Conservatism as risky as bullishness when it comes to growing pension pot

Time, patience and a clear head are all vital qualities when building a wealth pot. “Many Investors tend to move with the herd rather than buying when assets are distressed,” says Paddy Swan of pension and investment consultants Invesco.

As investors chase yield, conscious that we are now five and a half years into an equity bull run, some of the more canny have been putting their money in Irish commercial property funds lately, for example.

“It’s not so long since Irish commercial property was regarded as one of the most toxic assets in the world,” observes Swan. “Now, however, there are some excellent returns being made from vehicles in this area.”

Notwithstanding their associated tax advantages, pensions are expensive to fund. For example, a person with an income of €60,000 who wants to earn half of that in retirement - excluding the state pension - would need a pension fund of approximately €700,000 or more in today’s terms. That is likely to mean squirreling away around 10 per cent of their income over their working life.

Most are currently not doing that. Pensions calculators, such as those at the Pensions Board website (www.pensionsboard.ie) reveal the likely shortfalls many people will experience based on their current contributions.

Reserve fund

When creating a retirement pot - be it in the form of a pension scheme or otherwise - one issue investors need to be conscious of is fees, advises Smith and Williamson’s Derek Ryan. Ryan suggests that a management fee rather than transactional charges is the route to go.

In considering a pension strategy, Ryan thinks investors should consider it to be ‘The Reserve Fund’ rather than a high risk investment vehicle and that is should be managed with prudence. “A return of 6-8 per cent is what you should be aiming for and it should be spread between a wide mix of asset classes. It should be proactively managed. You should be looking at its performance on a quarterly basis at least.”

Munro O’ Dwyer of PwC agrees that inertia is of the main problems with investors’ approaches to pension schemes but adds that over-conservatism can pose equal risks to bullishness.

“Some of those who got burned during the market crash a few years ago and who moved to safe havens have been reluctant to move out of them and have not benefited from the upswing of recent years in the equity markets. Excessive focus on capital security will limit returns when you factor in inflation and DIRT so you need to have comfort with some element of risk if you want to grow your fund.”

In calculating annuities, actuaries used to think in terms of 10-15 years as the typical lifespan of a retiree. Longevity has increased significantly over recent decades. “Annuities are now typically calculated in terms of providing a 30 year guaranteed income and are priced accordingly. As in insurance, there are winners and losers. We have all heard the stories of the person who buys an annuity and dies a few months later but for each of those there are people who get a long-term income from their annuity,” says O’ Dwyer.

Providing for healthcare needs is another consideration in retirement planning. With the introduction of levies for those joining health insurance schemes late in life, healthcare costs are set to increase. Jeremy Tucker of Tailored Finance advises anyone sitting on the fence in regard to cover to act now.

Step Down

Costs have been escalating for premium level plans. VHI’s top plan is called Healthplus Platinum (Old Plan E), costs €4,843.25 per adult while one step down with VHI is Healthplus Premium (Old Plan D) which now costs €3,350 per adult. A trend in recent years has been for people to either downgrade plans or to cancel private healthcare altogether.

Tucker says that what looks like attractive short-term savings can turn into longer term financial burdens. Even those who downgrade their plan could face very significant costs when they access private care. “A typical example would be an orthopaedic procedure such as a hip replacement, where a policy-holder might be expected to co-fund say 20 per cent of the cost of an operation. That could result in a bill of around €2,000 per hip.”

Another issue is the cost of nursing home, especially in the case of a married couple. With many now charging fees in excess of €50,000, it is important to make provision. One comfort here is that nursing homes fees still qualify for tax relief at the higher 41 per cent rate.