Irish Pensions Irish Pensions OutlineOutline

PresentedPresentedByBy

Christopher M. QuigleyChristopher M. QuigleyB.Sc. (Maj. Accounting), M.I. I. (Grad.), M.A., QFA.B.Sc. (Maj. Accounting), M.I. I. (Grad.), M.A., QFA.

Qualified Financial AdviserQualified Financial Adviserwww.Wealthbuilder.iewww.Wealthbuilder.ie

cmqesquire@gmail.com

Overview:Overview:

The Issue of private pensions has become The Issue of private pensions has become centre stage due to the possibility that in the centre stage due to the possibility that in the distant future the State Pension may be distant future the State Pension may be abolished or severely diminished despite the abolished or severely diminished despite the fact that people are living longer.fact that people are living longer.

Overview:Overview:

The cost of living is increasing every decade. The cost of living is increasing every decade. This means the rate of return you receive on This means the rate of return you receive on your funds is crucial to adequately provide for your funds is crucial to adequately provide for you and your family. Therefore before you you and your family. Therefore before you chose check out the fund’s investment chose check out the fund’s investment strategy.strategy.

Overview:Overview:

Depending on the risk profile and age of the Depending on the risk profile and age of the client, traditionally pensions funds are invested client, traditionally pensions funds are invested in Cash or Stocks or Bonds or a mix of each. in Cash or Stocks or Bonds or a mix of each.

Choosing this “mix” has a fundamental effect Choosing this “mix” has a fundamental effect on the performance of the fund.on the performance of the fund.

Overview:Overview:

Currently bank deposit rates are very low or Currently bank deposit rates are very low or negative therefore you must seek higher negative therefore you must seek higher returns in order to adequately grow your returns in order to adequately grow your investment fund.investment fund.

Higher returns does not necessarily greater Higher returns does not necessarily greater risk. risk.

Overview:Overview:

In the main savings into a pension fund can In the main savings into a pension fund can be deducted for tax at your “marginal rate” be deducted for tax at your “marginal rate” which currently is 41%. Thus for example 500 which currently is 41%. Thus for example 500 Euro saved a month, or 6,000 a year actually Euro saved a month, or 6,000 a year actually costs you only 3,540. (6,000 x 59% = 3,540).costs you only 3,540. (6,000 x 59% = 3,540).

Overview:Overview:

Profits made on investments in your pension Profits made on investments in your pension funds are free of capital gains tax and stamp funds are free of capital gains tax and stamp duty therefore funds available for reinvestment duty therefore funds available for reinvestment are gross amounts not net. The compoundingare gross amounts not net. The compoundingeffect of these additional amounts available effect of these additional amounts available can have a spectacular effect on the build upcan have a spectacular effect on the build upof your pension fund. of your pension fund.

Main PointsMain Points

1. Through a PRSA (Personal Retirement Savings Account) or through a PPP (A Personal Savings Plan) you can get annual tax relief on funds saved. 

2. Maximum amounts you can get relief depends on your age: 

Age: Max Relief Available:30 (Less Than) 15%30-39 20%40-49 25%50-54 30%55-59 35%60 (Plus) 40%

3. No capital gains tax applies to pension funds, thus profits compound faster at gross rather than at net rate.

4. Benefits can be taken when one retires, normally between 60-75 years of age but can be taken earlier where one is permanently incapacitated.

5. Taking of benefits is mainly as follows:

Personal Pension Plan:

A: 25% of fund accumulated can be taken tax free up to a maximum of 200,000 Euro.

B: Balance up to a maximum of 300,000 Euro at the standard rate of tax.

C: Next 63,500 is used to buy an AMRF (Approved Minimum Retirement Fund) if you do not have a guaranteed income of 12,700 Euro per annum.

D: Balance can be transferred to an ARF (Approved Retirement Fund) or taken as taxable cash subject to PAYE at the marginal rate.

5. Taking of benefits is mainly as follows:

Personal Retirement Account:

Same as the PPP above except:A: After the 25% is first taken the balance can be retained in the PRSA up to the

age of 75.

B: This balance other than the 63,500 which is ring fenced for an AMRF is subject to a 5% pa annual distribution which applies to ARF’s.

C: At age 75 any balance left in the PRSA may be transferred to an ARF, used to buy an annuity or taken a taxable lump sum.

D: Any balance left in the PRSA after 75 cannot be accessed and in effect becomes a death benefit to your dependants.

6. PRSA’s have very specific restrictions so be careful what funds you choose.

7. Standard PRSA’s have maximum annual charges of 5% of contributions and 1% of funds under management.

8. With PPP’s there are more options on choice of funds and there are no minimum charges.

9. With a PPP you must have or have had a relevant source of earnings either as an

employee or self-employed.

10. Anybody can take out a PRSA regardless of source of income but one must be actually earning to avail of tax reliefs.

11. With a PPP only the individual can contribute. Where the employer contributes is must be treated as a benefit in kind.

12. With a PRSA the employer can contribute and well as the employee.

13. A PPP cannot transfer in to a PRSA only to another PPP but can transfer out to a

PPP and a PRSA.

14. State Pension Contributory:

A: Available at 66 years of age but that is changing. In 2021 it will be 67. In 2028 It will be 68.

B: Current Rate: 230.30 Euro per week.

C: Not Means tested.

D: Will need 30 years “stamps” to qualify for full amount.

E: Very valuable due to current low interest rates. The annuity value of the pension Is approximately 700,000.00 Euro.

15. State Pension Non-Contributory.

A: Available at 66 years of age but has similar changes as to the contributory pension.

`B: Rate: 219.00 Euro per week.

C: Means tested to income over 200.00 Euro. Main residence is excluded.

D Will need 30 years “stamps” to get full rate.

E: Very valuable due to current low interest rates. The annuity value of the pension is approximately 660,000.00 Euro.

E: Habitual residence rule applies.

16. Self Administered Pensions16. Self Administered Pensions

Everybody has the option to self administer or self manage their pension rather Everybody has the option to self administer or self manage their pension rather than place their funds with a passive or active fund manager. than place their funds with a passive or active fund manager.

This approach has been greatly assisted by the development of the Davy Select This approach has been greatly assisted by the development of the Davy Select Pensions Account. This allows the client directly manage their funds on the Davy Pensions Account. This allows the client directly manage their funds on the Davy Select Trading platform through a PRSA or PPP.Select Trading platform through a PRSA or PPP.

In this situation Davy’s act a fund trustees. This simplifies account transfer and In this situation Davy’s act a fund trustees. This simplifies account transfer and transaction management.transaction management.

Understanding Pensions.Example: Regular Savings Level Comparison.  Notes: 1. Assumptions: Return Rate 5% P/A Compounding.

2. Number Years Of Saving: Age35 to 65 = 30 Years.  3. Income Rate At The End Of 30 Years: 5% Before Tax. 4. Inflation: Inflation Value Of Funds Ignored 5. Return Rate: Is Net Of Expenses And Fees.

Savings Comparison 5% Return Per Annum Compounding: 30 Years.Savings Comparison 5% Return Per Annum Compounding: 30 Years.

Monthly Savings Final Fund Retirement Income Retirement IncomeEuro. Total. Yearly. Monthly.

 ------------------------------------------------------------------------------------------------------------------------------------------------------------------ 100 81,885 4094 341

  

250 204,714 10,235 853   500 409,429 20,471 1,706   750 614,144 30,707 2,559   1000 818,858 40,943 3,412

 Understanding Pensions.Example: Regular Savings Level Comparison.  Notes: 1. Assumptions: Return Rate 10% P/A Compounding. 2. Number Years Of Saving: Age35 to 65 = 30 Years.  3. Income Rate At The End Of 30 Years Assuming Switch Out Of Equities For Peace Of Mind: 5% Before Tax.

4. Inflation: Inflation Value Of Funds Ignored. 5. Return Rate: Before Expenses And Fees.

Savings Comparison: 10 % Per Annum Compounding: 30 Years.Savings Comparison: 10 % Per Annum Compounding: 30 Years.

Monthly Savings. Final Fund Retirement Income Retirement IncomeEuro. Total. Yearly. Monthly. ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 100 208,085 10,404 867   250 520,212 26,100 2,166   500 1,040,424 52,021 4,335   750 1,560,637 78,032 6,503   1000 2,080,849 104,042 8,670

Essay ReviewEssay Review

We will now go through the essay:We will now go through the essay:““The Difference Between Stock Market The Difference Between Stock Market Investment & Speculation” with the appendix:Investment & Speculation” with the appendix:““Compounding & The Power Of Starting Compounding & The Power Of Starting Early”.Early”.

Essay:Essay:““The Difference Between Stock market The Difference Between Stock market

Investment & Speculation”.Investment & Speculation”.

Available Here:Available Here:http://www.slideshare.net/quigleycompany/the-difference-between-stock-market-investment-speculation

Essay Point: The rule of 72.The Rule of 72 is a simplified way to determine how many years an investment will take to double, given a fixed annual rate of interest. Thus by dividing 72 by the annual rate of return investors can get a rough estimate of how long it will take for the initial investment to “double” itself.

Our target annual rate of return is 10%. (This is the rate the S & P has grown, on average, over the last 30 years). This average annual return objective when married to the “miracle” of compounding turns a consistent savings fund into an excellent retirement nest egg. Let me demonstrate.  When you divide 10 into 72 you get 7.2 . This means that it will take 7 years (approx.) for ones fund to double:

Essay Point: Rule of 72 continued: : 10% PA takes 7 years to double investment Essay Point: Rule of 72 continued: : 10% PA takes 7 years to double investment fund: fund:

Year 1. 1000 X 1.10 = 1100 Year 2. 1100 X 1.10 = 1210 Year 3. 1210 X 1.10 = 1331 Year 4. 1131 X 1.10 = 1464 Year 5. 1464 X 1.10 = 1611 Year 6. 1611 X 1.10 = 1771 Year 7. 1771 X 1.10 = 1949

Essay point: The Rule od 72 continued:Essay point: The Rule od 72 continued:

The average “pension investment” cycle is about 30 years, therefore if you focus on achieving an annual investment target of 10% you can get 4 “doublings” (approx.) of your investment over the 30 year period. Thus through the “magic” of compounding a 100,000 Euro investment grows into a handsome pension fund of 1.6 million Euro after 4 such “doublings”. Year 1-7. 100,000 X 2 = 200,000 Year 8-14. 200,000 X 2 = 400,000 Year 15-21. 400,000 X 2 = 800,000 Year 22-28. 800,000 X 2 = 1,600,000

Addendum: Investing: Compounding & The Power Of Starting Saving Early:

In order to emphasize the power of compounding, I am including this extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, Florida. In this study we assume that investor (B) opens a PRSA/PPP at age 19. For seven consecutive periods he puts $2,000 in his fund at an average growth rate of 10% (7% interest plus 3% growth). After seven years this fellow makes NO MORE contributions -- he's finished. A second investor (A) makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he's 65 (at the same theoretical 10% rate). Now study the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more early years of compounding than A. Those seven early years were worth more than all of A's 33 additional contributions.

Conclusion: Start pension investing as early as possible.

S & P Growth Over 30 Years: 10% P A On Average:S & P Growth Over 30 Years: 10% P A On Average:

Chart: Compound Ready Reckoner. The Annual Rate Of Return Needed To Turn 117 Into 2,041 Is 10%.Over The Last 30 Years Is 10% Approx.

Conclusions:Conclusions:

A: Time is of the Essence. Start as early as possible.A: Time is of the Essence. Start as early as possible.B: Try to achieve a rate of return in the 10% B: Try to achieve a rate of return in the 10% Per Annum region, (growth plus dividends).Per Annum region, (growth plus dividends).C: Keep administrative and management C: Keep administrative and management charges as low as possible.charges as low as possible.D: Over time the equity markets have proven to D: Over time the equity markets have proven to be the best place to invest for growth. Savingbe the best place to invest for growth. Saving over time into a fund minimises timing risk throughover time into a fund minimises timing risk through “ “dollar cost averaging”.dollar cost averaging”.

E: Most folk opt for a PRSA over a PPP due to E: Most folk opt for a PRSA over a PPP due to expenses and charges protection.expenses and charges protection.F: Today there is the constant possibility of changeF: Today there is the constant possibility of change of employment. Thus make sure your pensionof employment. Thus make sure your pension can move with you.can move with you.G: Your pension is fundamental to your future G: Your pension is fundamental to your future financial security. Regularly review it to make financial security. Regularly review it to make sure it is performing adequately and takes sure it is performing adequately and takes advantage of any recent tax changes.advantage of any recent tax changes.