€100 into Savings vs Pension

Some clients prefer to save directly into a savings plan, rather than a pension, mostly due to ease of access. With a pension you could be required to wait until your sixties to access funds, so the limitations are not the same as with a savings plan.

At times it is hard to show people the benefit of long-term savings in a pension, as the tax relief on pension contributions and the tax-free growth on pension plans isn’t always obvious. So, let’s see if we can give it a go today.

As an example, let’s look at a person, who wants to invest/save €100 a month for 30 years in an investment savings plan, while trying to match the kind of growth an aggressive pension fund would target. Savings outside of a pension are usually subject to tax on the growth and can be between 25%-41% depending on your investment. Let’s work off 33% tax (same as DIRT tax) on investment growth for this example.

In a pension, if you qualify for tax-relief and are contributing €100 a month, you will get tax-relief of €20 or €40 depending on your marginal tax rate. This means that you will be paying €20 or €40 less tax or to look at it another way, if you chose instead to take that €100 as income (to invest outside of a pension), you would effectively only have €80/€60 in your hand after income tax has been deducted.

For this exercise, I am going to work off the following assumptions.

1.    Saving €100 per month for 30 years, both invested in a fund that has exact same charges and fund return.

2.    Tax-relief on the pension at 20% or 40% and tax-free growth allows a contribution of €125 or €166.67 to your pension for €100 cost.

3.    Gross roll-up tax of 33% tax on the savings plan (you pay growth on tax at end of policy)

After 30 years

Savings value      €67,574

Pension value €103,907 (20%) or €138,546 (40%)

Now, out of the pension you may have to pay some income tax when you are drawing it down. You will currently get a portion of it tax-free and the remainder of the funds are subject to income tax. However, at retirement, most people’s income goes down substantially and in many cases people pay far less or no income tax on their pension deductions. For example, a retired couple over 65 can earn €36,000 income before being subject to income tax.

Paid Up Pensions…what to do with them?

A paid-up pension is a pension that you may have had with a previous employer and upon leaving employment and ceasing payments, you may not have enquired about or moved to your own name.

How do I get information about my old Pension?

In most cases you should be receiving annual benefit statements with general details (including the value) of your pension. Though if you have moved to a new address, you may not be receiving this information annually or at all. If you are unsure where to look, the company’s human resource department (or Employee Pension department if there is one) is a good place to start.

Can I bring my pension with me when I move employment?

In most cases, when you leave employment, you have several options. You are entitled to request “leaving service options” which sets out what choices are available to you. This can intimidate and confuse people but if it’s explained correctly, I find people are more confident making the decision to move their pension into their own name.

Will I lose out if I move out of the old Pension arrangement?

The only way of knowing is by enquiring about the benefits currently included on the pension plan, but in many cases, you can gain from moving your pension funds into your own name.

One of the main advantages is that you get direct access and information sent to you personally about your pension. Many people like to have complete control over their pension without having to contact a Trustee (or past employer) anytime they want information regarding their policy.

What can a Financial Adviser do for you?

Part of our job is to help people arrange their pensions together into an efficient / transparent portfolio. In simple terms this means you know exactly what you have, where you have it and when you can access the funds. In certain cases, individuals are surprised to learn they may have access to part of their pension once they reach age 50.

€100 For Cover That May Only Cost €70???

Our new financial planning system has been hugely successful and popular in assisting clients with setting budgets and plans in place for their future. We try to get people to visualise what they would like to have as a goal, whether it is to pay off a mortgage early, retire early, travel the world or simply provide for family later in life.

Another handy way it can help is to configure whether a person has enough protection in place. Whether it is mortgage protection when purchasing a home or perhaps income protection for a self-employed person, the first question we ask is …how much have you got to spend? This is a great starting point as we can then provide various quotes to accommodate this figure without going over budget before we have even begun!

The following is an example of a quote for Joe Bloggs who is a married, 35-year-old, non-smoker who told us that he has €100 as a monthly budget for his protection needs. In his case, the three main areas he wanted to review was protection for his income, life cover for his family and specified illness cover.

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After we provided Joe with these quotations, we were able to inform him that he can claim tax relief on €75 of this cover at his standard tax rate (20% or 40%). This meant that he could save €15 to €30 a month bringing the total cost (€100) of the cover down to as little as €70 per month.