# Good time to start a pension now?



## Newbie123 (4 Sep 2012)

I am a PAYE worker in my 30s with no pension
After doing a lot of research on this website and with pension providers, I have worked out the best option for my circumstances. 

However two questions that I would appreciate any feedback on:
I am unsure as to whether to commit now or wait 3 months until budget 2013 is announced. What are your thoughts on the likelihood of tax relief on contributions being reduced in the upcoming budget & pensions suddenly looking less favourable (I currently pay tax at 41% and would probably draw pension down at lower rate, so pensions are extremely favourable for me at the moment)
Any thoughts on consensus funds (such as the Irish Life ‘Managed Portfolio 4’) vs managed funds (such as Zurich ‘Balanced Fund’)


----------



## Baracuda (4 Sep 2012)

I guess my opnion maybe biased as I work in the pension's industry but here it is anyway.

Firstly many people think that you need a pension to save for retirement but this is not the case for everyone. You can save for retirement through a number of different vehicle's including regular deposit savings, direct shareholding's in company's, property etc. and of course a traditional pension fund 

The main advantage of a the latter is that each premium paid into it, currently gets full tax relief at your marginal rate and the income that the pension assets receives are also tax exempt i.e. dividents and profits on shares are exempt from tax. 

The main down side to pension funds is that you have to wait until retirement to claim an income. Management fee's and cost's can be a major issue for some, especially some of the older retirement contracts so buyer beware and understand all the life company costs. 

Fund performance is what most people give out about but as a consumer you need to know what level of risk you are happy to invest at. Unlike taking out a life policy where you can put it in a folder and forget about it for years at a time, a pension needs tender love and care if it is going to produce a return that you are happy with it i.e. you need to sit down and review fund performance and objectives at least once a year with your pension's advisor

So to answer your question, your getting 41% tax relief for another 4 months so take it, if tax relief is reduced in 2013 then all you are doing is deferring income till retirement which is not a bad idea either!

IL MPF 4 has its good points and bad points imo. Its biggest fault is that it is not a tailored fund for a person that has an interst in pension investment and is a one size fits all approach and on the flipside is its biggest merit is that it takes away investment fund decision's for thoes that know little about investment funds.

Based on past performance Zurich Life BF is a fine investment fund and alway has been through the years.

I can't really say which is the best as that would require a crystal ball which I do not have to hand ;-) What I can say is that you are not really comparing like with like. IL consensus product is based on the combined wisdom of the market it is tracking and is considered a passive investment approach and as a result should have a lower trading expence ratio (TER). 

Z Bal Fund is has an active managed approach and therefore should have a higher TER. but for this they should have a higher than average fund return which they have to be fair when you compare like for like funds with other companys. 

(TER is not published by any company in Ireland and is deducted at fund source before the funds returns are published) Will have to wait for the regulator to make all pension companys publish this info but I for one wont be holding my breath for this to happen!


----------



## Conshine (5 Sep 2012)

If they do reduce the tax relief at the next budget, is it likely to be in effect immediately or maybe effective say jan 2014?
Ie will there be a chance for those that contribute annually to take advantage of the relief after the budget, but before implementation.

I know nobody has a crystal ball, but traditionally how does this work?


----------



## SINED (5 Sep 2012)

Hi Baracuda

I have recently been made redundant and recieved €160K from my Pension to be reinvested in a new pension as my company scheme closed I am being advised to invest in Aviva Blue Chip Corporate Bond Fund the performance looks OK to me, I would appreacate your thoughts I am 54 Yrs of age


----------



## Baracuda (5 Sep 2012)

Hi Sined, I wish I could help you on this but I cannot really advise on funds due to my employment status plus even if I could I would definately not advise on a fund in a discussion forum as the funds need to be tailored to the individuals needs and asperations. 

What I would say is that you should get independant advice or go to each pension provider in the market and get their advice. This may cost you a little more in management charges but it could be money well spent if you get the right advice for you!!! 

What I have noticed over the years is that the trustees of a pension scheme, that is being wound up will ask their pension administrator to get the lowest cost deal in the market for their pension members. What often happen's after this in the case of a Buy Out Bond is that the member is left to their own devices and the pension administrator will provide little or no support. The reason why this happens is that the pension administrator's main duty is to advise the trustees and not the member. I do not agree with this but you will find several examples of people giving out about this here on AAM.


Edit... perhaps this link may help answer your question [broken link removed] but as I said you should seek advice before deciding what to do!


----------



## Baracuda (5 Sep 2012)

Conshine said:


> If they do reduce the tax relief at the next budget, is it likely to be in effect immediately or maybe effective say jan 2014?
> Ie will there be a chance for those that contribute annually to take advantage of the relief after the budget, but before implementation.
> 
> I know nobody has a crystal ball, but traditionally how does this work?


Fina Fail published a paper a few years ago stating that they would reduce tax relief on pension contributions over a number of years. Fina Gael as a counter measure said that they would bring in a pension levy and leave tax relief at the 41%... and so they did in their first budget. Looks more and more likely now that Fina Gael is going to  hyjack Fina Fail's policy in the coming budgets so I would guess that they would also reduce tax relief over a number of years from 41%, they would probably reduce the relief to 30% firstly. But then again this is pure speculation at the moment!

They have always announced any changes in the budget and then implemented it the following January or when the finance bill has been past latter in the year (MARCH).


----------



## SINED (6 Sep 2012)

Thanks Baracuda I understand your position I am dealing with a broker but he just pushs me the one direction its time for me to get professional advise, Thanks Again Sined


----------



## LDFerguson (6 Sep 2012)

SINED said:


> Thanks Baracuda I understand your position I am dealing with a broker but he just pushs me the one direction its time for me to get professional advise, Thanks Again Sined


 
Take your time and don't be pushed into any financial product - don't sign on the dotted line you're happy that (a) you understand the product well and (b) you're happy that it's suitable for you and your particular financial circumstances.  

Things that should be considered by any advisor before recommending a suitable product for you: - 


Early retirement now.
PRSA or Vested PRSA (if you had less than 15 years' service in the transferring pension scheme).
Buy-Out Bond / Personal Retirement Bond.
Each of these options should be explained to you so that you understand the relative merits of each in the context of your overall financial position.  

Then and only then, having selected a product should you move on to selecting a product provider (e.g. Aviva) and fund(s).  Your advisor should discuss with you (a) your capacity for taking risk (e.g. how much do your circumstances suggest that you could afford to lose) and (b) your tolerance for risk, which is a very personal matter.  

They should clearly show you why they are recommending one company over another, making reference to companies that have been discounted as well as companies that are recommended.  They should also show why the particular fund(s) being recommended are suitable to your risk capacity and tolerance.

All of the above should be done in such a way that you can understand it.  If an advisor can't explain something to you without hiding behind jargon, perhaps s/he doesn't fully understand it.


----------



## ashambles (7 Sep 2012)

For someone starting a pension I'd recommend avoiding riskier funds when starting off. Maybe have mostly cash and then over the next couple years try to find a balanced portfolio of funds, just as an example maybe 40% various equity trackers, 30% cash, 15% bonds, 15% commodities. 

The reason to avoid risky funds early on is because you won't see much of an impact from market fluctuations until your pension fund is larger - this is a subjective amount but maybe around 30% of your annual salary. If you're in high risk funds from the outset there's a danger you won't notice just how risky they are until too late. 

Initially the main growth in your fund comes from your contributions and the associated tax relief. When you've only a handful of monthly contributions if the market goes up or down 20% you won't really notice. 

On that consensus fund mentioned it seems it's 80% in equities, that's a high figure. It's not a fund to have as 100% of your pension. The problem isn't so much that equities are a bad investment, it's just you're risking running into some event like back in 2007-2009 when the consensus fund fell by around 50%. 

It's largely recovered since then, however that will be little comfort to people who reacted to the fall by switching to cash. 

Also be wary of consensus equity type funds in general, what they're typically trying to do is return the average of some high risk funds. That still makes them high risk. However it's only lately they've started categorizing them as high risk, the same fund the now marked as high risk was in a leaflet I've from around 2004 categorized the consensus fund as "Medium Risk - Lower End".


----------



## Marc (7 Sep 2012)

I felt compelled to address the last post. 

Let's assume that the OP is earning say 40,000 pa is aged 30 and is retiring at age 65 in 35 years time. Let's assume that their pay increases annually in line with inflation at 3%pa and that therefore we can discount the impact of inflation on their salary. 

Let's also assume that they decide to save a modest 10% of their salary. The guideline amount is 15%pa.

Over the next 35 years they will earn a total of 1.4M in today's money.
At 10% of earnings their first years contribution would be just €4000 which is insignificant in comparison to lifetime earnings. It is irrational to focus on the risk of loss of 4000 in the context of that lifetime income.

If we assume cash returns approximately equal to the underlying rate of inflation which is actually unrealistic once charges are taken into account, then the return on €4000pa would be zero in real terms. So we could expect someone using a cash strategy for their pension to accumulate a fund of 35 x 4000 =140,000 at retirement.

Assuming an annuity rate of 5% that would give a pension of €7000pa or 17.5% of current salary.

Assuming the OP is happy with an 82% drop in income in retirement then holding cash in a pension is fine. Alternatively they could save more say 30 or 40% of their income or they could retire later say age 75 or so.

The only other rational alternative that is available to anyone is to take more risk.

As a rule of thumb the amount allocated to equities should be 100% less current age so for a 30 year old just starting a pension between 100% and 70% is entirely appropriate. I wouldnt recommend a consensus fund but for entirely different reasons to those given.

Given the overall size of future income 1.4m compared to current pension fund zero it is entirely appropriate to pursue a higher risk investment strategy.

Also never delay.

The cost of waiting effectively doubles the amount you need to save every 5 years. You are already in your 30s the same you ten years ago could have saved less and still ended up with a bigger pension in retirement.


----------



## ashambles (9 Sep 2012)

> Over the next 35 years


I'm really only talking about the first couple years of a pension. This is an odd time, the fund is too small for growth to be a big factor. Contributions and tax relief are more important.

Say someone is putting 1k a month away and they start in Jan. By year end they've 12k of which only the first installment has had exposure to 12 months of market growth.

What this means in practice is they're guaranteed to see a much smaller change in their fund than they might have expected from the actual change in fund unit price. The fund return is also dwarved by the near 100% return they see from tax relief. You can pretty much guarantee regardless of fund selection that their fund after 12 months is going to be 12k plus or minus a couple hundred euro.

This inital lack of volatility despite a potentially volatile fund mix can cause a problem for new pension owners.

Most pension fund owners don't invest outside of the pension, they're not hardened investors. The problem with picking a fund 80% in equities is that once their pension has gone past the tipping point where fund performance is more important than contributions they're shocked when they see their fund collapses due to the credit crisis or something. Now you're into a different sort of risk, the risk that the pension owner gives up.



> You are already in your 30s the same you ten years ago could have saved less and still ended up with a bigger pension in retirement.


That's fine in theory where using compound interest at a rate of 6-8% per annum you get a swiftly growing pension. I think we all know however that the last 10 years were dismal, funds did well to manage 1% or so per annum. The only thing stopping someone who spent 10 years putting money under a mattress from catching up is restrictions on tax relief. 

Had they started a couple years ago, the mattress investor would in fact have been well ahead of pension fund owners.


----------



## Marc (10 Sep 2012)

I agree that pension investors need a better understanding of risk and return but advising someone in their 30s to avoid equities is not the way to do it even for a brief period.

For starters this approach ignores the benefit of euro cost averaging which is a substantially better way of benefiting from market volatility.

There is something to be said for pointing out that a pension investor should expect a 40% drop in equities about 2.5% of the time or about one year in every 40 years but we have no way of knowing when a big drop might happen.  This is normal to be expected and part of the investing process in fact its why equites are expected to return the most on average over the long term. 

The exact opposite of what you suggest is the approach taken with lifestyle funds (holding equities when the fund is smaller and switching into more conservative investments as retirement approaches)

Finally it isn't strictly true that pension funds backed by real assets all lost money or had returns worse than cash over the last 10 or 12 years. Just using a small sample of Irish managed pension funds does not reflect the overall global position.

A more accurate story would be that Irish pension fund managers took excessive bets on Irish shares and property compared to an international investor and on average fared much worse for taking uncompensated risks that they could have avoided from a more diversified strategy.

The answer here is to get a better pension adviser not to avoid risk altogether.


----------



## ashambles (10 Sep 2012)

It might be worth looking at average asset allocation shown in Mercer’s asset allocation survey.  

[broken link removed]


> The traditionally equity-heavy markets of the UK and Ireland continue to have the highest equity weightings (c. 44%), but the gap versus other European countries has narrowed substantially since we began to monitor the trend. Other countries, such as Belgium and Sweden, have comparable equity weightings (at just below 40%). Indeed, it appears that the past decade has seen a convergence of the UK and Irish equity-driven approach to pension investment with the continental European approach




There you’ll see that pension assets by country now range from a high of 44% equities in Ireland to lows of 13% in Norway and 6% in Germany. When Ireland is off at one extreme of any chart, it can usually be taken that it’s better to be down the other end. 

An individual can chose to be 80%+ in equities if they wished , however they should realize that overall the people running pensions everywhere from Switzerland to the Netherlands think that’s maybe 3 times more than they’re comfortable to manage.  

Incidentally many bond and fixed interest type funds are up by around 15% in the last year or so (many would say a bubble), these aren’t exactly low risk, low return funds. It’s not like equities are the only option for someone who realizes that cash returns aren’t likely to be enough. Personally I’d be prepared to sacrifice some potential growth in order to have a lower but more reliable outcome.


----------



## Newbie123 (10 Sep 2012)

Baracuda, ashambles, Marc - thanks for the replys - your comments are much appreciated

Most are in agreement that now is as good a time as any to start a pension, and I have decided to proceed. 

Picking funds is never easy, but the arguments above give a good insight into the things that need to be considered

For the record, I have found this site a great resource - I knew nothing about pensions 2 months ago and now have a solid understanding of the various issues 

Thanks again guys


----------

