Getting a pension vs. DIY investing for the next 35 years

JackieChang

I have no experience with pensions and I find it pretty confusing to be honest, particularly what the hell happens to your money when you retire.

Anyway, I'm fairly certain that you're taxed on whatever you draw down from your pension. So even if I invest in a pension as everyone tells you to do as it's very "tax efficient", you're still raped on the way out.

Now - let's say you reach the age of 60.

Scenario A:

Your pension pot is worth €1 million yoyo. That's 20 years worth of a 50k per year annuity. (let's assume you can get a guaranteed annuity of 50k / year)

20 years paying income tax on that. 20% of the first €35k, then 40% of everything over that (€15k). That equals €13,000 tax x 20 years = €260,000 total tax paid. Let's not forget pension admin fees which would be many thousands of €€€ on top of that. Let's say the fees are 1% per year and over the lifetime of your pension you've paid €100,000 in fees. So add that to the €260,000 tax = €353,000.

Scenario B:

I have never used a pension and I'm at 60 years of age with a DIY investment pot of €1 million yoyo.

I decide to pay myself €50,000 per year out of this.

Taxed at 33% capital gains tax every year = €16,081 CGT x 20 years = €321,618 tax paid over the 20 years.

I have full control over my money. If I need €70,000 in a year, I'll take that. Meanwhile my investments keep growing. (yes I know, there could be a crash)

Seems I'm better off just keeping my money for myself and not using a pension.

Or have I got it all wrong? Thoughts?

CIARAN_BOYLE

First that would imply that you did a lot better DIY investing than your pension managers did as there's no tax at the start. Let's say you put 200k into your pension pot. You either put in 120k into diy investment or you put in 200k (after tax) to start the same.

Second a small pension always makes sense. Looking at the numbers you suggest above 500k pension pot and an income of 25k per annum all at the lower rate of tax.

Third tax credits and/or tax exemptions for older people.

https://www.revenue.ie/en/personal-tax-credits-reliefs-and-exemptions/marital-and-civil-status/exemption-and-marginal-relief/index.aspx

JackieChang

CIARAN_BOYLE wrote: »

You either put in 120k into diy investment or you put in 200k (after tax) to start the same.

Where is this 120k figure coming from? I paid 80k in tax on 200k to get the 120k? That's a flat rate of 40%. Income tax doesn't work like that right? It's 20% of anything up to 35k, then 40% of anything after that. Then you have tax credits.

Let's say I put in 200k after tax. Is there an easy way to figure out how much that 200k cost me in tax?

CIARAN_BOYLE wrote: »

Second a small pension always makes sense. Looking at the numbers you suggest above 500k pension pot and an income of 25k per annum all at the lower rate of tax..

25k would be pretty low though would it not? I don't understand how that's better than 35k for example.

CIARAN_BOYLE wrote: »

Third tax credits and/or tax exemptions for older people.

Just read the link. I don't have to pay income tax if I'm 65 years old and earning less than €18k per year. That's poverty levels and I plan to be getting more than €18k a year, so I probably wouldn't qualify for it.

ArrBee

Your figures and assumptions are all wrong.
You should speak to someone to explain it all and clear up your misconceptions.

The tax applied when using tor pension is different for a start.

JackieChang

ArrBee wrote: »

The tax applied when using tor pension is different for a start.

Got a link that explains the different type of tax?

ArrBee

Not handy.
But when I looked into it I just used google.

Merowig

You pay hefty capital gains tax on any DIY investment - when you invest in shares via your pension it grows there tax free plus you actually get tax relief on your contributions and you can get a tax free lumpsum at the start.

Looking for your retirement via a pension vehicle is a non brainer therefor.
You can still play with any surplus money on the stock exchange yourself on top of that if you want to. One doesn't exclude the other.

And no way one pays as an average 100.000 in fees unless someone goes for some theft PRSAs which charge a 5% contribution fee or some other bad pension wrapper.

CIARAN_BOYLE

JackieChang wrote: »

Where is this 120k figure coming from? I paid 80k in tax on 200k to get the 120k? That's a flat rate of 40%. Income tax doesn't work like that right? It's 20% of anything up to 35k, then 40% of anything after that. Then you have tax credits.

Let's say I put in 200k after tax. Is there an easy way to figure out how much that 200k cost me in tax?

For a pension it's 40%. You put your pension in off the top of your salary. You don't put in during one year.

10k a year over 20 years or whatever its at the top of your salary so it will almost always be 40%.

JackieChang wrote: »

25k would be pretty low though would it not? I don't understand how that's better than 35k for example.

Just read the link. I don't have to pay income tax if I'm 65 years old and earning less than €18k per year. That's poverty levels and I plan to be getting more than €18k a year, so I probably wouldn't qualify for it.

You can do your DIY investment stuff if you want on top of that if you want. 100% of the time it makes to maximise your income at low (or no tax).

Probably best to have a pension upto 100% of the standard rate cut off point no matter what.

Then you can consider if you want to do higher tax pension or other investment options.

There is marginal relief too of the tax exemption which reduces your tax paid when over 18,000.

Jim2007

JackieChang wrote: »

Or have I got it all wrong? Thoughts?

You have completely ignored the human factor. The math always looks good, but individual investors very rarely do anywhere near as well they expect to, they'll get carried along in the crowd and do all the things they should not do.



If you are targeting 1m, the outcome is more likely to be 600k - 700k.

Buddy Bubs

Absolute non runner between investing yourself or setting up a pension if its for retirement. Anyone that doesn't understand why shouldn't be investing.

The J Stands for Jay

You've missed a few things here:

Pension investment is from pretax money. DIY is after tax. €100 in a pension costs something like €106 of your gross pay(no relief from prsi and USC). DIY needs about €185 of gross pay.

Dividends are taxed as income all they way through DIY investing. Then there's CGT when you sell any investment. No tax on dividends and no CGT in the pension.

You get a tax free lump sum from the pension, either 25% of the fund, or up to 1.5 times your salary if you take an annuity with the balance.

There'll be charges for the DIY investing that will be similar or possibly higher than a pensions charges.

You don't have to take an annuity. You can keep investing in an approved retirement fund and take withdrawals when you want (subject to a minimum).

At a certain age, I believe the tax changes so you will pay more of your tax at 20% rather than 40%. So you'll get more tax relief at 40%, and pay tax on your pension at 20% for most or all of it.

JackieChang

Ok, so pension is more tax effiicient vs self investing.

Now, let's say I'm 45 years old and my pension pot is worth 5 million somehow.

Can I access this money?

The J Stands for Jay

JackieChang wrote: »

Ok, so pension is more tax effiicient vs self investing.

Now, let's say I'm 45 years old and my pension pot is worth 5 million somehow.

Can I access this money?

No, you can only get your hands on it from 50 if it's an occupational pension scheme, or 60 of it's a personal pension.

JPup

Tax benefits on pensions cap out at €2 million by the way. It used to be €5m I think until the financial crisis.

If you really do have €5 million to invest I strongly advise you to speak to a professional advisor!

Bobeagleburger

Pension OP.

You won't get an investment that will give you the massive tax breaks a pension does.

burkey2k0

The real power of a pension lies in the fact that they magnify your investing power. It allows you to invest a greater amount of money using your pre-tax income than you can by using your already taxed income.

At my age, if I earned €100k last year, that would mean I could have invested €15,000 tax free, and my take home pay would only have been reduced by approx. €9,000.

If I personally invested the money without using a pension, it would have impacted my take home pay by the full €15,000. So a pension in this example gives me an extra €6,000 of investing power for that year.

Then you apply compound interest to that difference year on year, and you are multiplying your investing power hugely.

After a 30yr period, assuming only a 6% return, that extra €6,000 a year you were able to invest will give you an extra €489,628 you would not have had by using only your taxed income.
Yes that gets taxed coming out, but it is still money you would not have had without utilising pre-tax income.

On top of that there is the fact as you get older you can use more and more of your pre-tax income and then also the tax beneficial options you have when you take it out. But simply put, pensions magnify your investing power.

Bobeagleburger

To add to that, a lot of companies match up to a certain percentage, when you pay a certain percentage yourself. As mentioned above it's tax free money.


Grow wealth by pumping your pension, and paying off a mortgage early. Hard to beat that strategy.

Jim2007

The real power of a pension lies in the fact that they magnify your investing power.

Equally important or even more so is that they remove the human factor. I’ve seen a number of proprietary research papers over the years that should people in countries where pension restrictions are limited tend to do best. Not being able to touch it or manage it, suits most people.

JackieChang

My biggest problem with pensions is not being able to access it when I'm in my 50s. Let's say I'm comfortable with the amount my pension has grown to. I have to keep on working with my dodgy hip and sore back etc. until I'm 65. By that age I will be too old to enjoy the proceeds.

Can I sue the pension company to get my money out or something?

The J Stands for Jay

JackieChang wrote: »

My biggest problem with pensions is not being able to access it when I'm in my 50s. Let's say I'm comfortable with the amount my pension has grown to. I have to keep on working with my dodgy hip and sore back etc. until I'm 65. By that age I will be too old to enjoy the proceeds.

Can I sue the pension company to get my money out or something?

Occupation pensions are available from 50. If you were planning to retire before you can get access to your pension, you could plan to have enough invested outside a pension to cover you until then.

JackieChang

McGaggs wrote: »

Occupation pensions are available from 50.

I plan to set up a "self directed" PRSA with Davy. Is this available from the age of 50?

The J Stands for Jay

JackieChang wrote: »

I plan to set up a "self directed" PRSA with Davy. Is this available from the age of 50?

I know of one PRSA provider who will let you take it from age 50. Davy may be the same.

Merowig

JackieChang wrote: »

I plan to set up a "self directed" PRSA with Davy. Is this available from the age of 50?

That should be answered by Davy and mentioned in their documentation.

https://www.davyselect.ie/customer-services/faq-prsa.html

When can benefits be taken?
You can normally start taking your benefits from age 60 (and up to age 75). In certain circumstances, you can take benefits earlier such as if you retire from employment at age 50 or over or if you can no longer work because of a serious illness or disability.

Greenlights16

McGaggs wrote: »

Occupation pensions are available from 50. If you were planning to retire before you can get access to your pension, you could plan to have enough invested outside a pension to cover you until then.

So if I start investing in my company pension, when I’m 50 can I withdraw from it as much as I like or do I officially have to retire from the job to get access to it?

Let’s be realistic most of us are still well fit to work in the job if we’re still with the same company at 50?

Are there any cross border restrictions ? If you lived in NI but your employer and pension were in ROI

CIARAN_BOYLE

Greenlights16 wrote: »

So if I start investing in my company pension, when I’m 50 can I withdraw from it as much as I like or do I officially have to retire from the job to get access to it?

Let’s be realistic most of us are still well fit to work in the job if we’re still with the same company at 50?

Are there any cross border restrictions ? If you lived in NI but your employer and pension were in ROI

It depends on the scheme. Some won't let a 50 year old withdraw at all. Some have rules that a certain amount must be left in or that you must be retired.

Regarding cross border issues there may be in the future but I don't believe there would be now.

The J Stands for Jay

Greenlights16 wrote: »

So if I start investing in my company pension, when I’m 50 can I withdraw from it as much as I like or do I officially have to retire from the job to get access to it?

Let’s be realistic most of us are still well fit to work in the job if we’re still with the same company at 50?

Are there any cross border restrictions ? If you lived in NI but your employer and pension were in ROI

You just have to leave the job relating to the pension you want to draw down at 50.

Irish rules apply to draw down, regardless of where you live. You'd need to check if there's any additional taxes due to Queen Liz based on where you reside.

The J Stands for Jay

CIARAN_BOYLE wrote: »

It depends on the scheme. Some won't let a 50 year old withdraw at all. Some have rules that a certain amount must be left in or that you must be retired.

Regarding cross border issues there may be in the future but I don't believe there would be now.

It'd be difficult for any DC scheme trustees to justify not allowing early retirment.