Should I stop/reduce my payments into PRSA

[LDFerguson]

My poor boss is up for retirement this year and his fund has literally evaporated before his eyes. I know the funds can rise and fall, but what if there was another financial meltdown like this one in the year I am due to retire?

I've said it before - I do have sympathy for anyone who finds them in this position as they may have to realise a paper loss or defer retirement, neither of which is a pleasant prospect. But if they do, it's clear that they didn't get good advice.

Two relevant points: -

• Basic "Pensions 101" advice is that you should adopt a more aggressive strategy for growth in the early years of your pension funding...and you should review your pension fund 5 to 10 years before you plan to retire with a view to switching into cash or bonds or some other low-risk asset class.
• If your boss is eligible to invest his pension into an Approved Retirement Fund, he can simply invest in a comparable fund and thus avoid crystallising his paper losses, except in respect of his tax-free lump sum.

 

[MandaC]

In fairness, I don't think it was down to bad advice. He started pension very late, due to financial circumstances earlier on in life and was playing catch up, to a large extent. Knew the risks and needed to go with a "higher risk strategy" to build the fund and unfortunately did not pay off. Because of failing health, needs to retire but pension is very poor at the moment. He has accepted the position with a "dem's the breaks" attitude but I know if I were in that position, I would be going mad.

Looking at it in more depth, I really think I have a very conservative attitude to risk and am not prepared to lose any of my savings in years to come. I am already going mad over losing a quarter of €5k instead of getting the benefit of paying €5K off my mortgage, so I am probably not the best person to gamble on a pension.

 

[DerKaiser]

In fairness, I don't think it was down to bad advice. He started pension very late, due to financial circumstances earlier on in life and was playing catch up, to a large extent. Knew the risks and needed to go with a "higher risk strategy" to build the fund and unfortunately did not pay off. Because of failing health, needs to retire but pension is very poor at the moment. He has accepted the position with a "dem's the breaks" attitude but I know if I were in that position, I would be going mad.

That's like saying I needed €100k but only had €50k so I'd no option but to play roulette

 

[DerKaiser]

Looking at it in more depth, I really think I have a very conservative attitude to risk and am not prepared to lose any of my savings in years to come. I am already going mad over losing a quarter of €5k instead of getting the benefit of paying €5K off my mortgage, so I am probably not the best person to gamble on a pension.

Once again, many pension providers offer products where your money is effectively in a bank deposit and you get the tax benefit. By all means give up on the stock market if you're risk averse but that does not mean you have to give up on pensions

 

[MandaC]

That's like saying I needed €100k but only had €50k so I'd no option but to play roulette

No, more like saying I need more than €500K, so I will pay that much hoping for more but get back €300K

I just could not afford that kind of hit.

Also brings me back to what I was thinking earlier - very difficult to predict the market - if the market were to crash in or around the time I was either (a) due to retire or (b) due to transfer the fund to a less risky one, then I would be in a position similar to people due to retire around now.

 

[johnnygman]

Once again, many pension providers offer products where your money is effectively in a bank deposit and you get the tax benefit. By all means give up on the stock market if you're risk averse but that does not mean you have to give up on pensions

Majority of pension fund out there actually switch over automatically into bonds and cash in the years coming up to retirement for security.
If your fund is not one of these lifestyled switching funds then you would have have to make this switch manually yourself to protect your investment by written instruction.

 

[LDFerguson]

I am already going mad over losing a quarter of €5k instead of getting the benefit of paying €5K off my mortgage, so I am probably not the best person to gamble on a pension.

But you haven't lost anything! I'm assuming that you're not about to retire and have many years to go yet. (I have a mental image of you as being 20s or 30s, for some reason.) Pension funds go up and down. They've recently gone down. They will go up again, unless you lose your nerve and switch out now - if you do that you HAVE lost money.

 

[LDFerguson]

Also brings me back to what I was thinking earlier - very difficult to predict the market - if the market were to crash in or around the time I was either (a) due to retire or (b) due to transfer the fund to a less risky one, then I would be in a position similar to people due to retire around now.

You're absolutely correct - it's virtually impossible to time the market. So you should start considering gradually switching out of volatile assets 6 or 7 years before you plan to retire. If that happens to be just after a drop, you've still got 6 or 7 years to wait for the recovery.

Because it's impossible to time the market, you may lose out on the last few years of growth as you may have to watch the funds you were in rising and rising, but you'll have protected yourself from your boss's unfortunate current position.

 

[MandaC]

But you haven't lost anything! I'm assuming that you're not about to retire and have many years to go yet. (I have a mental image of you as being 20s or 30s, for some reason.) Pension funds go up and down. They've recently gone down. They will go up again, unless you lose your nerve and switch out now - if you do that you HAVE lost money.

Thanks Liam - I only look 21 and a bit! I have quite at least 25 years to go to retirement and will just sit back for the moment and see what comes out of the current turmoil. There is no point in losing my nerve now, given that I only took the thing out in January. It might also be an idea not for me to go online and keep looking at its value either.

Sound advice thanks.

 

[therock]

Just by way of an alternative, if you put an initial 5000 into a savings account with 5% interest(-1% dirt) for 35 years and added 5000 every year you would end up with 402,722.01.

Calculator here

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Yes it's not spectaculor, but it is safe money and will continue to accrue interest if you leave it in during retirement. Imo it mightn't be your main pension contribution, but something to fall back on if you pension went belly up on the stock market nearing retirement.

I agree that you can choose the option of a low risk savings account when asked by your broker, but I think most people trust that their fund manager knows best where to invest money and where to get the highest if sometimes riskiest return and so leave it to them.

 

[sanne]

Nice calculator ! Unfortunately it does not take into account what 400K will be worth in the said timeframe in real terms after inflation. If history is anything to go by it will not be worth as much as it needs to be in order to retire - so if the saver in question used this method to prepare for retirement they would likely be looking for a part time job (would you like fries with that) around their 70th birthday.

 

[DerKaiser]

Just by way of an alternative, if you put an initial 5000 into a savings account with 5% interest(-1% dirt) for 35 years and added 5000 every year you would end up with 402,722.01.

Calculator here

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Yes it's not spectaculor, but it is safe money and will continue to accrue interest if you leave it in during retirement. Imo it mightn't be your main pension contribution, but something to fall back on if you pension went belly up on the stock market nearing retirement.

I agree that you can choose the option of a low risk savings account when asked by your broker, but I think most people trust that their fund manager knows best where to invest money and where to get the highest if sometimes riskiest return and so leave it to them.

So if a friend said to you they had a spare €5k they wanted to put away for retirement which of these options would you recommend?

1) invest €8.5k in a pension and reduce your tax bill by €3.5k, choosing a deposit type fund with no dirt tax payable
2) Put €5k into a deposit account

 

[Bronte]

So if a friend said to you they had a spare €5k they wanted to put away for retirement which of these options would you recommend?

1) invest €8.5k in a pension and reduce your tax bill by €3.5k, choosing a deposit type fund with no dirt tax payable
2) Put €5k into a deposit account

I could answer that if you could tell me the value of 1 at retirement and using the rocks figure for 2 in the same period.

 

[DerKaiser]

I could answer that if you could tell me the value of 1 at retirement and using the rocks figure for 2 in the same period.

well €8.5k p.a. getting tax free interest over 35 years will amount to more than €5k p.a. getting taxed interest over 35 years.
Using 5% interest, 23% dirt tax and a 1% management charge on the pension (though it will be far less for a cash fund):
Pensions comes to €651k
Deposit comes to €371k
The pension proceeds are 75% higher ignoring any tax in retirement.
Of course with the pension you'll be subject to income tax on the proceeds (though you can generally take up to 25% tax free)
Even for someone paying marginal tax at 41% in retirement the pension proceed should still be over 20% higher.
For a pensioner paying the standard rate of tax (20%) the pension will be almost 50% higher.

 

[Bronte]

Even for someone paying marginal tax at 41% in retirement the pension proceed should still be over 20% higher.
For a pensioner paying the standard rate of tax (20%) the pension will be almost 50% higher.

You should explain those figures to MandaC's boss. It doesn't appear to have worked out that way for him.
I'm not against pensions and I think people need them, I just think people need to understand the negatives as well as the positives.

 

[DerKaiser]

Here's my explanation for MandaC's boss in relation to my figures:

I'M COMPARING A DEPOSIT TYPE PENSION FUND TO A NON-PENSION BANK DEPOSIT

PENSION DOES NOT EQUAL EQUITY BASED FUND

 

[askalot]

You should explain those figures to MandaC's boss. It doesn't appear to have worked out that way for him.
I'm not against pensions and I think people need them, I just think people need to understand the negatives as well as the positives.

But isn't the point that MandaC's boss wasn't invested in a deposit type fund and so was hit by the drop in equities.

(sorry crossed with DerKaiser)

 

[therock]

Nice calculator ! Unfortunately it does not take into account what 400K will be worth in the said timeframe in real terms after inflation. If history is anything to go by it will not be worth as much as it needs to be in order to retire - so if the saver in question used this method to prepare for retirement they would likely be looking for a part time job (would you like fries with that) around their 70th birthday.

yes agreed re inflation....lets assume inflation averaged out at the rate of interest, ie 4%

we would then be talking of 35 years times 5 = 185,000...

I did make the point that it mightnt be any good as your main pension, and that you might be wise to keep a main pension, but as a just in case fund, it might be no harm...ie in case your pension loses for example 50% of its value on the markets five years before your retirement a scenario many people are now experiencing.

Bricks and mortar might also be an option for those who are risk averse...since, over the course of 35 years, you are bound to hit a period when property prices are at a high. Again this would be a fall back in case your main pension hit trouble.

 

[johnnygman]

yes agreed re inflation....lets assume inflation averaged out at the rate of interest, ie 4%

we would then be talking of 35 years times 5 = 185,000...

I did make the point that it mightnt be any good as your main pension, and that you might be wise to keep a main pension, but as a just in case fund, it might be no harm...ie in case your pension loses for example 50% of its value on the markets five years before your retirement a scenario many people are now experiencing.

Bricks and mortar might also be an option for those who are risk averse...since, over the course of 35 years, you are bound to hit a period when property prices are at a high. Again this would be a fall back in case your main pension hit trouble.

Would you not agree given the tax advantages on pension funds that it would be wiser to perhaps take out several different pension funds, different assets etc.. as opposed to ordinary savings account if risk is your main worry, again deposit funds and Lifestyle funds take away these concerns for me, but you seem to be fixated on the possibility of all funds crashing out before retirement.
Property is not a liquid asset given the tax treatment and the blind luck trying to chose a time to sell to match your retirment age this would prove to be much riskier option in my mind, as you may appreciate many people are experiencing today!!

 

[therock]

Would you not agree given the tax advantages on pension funds that it would be wiser to perhaps take out several different pension funds, different assets etc.. as opposed to ordinary savings account if risk is your main worry, again deposit funds and Lifestyle funds take away these concerns for me, but you seem to be fixated on the possibility of all funds crashing out before retirement.
Property is not a liquid asset given the tax treatment and the blind luck trying to chose a time to sell to match your retirment age this would prove to be much riskier option in my mind, as you may appreciate many people are experiencing today!!

I agree that the tax incentives are helpful yes and people should have a pension with the tax incentives coming in...

I am just saying that people should avoid putting all their money into one basket in case something happens to that basket.

It's good to have a spread of investments (including a pension/PRSA) to cover all bases...Personally while I am in a company pension scheme which I assume is doing ok, I wouldn't like to be watching my PRSA go down by the day.

Don't get me wrong I am not scaring people away from pensions, I am scaring them away somewhat from the high and medium risk options which are invested in stocks. They should choose in the current climate low risk/low return options, because these won't go down so much or as fast.

When the banking crisis settles down, then change back to the medium risk option.

Someone for example who had 100,000 in their pension a year ago might be looking at it being 70,000 today. When it picks up again assuming normal returns of 10% it will take them a few years to get backs to where they were...which means a few years lost.

so just to reiterate, yes a pension is good, and the tax rebates are good, but don't choose a medium or high risk investment profile at the moment.