Pension Advice

Mr E

I want to set up a pension this week. The company I work for doesn't have any schemes (we're only a startup), and I think the sooner I start one, the better (I'm 28).

I would like to hear some recommendations for schemes that are available in Ireland.

I heard that the Government are giving back 50% on any state pension schemes started before the end of October. Has anyone got more information on this?

Thanks in advance,
Dave.

RainyDay

Hi Dave - Certainly, the earlier you can start a pension, the better. The more time you can give your investments to grow, the better off you'll be in your retirement. The big advantage of pensions is a tax deferral. You contribute to your pension out of your pre-tax salary, so you don't pay tax now. However, it's really a tax deferral, rather than a tax saving. You'll be liable for tax when you retire (subject to normal tax credits etc).

However, don't fall for all the advertising guff about "the big drop". There is no point in you paying money into a pension unless/until your finances are in generally good shape. Remember that once you put your money into the pension fund, you won't see it again until you retire - regardless of what happens in your life. So before you put money away, you might want to think about giving priority to house deposit, clearing credit card bills, clearing car loans etc. There is no point in paying 9%-10% interest on a car loan while your savings are making 4%-6% in your pension fund. Also, if you have an SSIA account, you should try to max your contributions to this account first, as the Govt 25% top-up is an unbeatable return that you won't get elsewhere.

Also, note that there are some restrictions on how you can use/get the money when you retire. Normally, you can take 25% of your pension fund tax free on your retirement date. Unless you can show that you have other guaranteed substantial income sources, you will probably have to use the remaining 75% of your fund to buy an 'annuity'. This means that an insurance company will guarantee to pay you €x per annum, regardless of whether you live for 3 more years or 30 more years. Whilst there is a lot of security in this, the security comes with an expensive price tag.

Check out the Pensions chapter of the Guide to Savings & Investments for more background information.

If you do take out a private pension, make sure that you get full details of the commissions that the salesman/broker will be taking. I've come across some pension contracts where 50% of your first year's payments plus 50% of any increases in payments in future years go to the salesman (and don't go into your fund). Personally, I'd recommend that you go to one of the fee-based brokers (Liam Ferguson & Associates or MyAdvisor.ie . These guys will charge you a flat, once-off fee to set up your pension and will not take any commission. This usually works out better in the long run.

Mr E

RainyDay,

Thanks for the well informed, well written reply. Much appreciated. Its definitely something I'm going to get sorted in the next week or two.

- Dave.

Victor

Make sure you find out the exact charges monthly and annual that you will be charged, often paying monthly accrues a lot of fees. While paying monthly is less painful and allows the money to grow during the year, annual payments allow you to shop around a bit better.

Example:
You pay €100 a month
BOI Lifetime deduct a minimum monthly transaction fee of €15.24
BOI Lifetime charge a 1%(1.5%) annual fund management fee
BOI Lifetime deduct a 5% spread commission

This means your growth is based on a starting point of about 80% of what you paid in. However, you can claim PRSI and tax back on the highest rate you paid.

Also, note that the annual statement from a pension company is a lot less transparent than a bank statement (my personal opinion is the statements border on the negligent / fraudulent).

thegills

Some additional info.
- If you are between 30-35 years old you can pay up to 20% of your gross yearly income into a personal pension. This % scales up/down if you are older/younger.
- If you only contribute say 15% of your gross salary, the remaining 5% can be carried forward.
- You can pay an annual lump sum or regular interval sums.
- If you join a company pension scheme in a few years you are not allowed to make payments into your personal pension unless you make payments through a different source of revenue (2nd house rental doesn't count)
- You cannot access your pension until you are 60 years old

In relation to charges most institutions charge
- 5% of your annual premium to cover spread commission.
- 0.75 - 2% to manage the fund. In some cases this decreases over time.
- Some institutions offer 10 year loyalty rewards of between 2-3%.

RainyDay

You really shouldn't be paying bid/offer spreads of 2%-5% these days. Check out the discount brokers mentioned in my earlier post for details of 'nil commission' contracts.

Earthhorse

Your company is young and so are you; have they stated explicitly that they won't be setting up a Group Pension Scheme?

If they do and it's compulsory then you will have to stop contributing to your Personal Pension Plan. As far as I know by next summer all employers will have to make PRSAs (Personal Retirement Savings Accounts) available to their employees.

You may wish to hold off till then, as RainDay mentioned most of these incentives are tax deferrals rather than savings. 50% of what you contribute this year won't seem like a lot when you're sixty five.

Ardrinekennels

I know it does not have the same tax advanteges but am I the only one so pissed off with all the charges and the idea of someone else gambling with my pension fund that I have decided to run my own fund???? It also has the added benifit (or disadvantage) that if required you can get at it.

RainyDay

I know it does not have the same tax advanteges but am I the only one so pissed off with all the charges and the idea of someone else gambling with my pension fund that I have decided to run my own fund???? It also has the added benifit (or disadvantage) that if required you can get at it

Actually, if you have a substantial fund, you can manage your own fund AND keep the tax advantages. They are known as 'Small Self-Administered schemes' - see here for an example of one such product. I think you need to have a fair old pile of cash (six-figure sum) to set up one of these.

Note that it's definitely possible to minimise charges with careful shopping around. Check out Quinn Life's index tracking funds or the local brokers mentioned in my earlier posts.

Victor

Following the clampdown on dubious 'private' pensions last year, are these funds still permitted?

RainyDay

Hi Victor - I'm pretty sure these self-administered funds are still permitted (though I'm not a real expert on this stuff). I think the clampdown last year related to these funds being used as 'wrappers' to hold property investments, if my memory serves me right. You'll probably find people with more knowledge than me on this topic on the Pensions Forum of Askaboutmoney.com .