What is a reasonable pension pot?

Babslovesshoes

If both yourself and your wife have contributory state pensions, that is worth approx 24 k per annum. If you have a pot of 300k, that will give you another 12k. But pensioner couple is not taxed until they have an income of 36k. So that is 3 k per month into your hand. In order for you to have a pot of 300k from your 48k at age34, estimating a 7 % return, you won’t need to add anything else to it (you should though). Look at this compound interest calculator
https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator

I am aiming for a pot of 800k on retirement, as 200k (25perecent) is the max you can draw down as a tax free lump sum. The next 300k is at 20%. The remaining 300k will give me an income of 1k per month

The J Stands for Jay

Babslovesshoes wrote: »

I am aiming for a pot of 800k on retirement, as 200k (25perecent) is the max you can draw down as a tax free lump sum. The next 300k is at 20%. The remaining 300k will give me an income of 1k per month

You've got that wrong. You can only take a 25% lump sum, on a fund of €800k you'll just be able to take 200k. 600k will go onto an A(M)RF, and any withdrawals will be taxed under PAYE.

Babslovesshoes

McGaggs wrote: »

You've got that wrong. You can only take a 25% lump sum, on a fund of €800k you'll just be able to take 200k. 600k will go onto an A(M)RF, and any withdrawals will be taxed under PAYE.

From the pensions authority website:
Currently, a maximum of €200,000 can be taken as a tax free pension lump sum. This is a total lifetime limit even if lump sums are taken at different times and from different pension arrangements. Lump sums between €200,001 and €500,000 are taxed at 20%, with any balance over this amount taxed at your marginal rate and subject to the Universal Social Charge.

Unknownability

Babslovesshoes wrote: »

From the pensions authority website:
Currently, a maximum of €200,000 can be taken as a tax free pension lump sum. This is a total lifetime limit even if lump sums are taken at different times and from different pension arrangements. Lump sums between €200,001 and €500,000 are taxed at 20%, with any balance over this amount taxed at your marginal rate and subject to the Universal Social Charge.

You're mixing up a few things.

The other poster is correct, the maximum you can take out of a pension fund without going done the annuity route is 25% and the balance to an A(m) RF.

You can access the ARF put its all taxable.

nompere

Babslovesshoes wrote: »

From the pensions authority website:
Currently, a maximum of €200,000 can be taken as a tax free pension lump sum. This is a total lifetime limit even if lump sums are taken at different times and from different pension arrangements. Lump sums between €200,001 and €500,000 are taxed at 20%, with any balance over this amount taxed at your marginal rate and subject to the Universal Social Charge.

What that means is that if you have a pot of €1,200,000, then you can take 25% - which is €300,000. Of that €300,000, €200,000 is tax free, and the remaining €100,000 is taxed at 20%.

Anything you take in excess of 25% of the value of the pot is taxed at marginal rates.

So your plan to take €300,000 as well as €200,000 out of a fund of €800,000, will give you taxable income in that year of €300,000, and a tax bill of approx €120,000 plus USC.

The J Stands for Jay

Babslovesshoes wrote: »

From the pensions authority website:
Currently, a maximum of €200,000 can be taken as a tax free pension lump sum. This is a total lifetime limit even if lump sums are taken at different times and from different pension arrangements. Lump sums between €200,001 and €500,000 are taxed at 20%, with any balance over this amount taxed at your marginal rate and subject to the Universal Social Charge.

Nothing there contradicts what I've said. The Pensions Authority website isnt a great source of information. It's extremely light on detail. The place to go is revenue.ie. The specific pdf you want is this one https://revenue.ie/en/tax-professionals/tdm/pensions/chapter-07.pdf

Babslovesshoes

McGaggs wrote: »

Nothing there contradicts what I've said. The Pensions Authority website isnt a great source of information. It's extremely light on detail. The place to go is revenue.ie. The specific pdf you want is this one https://revenue.ie/en/tax-professionals/tdm/pensions/chapter-07.pdf

Thanks for clearing that up. I’ll check out the revenue site

Happyhouse22

To answer the original question isn’t there something about having 25 times your annual expenses as a pension. That is if you live on 30,000 per year then you need to have 750,000 in the pension fund.

howamidifferent

You could subtract the state contributory pension from the €30k to needing ~€450k

The Mighty Quinn

howamidifferent wrote: »

You could subtract the state contributory pension from the €30k to needing ~€450k

Which may not exist in 30 years time.......
And if it does, likely to not be as 'valuable' as it is today

Jim2007

The Mighty Quinn wrote: »

Which may not exist in 30 years time.......
And if it does, likely to not be as 'valuable' as it is today

It will exist. Like the rest of Europe Ireland is moving to the typical three pillar system, with the state pension being the first pillar.

But as you say it will be less valuable because it will not be increased over time. That seems to be the common approach.

Happyhouse22

howamidifferent wrote: »

You could subtract the state contributory pension from the €30k to needing ~€450k

Ya this makes sense.

Then I guess more people will take 25% tax free so this will be added on.

E.g I need 30,000 (12,000 state pension + 18,000)

So 18,000 x 25 is 450,000. So if you want to take 25% at the start you would need a pot of 600,000.

athlone573

With low interest rates at the moment (specifically, long term government bond yields near zero) all the traditional rules of thumb for how much you need have gone out the window.

You should get an annual statement from your company scheme or broker if private pension with some projections which would be a reasonable starting point to see if you're on track.

Happyhouse22

athlone573 wrote: »

With low interest rates at the moment (specifically, long term government bond yields near zero) all the traditional rules of thumb for how much you need have gone out the window.

You should get an annual statement from your company scheme or broker if private pension with some projections which would be a reasonable starting point to see if you're on track.

Is this because the 4% rule presumes you can make at least 4% returns from your investments eac year? And with interests rates so low this may not be possible?

Jim2007

This is an exercise in long range forecasting and accuracy is not an option unless you are nearing retirement age, so a simple approach is as good as a complex one, the key is that you revise it on a regular basis and make the necessary adjustments as you go along.

My source of wealth was always salary or consulting fees plus capital gains from investing. So I used the formulas:

((Current Income * 65%) - state pension) / 3.5%) = required pot

Required pot - current projection of pension pot = short fall that needed to be made up

Of course it was not accurate, but it was enough to get me where I needed to be by the time I reached 55.

PhilOssophy

My only advice to you OP is to max out what you can afford for now, and if you can afford it take full advantage of the last real tax break. I.e. whatever age you are at, maximise the pension contributions.
That said, I often wonder are pensions a bit of a scam - the lack of clarity around pension fees, management fees, its so un-transparent. Labour recently raised a bill on this as far as I know and while I'm no supporter of the party, I welcome this attempt at clarity regarding fees in this sector.

Raoul Duke III

PhilOssophy wrote: »

My only advice to you OP is to max out what you can afford for now, and if you can afford it take full advantage of the last real tax break. I.e. whatever age you are at, maximise the pension contributions.
That said, I often wonder are pensions a bit of a scam - the lack of clarity around pension fees, management fees, its so un-transparent. Labour recently raised a bill on this as far as I know and while I'm no supporter of the party, I welcome this attempt at clarity regarding fees in this sector.

I find if you dig into the fund prospectus, you can find the fund AMC detailed there and then the pension scheme bumpf contains the detail of the charges that the administrator applies (which is generally capped).

Agree with your point though.
Why can it not be possible, when you receive your annual pension statement to see what fees were deducted? After all, you can see to the penny what your own and your employer contributions were.
So if I have a fund of 600k for example, how much was taken out of that as fees in 2020....right now, it's a mystery!

This would drive accountability and transparency in the sector which is badly needed.

bob mcbob

TheBully wrote: »

I started my pension late, not very late but later than I would have liked! For this reason, last year I started doin AVC's.
I'm 34, and I worry about my future. I'm currently putting 6% of my salary into my pot along with an additional 6% in AVC's, my employer puts in an additional 9%.
I currently have €48000 in the pot, with a forecasted 500k at retirement.

I know I will have more than others at retirement but I am pushing myself with the AVCs.
My question is, is this a decent enough pot, is it the average pot?
I'd like to max out my AVC contributions but I'm not financially able at the minute! What kind of pension pot have u guys?

I will add my experience in here as someone who financially can afford to retire but have not done it fully yet.

This is not for everyone but just want to share.

I started investing in a pension in the 90's and built up a reasonable pot 20/30K or so. With my spare cash I started investing in stock market funds. After a while I noticed that the cash I was investing in funds was growing a lot faster than my pension fund. Due to employment changes (in 2000 I went freelance) I stopped paying into a pension fund and instead built up a pot thru stock market funds and stock market investments.

Where do things stand now from my experience -
- investing in stock market funds, I have primarily invested for growth and I have seen my investments double every 8 years or so. I have not had any need to dip into this as yet
- stock market - this started for growth and now is more towards income. The income from this could pay my yearly living expenses.
- pension pot - as I said I stopped paying into this around the year 2000 and it was then valued at 20-30 K now 20 years later it is valued at 30-40K. There is no comparison with this and my other investments.

So my experience is - pension funds are good for tax and employers contributions but their performance leaves a lot to be desired.

The J Stands for Jay

bob mcbob wrote: »

it was then valued at 20-30 K now 20 years later it is valued at 30-40K. There is no comparison with this and my other investments.

Can you let us know what fund this is so we can all avoid it?

Raoul Duke III

bob mcbob wrote: »

So my experience is - pension funds are good for tax and employers contributions but their performance leaves a lot to be desired.

That is a very small sample size though - 1 self-employed person's experience.

For anyone who is employed, the combination of 40% tax relief plus an employer contribution is unbeatable.

Say for example, we're going to invest in equity Fund A.

We have two people; Tim and Tom. Both 40 years old. Both employed in the same job, both earning 100k. There is a company DC scheme and the employer will match up to 10%.

Tim elects into the scheme and choose to make the max contribution of 25% p.a.
Tom elects not to join the scheme and decides to manage his own investments.

Here's the breakdown of how their finances look at the end of the year:

Tim Tom
Gross Income 100,000 100,000
Pension Contribution 25,000 -
Taxable Income 75,000 100,000

Taxes\PRSi\USC 28,304 38,304

Net Income 46,696 61,696

Pension Contributions
Own 25,000
Employer 10,000
Total Pension Contributions 35,000 -


Tom has 15k more income but - crucially - Tim has put 35k into his pension fund.

Tom is worse off than Tim. Now he does have the luxury of making his own investment choices but I would propose that the tax benefit and the employer contributions far outweigh this.

Simply put; as a PAYE worker, this is the biggest break you will ever get. You would be foolish not to take advantage of it.

PhilOssophy

Raoul Duke III wrote: »

I find if you dig into the fund prospectus, you can find the fund AMC detailed there and then the pension scheme bumpf contains the detail of the charges that the administrator applies (which is generally capped).

Agree with your point though.
Why can it not be possible, when you receive your annual pension statement to see what fees were deducted? After all, you can see to the penny what your own and your employer contributions were.
So if I have a fund of 600k for example, how much was taken out of that as fees in 2020....right now, it's a mystery!

This would drive accountability and transparency in the sector which is badly needed.

Yeah exactly, they clearly hide it within their figures. It is such a scam. I have tried hard with 2 pension providers to set up a call outlining how much I have been charged and neither have called me back.

Raoul Duke III

PhilOssophy wrote: »

Yeah exactly, they clearly hide it within their figures. It is such a scam. I have tried hard with 2 pension providers to set up a call outlining how much I have been charged and neither have called me back.

You inspired me to look at the scheme booklet to see what's actually going on in there.
The wording is as follows:

<employer name> pays all administration fees and any other costs associated with operating the plan. The costs of investing your Retirement Account are met by a deduction from the assets in which your Retirement Account is invested.

So some good news there; the admin costs are not being paid by me! I don't know if this is standard practice.

The actual investment fees however are being paid by me. I'm 60% invested in a passive equity fund and the AMC on that is 0.09% p.a. The remainder however is in a diversified assets fund and the AMC on that is 0.3% p.a.

So I'd estimate I'm paying out maybe 1k p.a. (and more obviously as the fund builds up over time) in AMC. I have no idea if this is accurate though...

Raoul Duke III

So returning to the intent of this topic (and it's one I've been thinking about lately): What is a reasonable pension pot?

It seems like a question that can have as many answers as there are boards members i.e. no two people will have exactly the same circumstances.

For me, I've been operating on the vague notion that a reasonable number is '€1 million'.
This would mean I could take a 25% lump sum of 250k (on which I would have to pay 10k tax on the excess) so 240k cash in hand.
And, using the 4% rule, I could extract 30k p.a. as income.

There's a number of assumptions built into this:
1. I have my mortgage fully paid off. Currently I 'own' about 70% of the market value of my house, I would want to pay off the remainder well before retirement.
2. My house requires no major works beyond ongoing maintenance. Right now, it requires a deep retrofit - I would want to get this done very soon and well before retirement.
3. The state pension still exists largely in its current form. (personally I think people are far too ready to assume this, especially as our dependency ratio inches inexorably upwards). This will add about 12k p.a. to my retirement income.
4. My children do not need (as opposed to want!) large cash handouts from me when they are adults. I have 3 of them...hopefully they can wait until my demise to hoover up whatever is left. This is probably the most optimistic assumption of all, given the housing situation here, weddings etc.
5. My needs and wants can be supported by my pension income. I like good meals out, trips to the theatre and foreign travel. If I have 42k p.a., I think I can easily support a good lifestyle and take care of the basics.
6. If I decide to retire early, I can easily support the gap between state pension age and this time with my ARF drawdowns + my lump sum. Right now, I daydream about retiring in an age range of 55-59. Currently 47.
7. Government doesn't make it harder for me to continue contributing to my pension. Again this might be overly optimistic, especially if SF get in and put their rhetoric into action.

So it's all about continuing to build up the pot, take advantage of the tax break and keep an eye on the long term....

bob mcbob

Raoul Duke III wrote: »

That is a very small sample size though - 1 self-employed person's experience.

For anyone who is employed, the combination of 40% tax relief plus an employer contribution is unbeatable.

Say for example, we're going to invest in equity Fund A.

We have two people; Tim and Tom. Both 40 years old. Both employed in the same job, both earning 100k. There is a company DC scheme and the employer will match up to 10%.

Tim elects into the scheme and choose to make the max contribution of 25% p.a.
Tom elects not to join the scheme and decides to manage his own investments.

Here's the breakdown of how their finances look at the end of the year:

Tim Tom
Gross Income 100,000 100,000
Pension Contribution 25,000 -
Taxable Income 75,000 100,000

Taxes\PRSi\USC 28,304 38,304

Net Income 46,696 61,696

Pension Contributions
Own 25,000
Employer 10,000
Total Pension Contributions 35,000 -


Tom has 15k more income but - crucially - Tim has put 35k into his pension fund.

Tom is worse off than Tim. Now he does have the luxury of making his own investment choices but I would propose that the tax benefit and the employer contributions far outweigh this.

Simply put; as a PAYE worker, this is the biggest break you will ever get. You would be foolish not to take advantage of it.

I do not dispute any of the facts you have provided above. However I also do not believe that any pension plan provides great growth.

Lets go back to the Op's initial post and I am making some assumptions here so I am happy to be proved wrong if these are incorrect.

The OP said -

I'm 34, and I worry about my future. I'm currently putting 6% of my salary into my pot along with an additional 6% in AVC's, my employer puts in an additional 9%.
I currently have €48000 in the pot, with a forecasted 500k at retirement.

Thanks, my salary isn't major, 45k or so, but this will rise up to 50k within the next 5 years.

Assuming that the OP plans to retire at 66 - this leaves 32 years to grow his pension pot. Currently the pot is 48K and he (and his employer) will add 6.5K per year which will give an additional 208K. Over the life of the pension plan the OP (and employer) will have contributed 256K and the forecast return is 500K.

So this pension plan is not even returning 100% investment growth over a 40 year period. That return is woeful.

Henry Ford III

bob mcbob wrote: »

I do not dispute any of the facts you have provided above. However I also do not believe that any pension plan provides great growth.

Lets go back to the Op's initial post and I am making some assumptions here so I am happy to be proved wrong if these are incorrect.

The OP said -

I'm 34, and I worry about my future. I'm currently putting 6% of my salary into my pot along with an additional 6% in AVC's, my employer puts in an additional 9%.
I currently have €48000 in the pot, with a forecasted 500k at retirement.

Thanks, my salary isn't major, 45k or so, but this will rise up to 50k within the next 5 years.

Assuming that the OP plans to retire at 66 - this leaves 32 years to grow his pension pot. Currently the pot is 48K and he (and his employer) will add 6.5K per year which will give an additional 208K. Over the life of the pension plan the OP (and employer) will have contributed 256K and the forecast return is 500K.

So this pension plan is not even returning 100% investment growth over a 40 year period. That return is woeful.

1/. Pension plans can be highly effective.

2/. Quotations are based on a quite low assumed rate of return. Returns are guaranteed and may be higher or lower than projected. Relying on a quotation as an indicator of future benefits is horribly flawed.

The J Stands for Jay

Henry Ford III wrote: »

1/. Pension plans can be highly effective.

2/. Quotations are based on a quite low assumed rate of return. Returns are guaranteed and may be higher or lower than projected. Relying on a quotation as an indicator of future benefits is horribly flawed.

And those projections are often discounted by an assumed inflation rate, to give a value in 'today's prices', making the return look worse.

Raoul Duke III

bob mcbob wrote: »

I do not dispute any of the facts you have provided above. However I also do not believe that any pension plan provides great growth.

Lets go back to the Op's initial post and I am making some assumptions here so I am happy to be proved wrong if these are incorrect.

The OP said -

I'm 34, and I worry about my future. I'm currently putting 6% of my salary into my pot along with an additional 6% in AVC's, my employer puts in an additional 9%.
I currently have €48000 in the pot, with a forecasted 500k at retirement.

Thanks, my salary isn't major, 45k or so, but this will rise up to 50k within the next 5 years.

Assuming that the OP plans to retire at 66 - this leaves 32 years to grow his pension pot. Currently the pot is 48K and he (and his employer) will add 6.5K per year which will give an additional 208K. Over the life of the pension plan the OP (and employer) will have contributed 256K and the forecast return is 500K.

So this pension plan is not even returning 100% investment growth over a 40 year period. That return is woeful.

Nobody (including the OP) has any idea what the return will be.

It might be 500%, it might be 100%...it might even be a negative number.

Point being he is better off to invest in a fund via a DC scheme, take the tax break and the employer contribution, than he is to self-invest.

positron

This thread made me think about my own pension situation, so thank you!!

Quick question if I may.

According to this table:

Age Amount which qualifies for tax relief
Under 30 years 15% of net relevant earnings
30 to 39 years 20%
40 to 49 years 25%
50 to 54 years: 30%
55 to 59 years 35%
60 and over 40%

(Source: https://www.citizensinformation.ie/en/money_and_tax/personal_finance/pensions/personal_pensions.html)

Is that % for individual contribution or is it for individual + company contribution combined? If that limit is for "combined", what happens if one were overpaying into the pension, when/where will that be taxed?

Thanks again for this enlightening discussion!

Unknownability

positron wrote: »

This thread made me think about my own pension situation, so thank you!!

Quick question if I may.

According to this table:

Age Amount which qualifies for tax relief
Under 30 years 15% of net relevant earnings
30 to 39 years 20%
40 to 49 years 25%
50 to 54 years: 30%
55 to 59 years 35%
60 and over 40%

(Source: https://www.citizensinformation.ie/en/money_and_tax/personal_finance/pensions/personal_pensions.html)

Is that % for individual contribution or is it for individual + company contribution combined? If that limit is for "combined", what happens if one were overpaying into the pension, when/where will that be taxed?

Thanks again for this enlightening discussion!

Those figures are just for the individual, if you pay more into it you just lose the tax relief and wouid essential be putting taxed income into the pension.

Raoul Duke III

positron wrote: »

This thread made me think about my own pension situation, so thank you!!

Quick question if I may.

According to this table:

Age Amount which qualifies for tax relief
Under 30 years 15% of net relevant earnings
30 to 39 years 20%
40 to 49 years 25%
50 to 54 years: 30%
55 to 59 years 35%
60 and over 40%

(Source: https://www.citizensinformation.ie/en/money_and_tax/personal_finance/pensions/personal_pensions.html)

Is that % for individual contribution or is it for individual + company contribution combined? If that limit is for "combined", what happens if one were overpaying into the pension, when/where will that be taxed?

Thanks again for this enlightening discussion!

Remember that those percentages apply up to a limit of 115k.

So, if you're, for example 40 and earn 150k, and put 25% of your income into your pension you will get fully taxed now on the difference between 150k and 115k.

Not the worst problem to have though.