€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.

Automatic Enrolment is expected to start in 2025

The Automatic Enrolment Retirement Savings System is to provide a retirement plan for people without a work or private pension to save for retirement, which will supplement the State Pension.

Why is it being introduced?

*  Not many people have work or private pensions and will only depend on the State Pension when they retire. This means that they may experience a drop in income when they retire which could lead to a fall in their standard of living.

*  Ireland has an aging population, in the future there will be fewer people of working age to support the retired population. To make sure people have enough money when they retire, it is important that people start saving for their future now.

Who will be automatically enrolled?

• Current and new employees aged between 23 and 60 years of age and earning €20,000 or above per annum will be automatically enrolled.

• Employees earning below €20,000 per annum and employees aged under 23 and over 60 will be able to ‘opt-in’ to the system.

• Employer contributions will be limited to a qualifying earnings threshold of €80,000.

How will it work for employees?

~  Unless an employee is a member of a scheme already, contributions during the first six months of membership will be compulsory. Opt out is available after this time and a refund of employee contributions.

~  Members who opt-out will be automatically re-enrolled after two years but will have the ability to opt-out again under the same circumstances outlined above.

~  Invested funds and scheme membership will follow the member when members change employments.

~  Contributions are calculated on your gross salary, starting at 1.5% of your salary and will gradually increase to 6% by year 10. For every €3 that you contribute to your pension fund, your employer will put in €3, and the Government will put in €1. This means that for every €3 you contribute, €7 will be added to your account.

How will it work for employers?

>  Employees will be automatically enrolled with the National Automatic Enrolment Retirement Savings Authority by their employer via payroll software.

>  Employers will be required to make a matching (tax deductible) contribution on behalf of the employee i.e. at a specified contribution rate.

>  Any existing company pension schemes will run parallel to auto-enrolment. Any employees that have a record via payroll of either employee or employer contributions will not be auto-enrolled.

>  Self-employed individuals will not be included in the auto-enrolment scheme.

PLEASE NOTE : This information is correct as of May 2024 - the details of Auto Enrolment are being updated regularly so visit https://www.gov.ie/en/campaigns/0ab04-automatic-enrolment-for-pensions-hub/ for the most recent information.

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.