Now that I’ve got your attention, we can all agree that most people are really disinterested in Pensions. They are a conversation killer. People are put off by the technical language, there is too much choice, and getting to grips with how they work is often overwhelming. It doesn’t help that the Industry as a whole has made it very complicated.
Is this striking a chord with you? Do you often think that you can invest yourself and make a better return that investing in a Pension. You might think that the Financial Services Industry is full of cowboys who are just there to fleece you. There are a few out there, but there are plenty of good quality Financial Advisers out there.
There is a cohort of people in their 20’s and 30’s that think they don’t need a Pension and can do it better themselves by investing through Degiro etc.
For a Pension to strike a chord, it’s important to ask your future 60-year old self, what could you’ve done more of? Spend time with family, holidays etc? But you might ask yourself, could you have started that Pension earlier, paid more into your Pension, or even set-up a Pension. Maybe you should have listened to that Financial Adviser you didn’t really like, or searched for one you would have liked.
This is how I would go about setting up a Pension if I wasn’t a Financial adviser.
First Step
I would recommend finding a broker you like, know and trust. A useful website is brokersireland.ie This website lists brokers all around the country. If you want quality advice use www.fpsb.ie to find a certified financial planner. I don’t recommend the banks as they’re all tied to one Insurance Company which limits your choice. Often, the best way is asking friends or family or your accountant who they would recommend.
Second Step
A good financial planner will tell you the optimal Pension Structure (Personal Pension, PRSA, or Executive Pension Plan) There are different tax efficiencies for each, so advice here is important.
Third Step
What’s your magic no.?
Decide on the amount you wish to pay in now and figure how much you would like to retire with. A broker can help you with forecasting and budgeting to see what your magic number is.
Fourth Step
Decide on the level of Investment risk that you wish to take often in conjunction with a broker who will help you assess your risk profile. This is a critical step, and often times younger clients don’t take enough risk in well-diversified portfolios.
Why I would invest €10,000 per annum into a Pension ahead of Degiro for my future 60-year old self. (It all comes down to numbers)
PENSION EXAMPLE
My age – 38
Investing €10,000 per annum (Net cost €6,000 and €4,000 Tax Relief)
Target retirement age 60
Fund chosen Dynamic Zurich Life Fund (average performance over 10 years is 10.26%)
Charges – 1.5% per annum
Net Performance -+8.76% per annum
Future Value – €663,411
The actual cost to me
€6,000 x22=€132,000
Tax saved/Government Contribution
€4,000 x 22 = €88,000
If you didn’t pay into a Pension you would have normally been taxed this from your wages
I LOVE MONEY SAVED FROM THE TAX MAN
TAX FREE GROWTH/COMPOUND INTEREST
€443,411
This is free money by investing in the Stock Market
AT RETIREMENT
At retirement you can take 25% of the fund tax free – €165,852
Remainder has to be used to invest in an ARF or Annuity €497,559
For simplicity purposes €497,559 will need to last until death, so realistic tax rate is 20%. Net position €398,047.
Total = Tax Free lump sum €165,852 and remaining balance €398,047 + €563,898
An alternative may be to invest through Degiro and into an ETF. Let’s say you pick a good ETF and invest in the World FTSE Developed World Index (Vanguard) The fee for this is .22% per annum. Note to compare correctly you can only invest €6,000 with Degiro. When investing in the Pension is costing you €6,000 and the €4,000 is tax relief from the Government, so you can invest €10,000 altogether.
EXAMPLE 2 – INVESTING IN AN ETF THROUGH DEGIRO
Starting age – 38
Investment amount – €6,000 per annum (No Tax Relief for Investing)
Time Frame – 22 years
Growth Rate – 11.70%
Charges – .22%
Net Growth – 11.48%
Exit Tax – 41% every 8 years on growth or encashment
Total Invested – €132,000
Total Future Value after tax – €338,876
To conclude even though the fees and performance are better by investing in an ETF through Degiro, a good performing Pension will still win.
€563,898 > €338,876
And it wasn’t a close call.
Pensions get a bad name, but for the long term investor they make a lot of sense. Especially with the 40% Tax Relief for higher Income earners, and tax free investment growth. They may not always be as advantageous, so take advantage while you can. For short term investing Degiro does make sense with their low fees.
Unfortunately, by investing in ETF’s the tax rate is high at 41%, and this is automatically taxed every 8 years. Also, you have the added complexity of having to do tax returns etc.
Many people don’t believe in Pensions, educate yourself enough to make an informed decision on whether or not to invest in a Pension, don’t listen to the naysayers, and don’t forget about about your 60-year old self.
If you have a pension query reach out to me eoin@purefinance.ie
This represents the views of Eoin Wilson and does not constitute Financial Advice. When setting up a Pension or an Investment always seek the help of a Professional Adviser. Pure Finance Ltd is regulated by the Central Bank of Ireland. Pure Finance Ltd will not accept liability for any errors or omissions which may arise in the document. Copyright Pure Finance.