Changing jobs can be an exciting but sometimes stressful time. You get to learn new systems and meet new people but there are things that need to be sorted during this transition. One major item that is often overlooked is the pension you may have had with your previous employer. Most people either forget about that pension or think it is fine leaving it where it is but there are risks involved with doing that.

Are there risks leaving my pension at my previous employer?

The main risk is that the employer goes out of business while this is a remote possibility this can happen. The recent collapse Carillion is an example of this. It was totally unexpected and now all those people who had Carillion pensions both past and current are contacting the UK’s National Employment Savings Trust to see if they will receive their pension benefits. Can you imagine the panic and anxiety that ensues after such an event, I think it is safe to say none of us wish to experience this. The whole situation could have been avoided had the employees withdrawn their pension and taken control of it themselves. A second risk is that you are limited to the investment funds within the employer’s pension plan. By taking control of your pension you are then free to select from a wide variety of investments. You can invest in funds, stocks and shares and properties. Getting the right advice is vital to ensure you invest in the product that is right for you. Your appetite for risk must be assessed before any investment is made.

What are my options?

Removing you pension from your previous employer is not a taxable event as you are just transferring it from the employer’s pension scheme to a personal pension scheme and therefore you are not liable for tax of any kind. In order to give balance to my article I must also tell you the downside of taking the pension from your previous employer’s scheme. It is that some pension schemes have benefits that you would not receive in a personal pension plan. Once again getting the right advice is vital to ensure you make an educated decision. I have helped countless clients navigate this process and would love to help you Call me today to set up an appointment and see what option is best for you… and as always there is no obligation with this appointment.

Investing in property is an excellent way of diversifying your pension investments – but not property abroad – property right here at home, in Ireland. Most Irish pension companies do not offer property funds and if they do, they are generally abroad or in a pool of properties. This makes it difficult for the investor to be clear on exactly where their money is invested. There are many options for the individual who wishes to invest their pension or part of their pension in to property. A self-administered pension is a solution that enables an individual to have flexibility of investment in various assets with transparency of fees.

Using Self-Administered Pensions to Diversify in Properties

With a self-administered pension you can invest in a single property or a syndicated property. In a single property you can invest in either a commercial or a residential property and you can pick the property, select the renter and also collect the rent. Of course all the rent collected is tax free. In a syndicated property you can also invest in either a commercial or a residential property but it allows you to invest in a bigger property with other pension or non-pension investors. The structure is usually a limited partnership with several investors. This will allow you to invest in a large property within your pension portfolio without having to invest a large sum of money. For example a commercial property selling for €1 million you can invest €100,000 and own 10% of the property. This gives your pension portfolio exposure to a commercial property that may not have been possible previously. One of our clients recently invested €50,000 in to a syndicated commercial property leaving him €200,000 to divide between 4 other properties.

As Ireland has recovered from the financial crises we are now moving into the expansion phase in a business cycle. Sole traders, executives and directors are looking to save tax on their income. A self-administered pension gives them not only tax relief but greater diversification on their investments, which in turn lowers their risk.

Pension Since 2008

Since 2008, pensions contributions have declined to a non-existent level; in fact many believed that pensions were dead. However over the last two years, pensions are being revived and a lot of individuals are beginning to contribute once again. This is a sign that that the economy has begun to improve. A great number of pension funds were diminished or in some cases wiped out during the financial crisis, which in turn left people nervous and reluctant to invest in their pension. Pensions with Irish Life, Aviva, Friends First, etc. are a homogeneous investment in funds that people traditionally invest in. When the majority of individuals receive a pension statement, they are unsure whether or not they are actually making money or what fees they are being charged. As investors become savvier, they are looking for other types of investments that they wish to diversify their portfolios with.

An Alternative Investment to Traditional Pension Funds

One investment currently worth looking at is property – but not property abroad – property right here at home, in Ireland. Most Irish pension companies do not really offer property funds and if they do they are abroad or in a pool of properties thus the investor is not aware of what they are invested in. So are there any other options for the individual who wishes to invest their pension or part of their pension in to property? A self-administered pension is a solution that enables an individual to have flexibility of investment in various assets and transparency of fees. Many believe that self-administered pensions died with the financial crises but this is simply not true. It is now even easier and more affordable for individuals to start a self-administered pension under any pension structure – PRSA, AVC, SSAP, ARF and AMRF. For example this type of pension allows an individual to pick a property and then purchase it in their pension, within the proper regulatory channels. They know exactly what they are invested in and it is tangible. They can also participate in pooled investments in commercial property for example and this allows them to receive a good yield on their pension investment. Tax relief is received on any contribution made to the self-administered pension fund; in fact they can make up for missed contributions since 2008. Contact me today and we can discuss the particulars of the self-administered pensions.

No matter what comes from the new budget, people should be and need to be contributing to their pensions. Taking matters into you own hands and start investing today to ensure that you will have the amount of money you need at retirement. Reports have shown that the economy is picking up, so if you have not made contributions to your pension in the past 4 or 5 years, you need to start thinking again about retirement. As the new budget looks to have come out with higher taxes to be collected, contributing to your pension will not only help you save for the future but possibly reduce your tax bill as well. Here are a few points that help unpack this a bit more:

1. Contributions to pension reduces income tax bill.

2. For a 35 year old self-employed person with 50k per annum net relevant earnings and not contributing to any pension plan – Their maximum pension contribution is at 20%*, which is €10,000 for that tax year. The actual contribution would be €6,000 after tax relief if you are at the 40% marginal tax rate or €8,000 if you are at the 20% marginal tax rate. Pension contributions are still subject to USC and PRSI.

3. Growth in a pension grow tax free.

4. State pensions are subject to changes in pension laws with each budget. Maximise your pension contributions and grow your pension to maintain a quality of life that you are accustomed to.

5. Self-administered or self-directed pensions allow you to have direct control of investment policy and management of the funds.

6. Defined benefit pension is a pension in which you will receive a monthly/annual income at retirement based on your current salary. The benefit is guaranteed by the company which you work for. The ‘pros’ of this is you know what you will get at retirement and the ‘cons’ is the benefit remains as long as the company remains.

7. Defined contribution pensions are pensions in which you know the amount you contribute at every pay period but do not know the monthly/annual income you receive when you retire. Your income is based on the amount at retirement and return on your investment. The ‘pro’ is that you can get a great return on your funds and this can also be a ‘con’. The ‘cons’ is not knowing what income you will receive at retirement till the retirement date.

What is a Tracker Bond?

Many people ask me what is a Tracker Bond and a Tracker Bond is a savings in either a Life Assurance company or a bank that tracks a certain stock market index with a guarantee of capital and only provide capital growth not interest.   What this means in simple terms is that you can invest in a Tracker Bond and recieve possibly a good return similar to the stock market without risking your capital.  

Tracker Bond chareteristics

• There is usually a minimum return at maturity with a possibility of a bonus related to performance of various stock market indices or individual shares. 
• Maximum return may be capped.  
• Tracker Bonds are subject to market risks as bonus payable at the end of the term is related to growth in stocks or indexes.  If a bonus is not paid, then your capital did not keep with inflation.  
• The issuer of the tracker bond could default.  
• Tracker Bonds are for a fixed term 5 years is the usual term.
• A death exit tax is incurred from the day before the death of the insured. There is no USC or PRSI at this time.
• If the Tracker Bond is in a Bank deposit product, it is usually subject to DIRT.  Gross interest is liable to PRSI and USC.  
• Early access to funds prior to the end of the term is subject to penalties. 
• There are no explicit charges; charges are built into the Tracker Bond structure.  
• You can invest in a Traker Bond inside our out of your pension and if the Tracker Bond is in a Life Assurance investment, exit tax applies on gains. 

Tracker Bonds are for investors who want to participate in equity markets but with little to no risk.  A Tracker Bond may be for you but it must fit in your overall financial goals.  Make an appointment with us today and see if a Traker Bond is for you.

• A Unit Linked bonds is a single premium Whole of Life assurance policy, where a once-off premium is invested in secure units in one or more Unit funds.

• Unit-linked bonds provide capital growth only.  Income requirements could be met through regular withdrawals.

• Unit-linked bonds have different funds that you can invest in.  Each fund has individual risks.

• Some funds offer a form of investment guarantee that can reduce risk.

• Funds can be matched to your risk tolerance.

• Transfers between funds are allowed.

• Typically there is no investment term, however there are initial fees to overcome and there could be exit fees.  Management fees apply.

• Funds are priced daily; there is a risk of capital loss upon an exit.

• Funds do accumulate tax-free, however there is an exit tax on capital growth.  There is no USC or PRSI.

• Minimum investment typically starts at €20,000.

• Unit-linked bonds are not for short-term savers.  Unit-linked bonds are for investors who can accept a level of risk and tie-up their capital for minimum of 3 to 5 years.

• The most common bonds are loans to governments or corporations.  Bonds provide a fixed income in a form of interest paid semi-annually or annually.

• Capital on bonds are not repaid until maturity.

• Since bonds pay a fixed interest from issue, the risk is that bonds do not keep up with current interest rates.

• When bonds are purchased the bond value will fluctuate.  If you need access to the funds prior to maturity you could risk a capital gain or loss.

• There is no capital guarantee and the issuer of the bond could default.

• Bonds in a different currency will encounter risk due to currency rate fluctuations.

• Term of bonds vary and can range from a few months to greater than 20 years.  You can select a bond that’s in line with your investment time.

• There are no explicit charges on bonds but there are commissions to be paid on purchase and sale.

• Income paid by bonds is liable to income tax, USC and PRSI but is not liable for DIRT at source.   In some instances bonds can also have a capital gain which would be subject to Capital Gains Tax.

• Bonds are for investors seeking a fixed income for long periods of time.

• Bonds can also be a part of a portfolio to reduce risks from stock or market risk.

• Stocks or shares are a partial ownership of a publicly traded company.  Stocks can have a combination of capital growth and dividend payments.

• Not all stocks pay dividends, particularly growth stocks.

• There is no guarantee of capital and are subject to market risks.

• Depending on the industry, there could be specific risks.

• Stock in a different currency will encounter risk due to currency rate fluctuations.

• Stocks typically keep up with the rate of inflation.  This provides protection from deposits or savings that are not keeping up with inflation.

• Access to funds is quite easy, as stocks do not have a term.  There are commissions paid on purchase and sale of stocks.

• Stocks are subject to capital gains tax, if any gains and dividend withholding tax if dividends are paid.  There is an annual capital gain tax relief of €1,270.  Capital losses brought forward can offset capital gains tax.
• • Stocks kept in a portfolio help reduce risks from low interest rate investments.   They are suitable for investors who want capital growth and can accept a higher level of risk.

• Savings are accounts than can be held at a bank or credit union.  Savings usually have higher interest rates than deposits.  Interest growth is on monthly, six month or yearly anniversaries.

• Savings do not keep up with the rate of inflation so this would be considered a risk.  Since rates are based on ECB rates there is also a risk of interest rates changing and no longer meeting your financial objectives.

• Another risk is that the bank or financial institution could default however deposits are covered up to €100,000 by the Deposit Guarantee Scheme.

• Savings can have some withdrawal restrictions of a week or so.

• Interest is usually subject to DIRT and PRSI.

• Access to funds is quite easy and there are no explicit charges.

• Savings are suitable for investors who need readily accessible emergency funds; allocation of a portion of portfolio to meet diversification goals; risk-adverse investors; and looking for a higher rate than deposits.