Every year, the October 31st preliminary tax and file deadline (November 14th for those who file on-line) allows workers a last chance to reduce their income tax bill for the previous year by investing in their pension. This includes workers with occupational pensions, who can top them up with an Additional Voluntary Contribution (AVC) contract to boost their final pension; the self-employed and proprietary directors of companies or workers with PRSAs (the flexible pension retirement savings accounts).
The big problem this year is that the collapse of stock markets and the unending uncertainty and volatility has not only put a huge question mark over the choice of pension asset you may want, but whether you should take out a pension at all in this current climate.
It isn’t that pensions are a bad thing – far from it. In this country a personal pension is one of the last, really significant tax breaks available, especially to anyone who pays the marginal, or higher tax rate of 41 per cent. You may even be able to claim back the six per cent you pay in PRSI and health levy contributions.
The problem with personal pensions is twofold this year: not only are fees and charges still too high – the pension companies continue to take five per cent (or higher) entry charges and fund management fees as high as two per cent without delivering anything but losses – but the markets have been falling steadily since the summer of 2007, wiping out several years worth of gains. Typical Irish pension funds have lost about 20 per cent of their value this year alone – a total of €18 billion.
So should you keep paying into a fund that many have criticised for years as being too heavily in weighted in equities (i.e. stock and shares) but especially in Irish stocks and shares, or do you just hope that you have enough time left before retirement for these losses to turnaround?
Anyone who is self employed and nearing retirement – say between five and 10 years – has always been told to move their funds gradually away from equities and into safer bonds and cash funds, but not everyone has done so.
Unfortunately, not even all small companies have done so for their older employees, though larger firms tend to do this as par for the course. Now, when markets have fallen by at least a fifth, may not seem like the time to do so, but John Maynard Keynes’ famous quip, “The markets can stay irrational longer than you can stay solvent’ has never been more apt.
If you are 55 or older, before you put another penny into your pension, get it reviewed by a qualified, fee based pension advisor and consider how to protect your existing assets. For the rest of us, do we take the plunge, or not, into a mainly falling stock market environment?
As a response to the sub-prime and banking crisis, and our own recession, pension companies like the Hibernian Life have launched a ‘Safe Haven’ fund which puts your pension money into a safe deposit account and offers the ECB rate plus one per cent for a year (currently 5.25 per cent) and then allows you to freely switch into other assets. The annual management fee ranges from 0.75 per cent to one per cent per annum depending on your status (self-employed, company director, etc). Other pension providers are coming up with similar safe options.
Meanwhile, financial advisor, Eddie Hobbs, for example, is recommending to his higher risk tolerant clients that they also consider funds like the Zurich Life/Eagle Star’s new balanced Earth Resources Fund which invests in a combination of four sectors – oil, clean energy, precious metals and food.
Mr Hobbs notes that had this fund been around since 2003 it would have averaged a return of 13.7 per cent annually, though this is no indicator of future performance. At 1.5 per cent, the annual management fee is on the high side and you should ideally arrange a fund like this on a fee, nil commission basis.
Depending on how long you believe this financial crisis will last, the addition of precious metals to your retirement portfolio – the most enduring and portable (if you buy the coins themselves) of ‘real’ assets being gold – is something you should consider.
Gold is the ultimate hedge against inflation, war and the destruction of paper money by the inflating of the money supply by governments and central banks, something that is clearly happening right now.
An ounce of gold could buy a fine suit of clothes 2000 years ago; at over $880 an ounce at time of writing, it can still buy you a pretty good suit of clothes. (A $100 bill from even 20 years ago only buys a fraction of the same goods today.)
Gold pays no dividends or interest, but it isn’t created out of thin air either; it has to be dug out of the ground. It is increasingly rare and has an intrinsic, enduring value that will never altogether disappear. Gold as an investment asset for pensions is now approved by the Revenue Commissioners in the form of the Perth Mint Gold Certificate programme (see www.gold.ie) but, as with all other asset choices it should make up only a small proportion of your overall pension portfolio and you should be aware of that the set-up costs will be circa two to four per cent of your contribution but it attracts full tax relief.
If you don’t want to add gold to your pension – you can always buy some as an ordinary investment in coin form via the cheaper certificate route or even as exchange traded funds (ETFs), which trades like a share on the stock exchange – though there is now a growing concern about the counter-party risk of some gold ETFs because of the financial crisis.