

Risk of government levies is a political risk. You can guard against it by keeping your savings in banknotes in a shoebox under the bed. Do that if you want to, but first of all think clearly about what other risks you accept, and what advantages you sacrifice, by not keeping your money in a pension fund. The fact that someone who saved for retirement in a pension fund, and suffered the levy, is still vastly better off than someone who contributed the same amount to some other savings vehicle. You may be outraged by the pension fund levy, but that is no reason to beggar yourself in retirement.

jamesthepeach

Peregrinus wrote: »

Although of course that's equally true of any other other savings vehicle you might use to save for retirement; if the government can levy pension funds they they can levy other funds, bank accounts, insurance policies . . .

Risk of government levies is a political risk. You can guard against it by keeping your savings in banknotes in a shoebox under the bed. Do that if you want to, but first of all think clearly about what other risks you accept, and what advantages you sacrifice, by not keeping your money in a pension fund. The fact that someone who saved for retirement in a pension fund, and suffered the levy, is still vastly better off than someone who contributed the same amount to some other savings vehicle. You may be outraged by the pension fund levy, but that is no reason to beggar yourself in retirement.

It's not about amounts or risks in other asset classes etc.
It's about something that has been demonstrated, is easy to guard against for the future, but is not being guarded against.

Make sure it can't happen again and you will see floods of people starting pensions. The amount of people I have spoken to who can't have a pension and have mentioned this as the overwhelming reason is massive.
And it makes it much worse to them that the govt will not lock it down from happening again.

So people see this as. The govt opened the bank door, came in and robbed people, and they won't close the door behind them, so that they can come back for the rest at their leisure.

Peregrinus

The people you spoke to who "can't have a pension" can have a pension. They just choose not to. And if this is the reason they give for this choice, if you care about them at all you should be pointing out to them that it's a bad choice, and their reason for making it is not sufficient.

You're never going to get a constitutional amendment to identify a certain savings mechanism and decree that it shall for ever be exempt from a particular kind of taxation. You know this. Not even the Americans, who fought a war of independence because they objected to stamp duty, have a constitutional ban on stamp duties. This is not a realistic solution to the problem you identify.

jamesthepeach

Peregrinus wrote: »

The people you spoke to who "can't have a pension" can have a pension. They just choose not to. And if this is the reason they give for this choice, if you care about them at all you should be pointing out to them that it's a bad choice, and their reason for making it is not sufficient.

You're never going to get a constitutional amendment to identify a certain savings mechanism and decree that it shall for ever be exempt from a particular kind of taxation. You know this. Not even the Americans, who fought a war of independence because they objected to stamp duty, have a constitutional ban on stamp duties. This is not a realistic solution to the problem you identify.

We are talking about encouraging people to start pensions right?
What's the most important thing to a person starting a pension where their money is going to be locked away for 30 or 40 years?
The gobvt can ignore the elephant in the room all they like, but if they are serious about convincing people to start pensions then they better look at the real issues.

Peregrinus

jamesthepeach wrote: »

We are talking about encouraging people to start pensions right?
What's the most important thing to a person starting a pension where their money is going to be locked away for 30 or 40 years?

Tax relief. That's why they start pension plans, as opposed to conventional savings plans or other investments which they use to save for retirement.

There's no law, after all, which says that if you're saving for retirement you have to do so using a dedicated savings mechanism. You can use any savings mechanism you like. The reason people use pension plans is because of the tax reliefs, which (even allowing for the effect of the levy) will leave them better off than any of the non-tax-favoured plans.

If the people you speak to are really that worried by the levy, then encourage them to save for retirement in other savings plans. They'll end up paying far more money to the state, but if they are that terrified by the word "levy", until they get a friend or adviser who can explain things clearly to them that might be the best option available to them.

jamesthepeach

Peregrinus wrote: »

Tax relief. That's why they start pension plans, as opposed to conventional savings plans or other investments which they use to save for retirement.

There's no law, after all, which says that if you're saving for retirement you have to do so using a dedicated savings mechanism. You can use any savings mechanism you like. The reason people use pension plans is because of the tax reliefs, which (even allowing for the effect of the levy) will leave them better off than any of the non-tax-favoured plans.

If the people you speak to are really that worried by the levy, then encourage them to save for retirement in other savings plans. They'll end up paying far more money to the state, but if they are that terrified by the word "levy", until they get a friend or adviser who can explain things clearly to them that might be the best option available to them.

Ok then.
We will tell them all that a pension is a great thing to do, but at any time the govt can raid it, but hey you would do worse in other investment vehicles.
And just because the govt robbed it and refused to do something to prevent them doing so again, they probably won't take too much.

Yep. I think they'll all be convinced.

Peregrinus

Depends on what you're trying to do here, James.

The government can raid any savings vehicle just as readily as it can raid pensions. For that matter it can raid salaries and wages, it can raid houses, it can raid land. It's the government; it can levy taxes. Deal with it.

Declining to save lest your savings be taxed more than you initially anticipate is a bit like declining to work lest your earnings be taxed more than you anticipate. In both cases, you will save tax, but you will also make yourself much poorer than you need to be.

You can encourage this kind of hysterical reaction in people, or you can encourage them to take a deep breath and think clearly about what they want and what is the best strategy for getting it.