Posted by Jill Kerby on September 30 2009 @ 23:11
Will You Be Topping Up Your Pension in 2009?
Every year at this time, many self-employed people, company directors, workers whose employers don’t offer them membership of an occupational pension scheme, and anyone who wants to top up their pension with an AVC – an additional voluntary contribution - starts working out how much they can and should spend on their pension in order to take advantage of the October 31st pay and file deadline for tax relief on their contributions.
What a difference a year makes. Financial advisors and pension consultants are all reporting that pension contributions have dropped off – and perhaps for good reason: Irish pension funds fell off a cliff in the year to March ’09 and while they have rebounded since then, are still down over the year by an average of -11.5% to August ‘09 and by -8% over three years. For the year to date to August 2009, pension funds are strongly back in the black at +14.5%.
With performance figures up, those same advisors and the pension companies are hoping that the tax relief that is still available for pension contributions – but perhaps not for much longer – will be enough to get savers to make their contributions by the end of October (or mid-November if you file on-line) in order that they collect that tax relief. Worth between 46% to 49% for higher rate taxpayers when you take into account income tax, PRSI and the health levy and 28% for standard rate tax payers, pension contributions are one of the last generous tax relief’s available, especially for people on the higher rate of tax.
If the government implements the recommendations of the Commission on Taxation, which also includes a SSIA type pension savings scheme for lower earners and a reduced, single tax relief rate - probably about 38.5% - this should be quite a good incentive for lower earners to start pensions. However, for those people on higher tax rates, it could stop many from making contributions in the future as they will end up paying far more than 38.5% tax on their pensions when they retire.
The other change being recommended is that the one and a half time salary that employees can take tax free from their pension fund or 25% of the fund if you are self-employed, should be subject to a €200,000 maximum sum.
These changes haven’t been implemented yet, so your AVC top up or other contributions will remain as they were for this year at least. However, there have been a few changes that you should know about – such as the fact that the income limit for making contributions has been reduced to €150,000. And of course if you are a civil or public servant, you will already be paying the pension levy which, on average amounts to a gross salary deduction of 7.5% but closer to 4.5% after tax relief.
Many civil and public servants have stopped their AVCs because of the new pension levy, but this is, perhaps, a false economy given that the levy does not improve your final pension return – it is just an additional contribution to your existing benefits. Speak to a pension advisor about this, but be extra conscious of any commissions and charges attached to AVCs; teachers and nurses in particular have been paying extremely high charges for their AVCs schemes.
If you do decide to continue to make contributions to an existing private pension or AVC or intend to take out a retirement contract or even a PRSA (the flexible Personal Retirement Savings Accounts) the extra difficulty this year is which fund to choose.
The massive losses that older pension contributors in particular suffered last year (now partly recovered) is as good a warning as anyone can get that they were taking too much risk with their retirement portfolios. This year, given how irrationally overbought stock markets have been since March, new contributions should be invested in ‘safer’ assets and sectors like cash, index-linked bonds, defensive shares, precious metals and for savers who still have many years before retirement, higher risk asset classes like energy, water, alternative energy, emerging markets in the Far East and commodities.
Ideally, you should speak an experienced, fee-based advisor before making a lump sum contribution this year, if only for him or her to also review your existing pension funds to see how well diversified it is. The tax-breaks are important and given how few tax reliefs are still available, should be taken advantage of while they last, but the tax deadline shouldn’t override the inherent risks involved with any stock-market based investment this year.
If the markets should take another dive – and many commentators believe they will – you want to make sure that the shares or funds you’ve chosen won’t plunge with them.