Pensions, ETF's and Taxation

coenaculous

Hi All,

I'm 27, and looking to start my pension. I'm trying to understand the various parameters which would determine where I start putting my money, and there is a lot of information so any help would be appreciated...

There is an opinion out there that 'money managers' on average perform no better than the market. I get that institutional investing is a little more complicated than that, and sometimes they attempt to hedge and protect their investor's capital rather than make the most possible returns. However, I'm pretty convinced that a simple geographic spread could do this.

If we take that as a given - even if you don't - some of the best regarded alternatives are ETF's which promise to cover a broad range of stocks, tracking a certain index, a commodity, bonds, or a basket of assets like an index fund. The difference being that an ETF trade's like a common stock.

Then you have the government's tax relief associated with PRSA.

This funnels people's savings to a number of approved pension trustee's. These are the very same money manager's. They are offering a mix of highly managed funds in which the investor does very little, and some are also offering access to ETF's through 'execution only' PRSA's.

drive.google.com/file/d/0Bwsxfnty94iTbUE4aEl5SkpYaG8/view

As far as I can tell, all of this is extortionate, it's just some of it is more extortionate than the rest. People on this site talk favourably about Davy Select, which seems to be the most reasonable of the lot, these people must be suffering from some sort of contrast based perception disorder.

If you take Davy's own documentation on this (davy.ie/binaries/content/assets/davy/legal/execution-only-fees-and-charges.pdf, page 105) they suggest that you might experience a 1.25% reduction in yield. This is for an initial and only investment of 10,000, so more trades will incur more transaction fee's. One thing I can't see is if the 'annual dealing charge' is a flat fee of 75 euro, or if it is a % of the amount invested. I read something elsewhere which leads me to believe it's a %, but it's several tabs ago and I can't find it, so please correct me on this if I'm wrong because it makes a big difference to what I'm about to say. If what I think I'm reading is correct, if you left your money with them for 48 years, investing 10000 every year, you would stand to LOSE A THIRD OF YOUR MONEY TO THEM...

Their admitted reduction in yield of 1.25% is huge over the long term. The inventor of index funds, Jack Bogle, is quoted as saying that paying anyone over 4 basis points for index funds is insanity. Maybe ETF's should be slightly more expensive, I don't know, but 1.25%!? For just execution.

Of course you have the tax benefits, and if you not self-employed, it maybe makes sense in that it just costs you less to put the money in, but but but...

1. They are still going to charge you on it as normal income when you take it out.
2. Michael Noonan raided the PRIVATE pension funds not so long ago, when needs must'd.

Capital Gains tax is at 41% for the some of the ETF's I would be looking at. This looks to be high in relation to other countries anyway, so maybe it will come down in the future. I haven't done all of the sums yet, I'm just looking for some guidance.

I'm looking to buy ETF's and treat them like a savings account, if I go with a PRSA, even with the tax benefits there is no promise they won't change and raid them anyway as they have done before. Degiro have basically no fee's (some ETFs have none) and although they do take a spread of 10 basis points on FX, it still seems like a more sensible option.

Am I missing something?