Pensions - how good an investment realistically?

[Allpartied]

- For a lot of that 50%, the State Pension is enough

- There’s also an element of personal responsibility; some people should get up off their backsides and organise their own affairs rather than waiting for the State to spoonfeed them

It's not a case of the state spoon-feeding, more providing an option and actively promoting that option.

In the same way the state provides healthcare, education, transport infrastructure, policing, energy, etc. Providing a pension service , via the state savings scheme might be beneficial and increase the number of people who reach retirement with a small amount of cash to supplement their state pension. People who are 50 plus and have no pension would find such a scheme attractive. No risk, no fees and full tax relief.
The savers would still have to engage a professional once they retire, to invest/manage their bond and provide the additional income.

 

[Jim2007]

Bonds, remember, have, virtually, no risk and produce a guaranteed return.

All that statement tells me that you do not understand the risk profile of bonds. But this is not unusual, as a performance and attribution specialist, I've heard it before, even from fund managers and traders. More money is lost on bonds than equities because you are playing directly against the experts and in most case you don't even realise how much you lost.

I still think that a state guaranteed retirement bond, issued via the State Savings Scheme, would be hugely popular. It would incur minimal management fees, and yet it would still qualify for the tax relief.

Of course it would be popular, but it would be highly risky for the state and very expensive. There is not magic involved, you need to get a return a return of about 8% and that costs money.

 

[Allpartied]

All that statement tells me that you do not understand the risk profile of bonds. But this is not unusual, as a performance and attribution specialist, I've heard it before, even from fund managers and traders. More money is lost on bonds than equities because you are playing directly against the experts and in most case you don't even realise how much you lost.



Of course it would be popular, but it would be highly risky for the state and very expensive. There is not magic involved, you need to get a return a return of about 8% and that costs money.

I don't think you are understanding me.
Capital is safe, plus a small interest premium. Plus the 40% tax relief.
The only way my capital is at risk, is if the state goes bust.
A return of 8% per year is not required for those investors over 50. The state can offer the same interest rate as state savings, which are still very popular. It doesn't need to compete with risky equity funds. It's a safe, capital guaranteed savings account, for your pension.
Sure I might lose out if equity markets perform like the last 10 years. But if they perform like the 10 years before that, I'm quids in. But,more importantly, I will preserve my capital investment and never go negative.

 

[jpd]

Hope you have a lot of capital if you are hoping for a decent pension

The difference between 0.5% on a govt bond and 6-7% on equities over a 25 year span is enormous

 

[Paul O Mahoney]

I think theres merit in the OPs suggestion that Government Bonds should also have the favorable tax treatment. I can see many people who's main objective is capital security would buy bonds, but as the idea that state bonds would sufficiently take care of someone's income requirements after retirement is probably optimistic.

We do need to try and get more people to engage in having private pensions and sceptical investors who either don't trust or understand how pensions work it might be a way of getting people saving for retirement and that would be a good thing.

If younger people were to say start earlier in providing for their pensions via state bonds and they then say by 40 had finished the heavy lifting of life, buying a house, family etc, they would have a capital amount that would form the basis of 25 further years of investment strategy until retirement.

The thoughts of starting to provide for pensions at 40 from a zero position is not ideal either. Some will have some type of pension in place via employers and then everything could be looked at.

I fully understand that returns on bonds will not be as good as pension products that are available but these products don't really appeal to everyone for a multitude of reasons.

 

[NoRegretsCoyote]

I think theres merit in the OPs suggestion that Government Bonds should also have the favorable tax treatment.

In practice they do.

State savings products are a not insignificant €20bn (8% of total Irish government borrowing) and get favourable tax treatment in that the interest is usually DIRT free.

Of course there is no capital gain to be shielded but there is no default risk either and they are available to everybody.

 

[Paul O Mahoney]

In practice they do.

State savings products are a not insignificant €20bn (8% of total Irish government borrowing) and get favourable tax treatment in that the interest is usually DIRT free.

Of course there is no capital gain to be shielded but there is no default risk either and they are available to everybody.

I know that but I was thinking about the way pensions are dealt with at point of contributions.
Pension funds aren't liable to any tax annually either.
If younger people are going to be enticed to start providing for retirement early and want a product where the swings and roundabouts of the global stock market are alien to them or they simply don't trust financial institutions then security of capital is a very big element that might sway them into saving for retirement.

As say above only 8% of government bonds are owned by the population, we know returns are scant but not everyone wants to gamble their few bob either.

 

[Steven Barrett]

But the tax relief is only available , if you buy a private pension product. That comes with fees, and all sorts of complex options.
The private market forces have been allowed unfettered access to this tax relief and use it, quite openly, as a major selling point for their products.
And yet, they have failed, miserably, to engage 50% of the population.
Time for govt to step up and provide a state backed pension bond. Use the SSIA type incentive, which people clearly understood, and aim the product at people aged 50 and over, who have no pension arrangements.

I presume you mean working population and not total population?

Of those working, as Gordon says, the State pension is enough and they don't need a private pension. For the others, I would argue the biggest reason is they want to spend the money now and not put the money away for later. There is never a perfect moment to start a pension (actually there is, your first day of work, like in the public service), with constant demands on money. People get used to spending and having money and don't like the thoughts of having less now so they can have more in 3-40 years time. Well guess what, there's no secret formula that allows you to spend now and have money in the future too.

If you are over 50 and have no pension arrangements, they are seriously playing catchup. Below are the monthly contributions required to fund a pension of €1m at 6% annualised return.

1. 40 years of pension funding - €502 a month
2. 30 years of pension funding - €995 a month
3. 20 years of pension funding - €2,164 a month
4. 10 years of pension funding - €6,102 a month
5. 5 years of pension funding - €14,332 a month

Even if you aim for a fund of €100,000 in 10 years at the current AER for the 10 year bond of 0.96%, it would cost you €794 a month. Of that €100,000 at the end, you would have contributed €95,000 of the €100,000. Hardly worth your while.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[AAAContributor]

The private market forces have been allowed unfettered access to this tax relief and use it, quite openly, as a major selling point for their products.
And yet, they have failed, miserably, to engage 50% of the population.

Not necessarily.

One main issue with pensions is that savings are locked up for the long-term. That creates a conflict in the human animal. Behavioural finance research has highlighted our inclination to choose immediate rewards over rewards that come later in the future, even when these immediate rewards are smaller ("hyperbolic discounting").

I take the point that the pensions area is too complex and that a more straight-forward relief like the SSIA proposal would be more attention-grabbing. However, you are still up against the force of hyperbolic discounting and also the individuals that would be investing in any new State initiative would be those with the means to do so, and I suspect people with the means to invest are already invested in the current pension set-up.

At the moment, if you want to invest your pension in Irish Govt bonds, you have to employ a financial institution and pay them a fee. I don't see why the state can't offer a direct route for these people and it would, at least, encourage more people to engage with their pensions.

Arguably the State does provide a direct route already for pension investment products. The State owns most of AIB (albeit they use Irish Life I think for the underlying service).

We could beef up staff members in the NTMA or some other State agency (An Post?), create an administrative infrastructure to process funds, make payments etc. Staff would be hired, probably unionised, and of course you would have to give them defined benefit pensions. There are plenty of private sector outlets that can do this cheaper than the State could.

But,more importantly, I will preserve my capital investment and never go negative.

I think the point that @Jim2007 was making to you above was that interest rates go up as well as down and this can affect the value of a fixed-return security negatively and positively. Granted, this instrument you are proposing would not have a market price where people could watch the value of security fall. But, what if someone lump sum invests in a 10-yr bond and 2 years later the interest-rate environment changes for the worse (i.e. interest rates increase)? And worse, what if it is someone in their 20s? The opportunity cost in this situation is horrific. The argument has been made above that this can be managed by a drip-feed into an investment like this but inevitably people will lump sum invest and inevitably people will allocate too much capital that is inappropriate for their age. Marketing such an investment as risk-free for all is a little underhanded in my book.

One should engage with a professional and seek out good advice even if investing in a perceived lower risk product.

If younger people are going to be enticed to start providing for retirement early and want a product where the swings and roundabouts of the global stock market are alien to them or they simply don't trust financial institutions then security of capital is a very big element that might sway them into saving for retirement.

I thank my lucky stars as a someone starting out investing in a pension in my early 20s (and would be a naturally conservative investor) that someone made me realise that I was at a stage in life where I had the most ability and capacity to invest in risk assets.

No risk, no fees and full tax relief.

I would prefer as a taxpayer that the State would continue borrowing at 0% or negative where possible from the international capital markets. The State needs a lot of investment. The State does not need to pay more than it needs to for these funds which it would be doing so by offering tax relief.

 

[Paul O Mahoney]

I thank my lucky stars as a someone starting out investing in a pension in my early 20s (and would be a naturally conservative investor) that someone made me realise that I was at a stage in life where I had the most ability and capacity to invest in risk assets.

And that's true, but today younger people are saving for deposits of multiple times we had to ours was £2000 in 1991 and the government gave us back £3000 a few months later.

Most of my children's age group lived through the crash and despite being young they fully understood broadly what happened, unemployment touched a lot of families and those memories are still fresh.
Our son 20 states he'll never buy a financial product and squirrels away €100 per month into gold out of his part-time wages. Any other money is simply on a demand account.

Young people have changed the financial situation they find themselves in is very different to ours when we were that age, and they have the internet at their fingertips to inform themselves, rightly or wrongly on anything should be choose.

I don't think risk with the little money they might have would enthuse them.

 

[AAAContributor]

I don't think risk with the little money they might have would enthuse them.

My youth is well behind me but I suspect that such a proposal as investment in government bonds (even with tax relief) would not enthuse them!

I think we get things the wrong way around in this country. We give the Centenarian Bounty of €2,540 to a 100-yr old at a stage of life where it makes not a damn bit of difference.

If it's not too David McWilliams-esque, and to your point about enthusing the young folk, would it be better to seed a pension fund for every newborn in the State? Let sixty-five years of compounding do some heavy lifting! Granted, there are a lot more newborns than 100-yr-olds which would be more costly upfront. But long-term returns and compounding may allow the State to dial back the future State pension (and or tax relief) as a result. By the time a young person completes their college and apprentice years, there will have been more than twenty years of investment performance behind them. Granted some cohorts will do better than others depending on when they were born, but to the point made earlier:

historically stocks beat bonds in just over 90% of 20-year rolling periods

someone at the cusp of their working life and potentially considering pension options, already has skin-in-the-game and a more personal appreciation as to the power of compounding when they log-in to their pension account.

Our son 20 states he'll never buy a financial product and squirrels away €100 per month into gold out of his part-time wages. Any other money is simply on a demand account.

This is a perfectly legitimate strategy - when money is being saved to pay for nightclubs and festivals. But this thread is about pension saving and the benefits thereof and we have to be mindful that we are all playing different games with our money. Your son has been perhaps scarred by reading about unfortunates who lost money on the "blue-chip" banks and property during the crash but those horror stories were a fault of lack of diversification, poor risk management/advice, greed etc. and not a fault of pensions. Do your son a favour and make him realise this. But again, your son is not saving (at the moment) to provide for himself when he reaches retirement, he has more short-term needs and goals and his approach is rational enough.

 

[silverfox239]

An ISA type product like in the UK would be a simple tax efficient way for young people to,

• Get in the habit of saving
• Its tax efficient as growth is tax free
• Its post income / prsi / usc tax so no big hit to government revenue
• Not locked away until old age so can be used for home purchase, big trips, etc.

I cannot for the life of me understand why the Government do not push for this type of product.

It would surely get them more votes in next election as if they promote it as 1 piece of helping people to get on property ladder its a no-brainer.

 

[Allpartied]

Hope you have a lot of capital if you are hoping for a decent pension

The difference between 0.5% on a govt bond and 6-7% on equities over a 25 year span is enormous

Ok, this is the crux of the matter.
You cannot guarantee 6-7% return, annually, on equities. If you could, the companies would be shouting it from the rooftops.
All you can say, is it will, probably, maybe, over time reach 6-7% per annum. Then take the charges off, that figure, check the allocation rate and you might get 4% per annum. But not guaranteed, far from it.
Japanese equities are, currently, sitting below their 1989 levels. That's 32 years ago.
'Maybe, you think the conservative, cautious investor is an idiot and, maybe, you're right. But, maybe, you're wrong.

My idea was really floated at people who have no pension arrangements and reach 50 or 55 years of age. They may have finished their mortgage, kids through college and they are earning more money than when they were younger. Suddenly, they do have spare capacity to save. Indeed, they could turbo charge a pension at this stage.
A 70K salary , for a 55 year old, would allow 26250 Euros to be saved, per annum, with full tax relief of 40%.
Once they got to 60 , they could increase to 30000 ( again with substantial tax relief) .
So, they could, in 10 years save 280 000 Euros. With 40% tax relief, the effective cost would be 168000.

It's just an option and it could be used by long term investors too. At 55, you could cash in your pension investment and stick it into the safe, secure, guaranteed vehicle, with no charges, continue making deposits.

Of course, it won't happen and it won't happen because it would be hugely popular. The vested interests, some of whom appear on these pages, would not be happy and they have the ear of the Dept of Finance.

 

[Paul O Mahoney]

An ISA type product like in the UK would be a simple tax efficient way for young people to,

• Get in the habit of saving
• Its tax efficient as growth is tax free
• Its post income / prsi / usc tax so no big hit to government revenue
• Not locked away until old age so can be used for home purchase, big trips, etc.

I cannot for the life of me understand why the Government do not push for this type of product.

It would surely get them more votes in next election as if they promote it as 1 piece of helping people to get on property ladder its a no-brainer.

Forgot about those and yes it would start a good habit and that's what needs to be pushed.

 

[Paul O Mahoney]

My youth is well behind me but I suspect that such a proposal as investment in government bonds (even with tax relief) would not enthuse them!

I think we get things the wrong way around in this country. We give the Centenarian Bounty of €2,540 to a 100-yr old at a stage of life where it makes not a damn bit of difference.

If it's not too David McWilliams-esque, and to your point about enthusing the young folk, would it be better to seed a pension fund for every newborn in the State? Let sixty-five years of compounding do some heavy lifting! Granted, there are a lot more newborns than 100-yr-olds which would be more costly upfront. But long-term returns and compounding may allow the State to dial back the future State pension (and or tax relief) as a result. By the time a young person completes their college and apprentice years, there will have been more than twenty years of investment performance behind them. Granted some cohorts will do better than others depending on when they were born, but to the point made earlier:



someone at the cusp of their working life and potentially considering pension options, already has skin-in-the-game and a more personal appreciation as to the power of compounding when they log-in to their pension account.



This is a perfectly legitimate strategy - when money is being saved to pay for nightclubs and festivals. But this thread is about pension saving and the benefits thereof and we have to be mindful that we are all playing different games with our money. Your son has been perhaps scarred by reading about unfortunates who lost money on the "blue-chip" banks and property during the crash but those horror stories were a fault of lack of diversification, poor risk management/advice, greed etc. and not a fault of pensions. Do your son a favour and make him realise this. But again, your son is not saving (at the moment) to provide for himself when he reaches retirement, he has more short-term needs and goals and his approach is rational enough.

But pension funds did suffer during that time and since they were involved in buying stocks of companies that were essentially broke in any language they were part of the reason why things fell apart.
The financial world was awash with CDOs and those CDOs were bought by pension funds.
To say it wasn't the pension funds that caused it isn't accurate, they may have been hoodwinked by slick selling by the investment banks but they didn't carry out sufficient due diligence either.

I've spoken with my son, and his goal is to have enough money to emigrate and as he says " in a country where money is not everything people talk about ".He'll have some difficulties finding one but it's his life.

 

[jpd]

My idea was really floated at people who have no pension arrangements and reach 50 or 55 years of age. They may have finished their mortgage, kids through college and they are earning more money than when they were younger. Suddenly, they do have spare capacity to save. Indeed, they could turbo charge a pension at this stage.
A 70K salary , for a 55 year old, would allow 26250 Euros to be saved, per annum, with full tax relief of 40%.
Once they got to 60 , they could increase to 30000 ( again with substantial tax relief) .
So, they could, in 10 years save 280 000 Euros. With 40% tax relief, the effective cost would be 168000.

Not sure that someone on a salary of 70k could save 26k a year but maybe ...
A pension pot of € 280,000 would give you a pension of around € 10,000 per year with no frills such as inflation protection, spouse pension,

 

[steadstill]

So to put some context around bonds - as a layperson:

I seem to remember my father many years ago getting worthwhile returns from state savings (long before the SSIA) - but it appears that has changed.

If I'm reading this right, Irish bonds have about 1% return per year for a 10 year commitment. For shorter terms, the return is lower.

The current inflation rate in Ireland is about 4% per year (UK is about 3% and USA is about 5%).

Those numbers suggest it's a bad investment?

Also if the tax incentive is on the return - this is a very small gain?

I don't see any substantial advantages over just saving money in a bank account? My bank (now leaving the country) were paying me 1% annually for 1 year commitments, not 10 year.

 

[bstop]

It doesn't really matter what sort of pension contributions method the government might introduce because at present no Irish government can be trusted. A previous government has raided the invested pension funds of its citizens. Until there is a law passed to guarantee that this will never be repeated, it is uncertain if investing in a pension in Ireland is a good idea. Pensions are a very long term investment and the rules should not be constantly changed by the government. Most recent changes made, have been to the disadvantage of the pension contributer.

 

[AAAContributor]

But pension funds did suffer during that time and since they were involved in buying stocks of companies that were essentially broke in any language they were part of the reason why things fell apart...........To say it wasn't the pension funds that caused it isn't accurate

The danger I see here is tunnel vision. There is undue focus on the value of the fund/investment and not enough on the person investing and their risk management which hopefully they will have a good adviser guiding them on.

Of course funds went down in that time.

Someone five or ten years out from retirement will have been dialling back the risk of their overall asset allocation and this fall in markets would have been lessened.

Someone at the accumulation stage of the investment journey with a greater allocation in risk assets is grateful that stocks are trading at much lower multiples. Nicer bottles of wine in retirement!

The funds are not at fault. They are just a vehicle.

 

[Sarenco]

My bank (now leaving the country) were paying me 1% annually for 1 year commitments, not 10 year.

No Irish bank is paying anything remotely like 1% interest on one year term deposits these days.