Making a personal contribution to a personal pension plan allows the individual to put aside monies to build up a fund for when they stop working. This makes excellent financial sense as all personal contributions (subject to certain rules) are tax deductible at the client’s highest (marginal) tax rate.
The tax relief is capped at a maximum earnings limit of € 115,000 – regardless of whether an individual might earn a higher annual income. The tax relief is also subject to age related limits so a 30 year old can secure tax relief on 20% of net relevant earnings and a 50 year old can secure tax relief on 30% of net relevant earnings (subject to the maximum ceiling of € 115,000).
Mary aged 50 is self-employed and her net relevant earnings are € 140,000. Mary now has the scope to make a maximum personal contribution of € 34,500 (€ 115,000 x 30%) and is looking to retire at age 60 – giving her a 10 year investment horizon.
She has also considered the possibility of investing these monies into the State’s 10 Year National Solidarity Bond and has asked which option might be more appropriate for her.
The value of tax relief on pension contributions cannot be underestimated. In addition all growth achieved by the funds within your pension plan are tax exempt – comparing favourably with the tax free returns provided via the National Solidarity Bond.
….so let’s have a look at the options….
If Mary invested € 34,500 into a Personal Pension Plan the net cost of doing so would be € 20,700. If she then sought to secure an annualised return of 1.5% (equivalent to the annual return provided by the 10 Year National Solidarity Bond) and the cost of managing the pension funds was 1% p.a. she would secure a pension fund value at age 60 of € 36,260 representing an annualised yield of 5.75% p.a. on her net investment amount of € 20,700.
An equivalent investment of € 20,700 into the 10 Year National Solidarity Bond securing a State Backed annual return of 1.5% p.a. would secure a gross cumulative (tax free) value of € 24,012 – representing approximately 2/3rds of what Mary might otherwise achieve via the pension plan.
….You can also arrange to backdate this pension contribution into your 2019 tax year (securing a rebate of tax paid) if the contribution is made no later than October / November 2020.
Feel free to contact Full Circle Financial Services Limited if you might wish to discuss your pension options of any other financial matters that we might be able to help you with.
Assumptions:-
The rate of return on the pension investment has been assumed as 1.5% p.a. – whilst this is a relatively low growth rate assumption this is not guaranteed and the actual rate of return could be more or less than this. When investing in products with no guarantees the investor has to accept that unit values may fall as well as rise.
Full Circle Financial Services Limited is regulated by the Central Bank of Ireland.
Full Circle Financial Services Limited – www.fcfinancial.ie – 01 2530060