PENSION CONTRIBUTIONS ARE A WASTE

Hi,

I want to be a little contrary on this web site. Just looking at the various tables in yesterdays Business Post and looking at my own pension statements for the last 10 years (not just over the bear market period) I am really pessimistic about having a good pension at 65 years despite contributing €13,000 pa AVC's. I am 44 years.

The bottom line is that true net performance over time AFTER charges is pretty miserable in this country.

We are all conned into frantic AVC contributions on the back of tax breaks which are in fact tax deferrals not tax breaks.
This same tax derrals simply ACT TO HIDE THE INCOMPETENCE OF THE AVERAGE IRISH FUND MANAGER.

I am further dismayed when I read in the same week ends papers that the typical Irish fund manager is far more likely to give a buy rating to a stock than his international counterpart.

THINK CAREFULLY ALL YOU AVC contributors. Look back at say 10 years of YOUR PENSION STATEMENTS. I PROMISE YOU IT IS NOT PLEASANT READING.

YOU ARE BEING RIPPED OF BY A LAZY, INCOMPETENT, OVERPAID BUNCH OF UNDERPERFORMERS

So what's the alternative?

Rainyday,

What's the alternative?
Well I don't really know. Certainly the alternative isn't inertia on the punters behalf, but continuing to be frightened like lemmings into handing our money over to underperforming overcharging fund managers is JUST NOT ACCEPTABLE.

Be frank here, how many people have you met or know who have retired after a lifetime of pension contributions who have anythinh like what they expected or were led to believe to expect in the way of retirement income?

Not many I bet.

Personally I am now at the point where I am considering stopping my AVC contributions and directing the net money saved (around €7280) into purchase of stocks from one of the top 10 companies in the ISEQ in tranches of €5,000 or more.

I have dabbled consistently over the past 10 years primarily in Irish financial stocks in tranches of anything from €3k to €5k. I am not an expert in the stock market but I sure feel a lot happier with my own performance than with that of my pension manager.

Not defending the fund managers, but you would want to be doing a WHOLE lot better than the average fund manager to make up for the tax deferral that you are missing out on with your DIY approach.

Rainyday,

That is the key point. TAX DEFFERRALS is what blinds the punters and props up the industry non performers.

ITS TAX DEFERRED not TAX FORGIVEN. You and I will pay this tax in due course if we live long enough to collect our pension.

If we kick the bucket 2 months into retirement the lazy so ands so fund manager walks away with our booty and no doubt uses it to pay himself a handsome PERFORMANCE BONUS.

Is this not a crazy situation?

You and I will pay this tax in due course if we live long enough to collect our pension.

Click to expand...

Not fully accurate - we will pay some tax in retirement, but the deferral allows us to use our tax credits in retirement, which would not otherwise be the case.

Crazy or not, I'm not sure your alternative approach stands up. It might make you feel better by not giving money to fund managers, but you would probably end up poorer by missing out on the tax deferral and the tax free growth within the fund.

Would agree with Rainyday here......

Tax Deferral Issue:

While paying pension contributions you get tax relief at the top rate that you pay.

On retirement, you get a tax free lump sum plus the leftover is normally used to purchase a pension. The pension at best is normally roughly 50% of your pre retirement income. As raindyday points out you then get to apply your tax credits with the result the tax paid as a percentage of pension is normally a lot closer to 0% than the 42% relief you achieved over the course of your membership. e.g. if you earn 50K before retirement you will pay 42% tax on your top earnings. If your income drops to 20-25K post retirement how much tax are you going to pay. Very little if any at all.

Fund Managers:
On fund managers, if you don't like Irish fund managers there are plenty of foreign fund managers available that your scheme could take on.

Having said that, have overseas fund managers really outperformed Irish managers. I'll bet that Irish property fund managers have outperformed nearly everyone worldwide but have underperformed with equities.

Returns:
Returns have been disappointing over the last 10 years. However most people who had money 10 years ago thought that equitities were the sure way of making money. Sure Eircom was only 6 years back and we still thought it a safe bet. Reminds me of where we are with property now ( but thats another argument ). Most pension funds were biased towards equities which have underperformed.

Pension planning is a marathon not a sprint, you are going to have disappointing patches just as you've had periods of huge growth. e.g. the Dow Jones grew by over 200% during both Clintons and Reagans spells in charge.

I am biased as I am a financial advisor but I have "conned myself" into paying 17% salary into AVC's along with trying to pay a hefty mortgage.

I still have yet to see a more matematically beneficial method of saving for retirement given the level of risk I want to take.

PS.....

Just a few figures to show AVCs are normally better than your own personal share portfolio outside a pension scheme.

Say you have 10,000 and buy shares. Assume you get 6% growth each year for 15 years. They will be worth 23,965 after 15 years. Less CGT and you have 21,172.

Say you put 10K into a pension scheme. If you are a higher rate payer you will get 17,857 into the scheme (asumes 42% tax + 2% prsi relief). And say that you only achieved growth of 5% per annum ( i.e. 1% less than achieved yourself ). The fund will grow to 37,123. Since it is an AVC I can put this into an ARF and draw down as I need. And I would hope to pay very little tax on this. I would need to pay 43% tax and PRSI on this to have faired worse. Some will but the vast majority won't as they can use credits and allowances.

And its even more beneficial if you are a 5% proprietary director, a member of a PRSA or a personal pension as you are guaranteed that at least 25% of the fund won't be subject to any tax.

Just my tuppence worth...

> I want to be a little contrary on this web site. Just looking at the various tables in yesterdays Business Post and looking at my own pension statements for the last 10 years (not just over the bear market period) I am really pessimistic about having a good pension at 65 years despite contributing €13,000 pa AVC's. I am 44 years.

Regualar non pension investments over the same period would presumably have provided similar levels of return (and possibly less once tax issues have been factored in)?

> The bottom line is that true net performance over time AFTER charges is pretty miserable in this country.

Part of the problem may be that in the past ridiculous levels of charges on pension and other investment products were permissable and the norm - e.g. anything from the first six months to two years of all contributions, initial units, high bid-offer spreads, commissions, annual management fees etc. At least charges these days on pension and non pension investments are generally at a much more reasonable level. Obviously this simply means that more is invested from day one but doesn't influence market performance...

> We are all conned into frantic AVC contributions on the back of tax breaks which are in fact tax deferrals not tax breaks.

It's up to individuals to assess their own needs (possibly in conjunction with a suitably qualified and authorised independent professional advisor) and then plan for these. There's no point in blaming advertising for most or all of our woes in this context or any other. We all have certain choices to make in life and usually can't really blame others if we make the wrong ones or delegate this responsibility to somebody else. (With the obvious exception of mis-selling of course).

> I am further dismayed when I read in the same week ends papers that the typical Irish fund manager is far more likely to give a buy rating to a stock than his international counterpart.

Stock tips are generally useless regardless of the supposed expertise of the person providing them. Nobody can predict the markets.

> THINK CAREFULLY ALL YOU AVC contributors. Look back at say 10 years of YOUR PENSION STATEMENTS. I PROMISE YOU IT IS NOT PLEASANT READING.

Past performance is no guide to future returns.

> YOU ARE BEING RIPPED OF BY A LAZY, INCOMPETENT, OVERPAID BUNCH OF UNDERPERFORMERS

Topical and controversial but hardly constructive...?

By the way - I am just an average punter with no involvement in the financial industry by the way. As it happens I currently squirrel away the max 20% tax relief limit for my age in my PRSA and have (sporadically) over the past decade or so tried to maximise my pension savings through varions occupational and personal pension schemes. As with Alan I see this as the most appropriate vehicle for planning for my retirement needs within the constrains of what's available, what tax incentives exist and my general attitude to risk/volatilty.

Beat The Street

Regualar non pension investments over the same period would presumably have provided similar levels of return (and possibly less once tax issues have been factored in)?

Click to expand...

I don't know. I remember being struck by a news item recently on the performance of pension funds over the past quarter or two. I was driving so I couldn't take down the figures.

It said that the ISEQ had gained about 6% or 6.5% I think. But the best performing pension over the same period was in or around 1% or 2%.

Does anyone else remember this?

Now I have to then ask the question, why didn't they just buy the index? This is a question that a lot of people are asking about "Professional" traders in the US, the UK, and now here.

I can walk into a broker and buy a broad selection of shares and then leave them until I retire, and the probability based on past experience, is that I will beat a significant proportion of professionals.

To answer your "What's the Alternative" question, A Self Administered fund might be an alternative if you are a business owner.

The problem with the current pension system and the reason it is hard to convince people to take them up, is they are confusing, and even if you understand how they work, you have very little idea of what you are invested in. They are opaque.

People seem to be opting for buying houses as investments on the basis that these will be their pension.

This has the double effect of concentrating a huge number of peoples retirement plans into the same asset class, while making houses too expensive for people who want to live in them NOW.

-Rd

Beat The Street

> and even if you understand how they work, you have very little idea of what you are invested in. They are opaque.

I don't think that's necessarily true. You pension statement should detail what funds your money is invested in and it is often possible to obtain more detailed information about the composition (e.g. specific share, bond, cash holdings and maybe even acquisitions/diposals) of these funds.

Quick point......

Hi Daltonr

"Now I have to then ask the question, why didn't they just buy the index?"

The ISEQ is 100% equities. Most pension funds are a basket of asset classes. The bulk of pension funds tend to contain bonds/gilts/cash also makes them a more cautious animal than equity funds. So, you are not really comparing like with like. There are pension funds are are index trackers, if that is what you want.

However, there is another argument (that has been covered at length on AAM) that index trackers are superior to focused managed equity funds.

Managing your own funds

I can understand the author's frustration with the relative performance of most Irish pension mangers in the past. Many people still want the tax benefits of a pension but want to avoid the equity route and instead opt for a property based route, such as a syndicated property purchase. People tend to find this method of getting the 'best of both worlds', ie the pension tax relief and the access to property away from the turbulence of the equity markets. Or as another alternative, a pension mortgage with the pension element invested into a secure fund.

Re: Managing your own funds

I would question the wisdom of having your pension fund heavily invested in property, given that most people's other largest asset is their home (also property). This means that a huge proportion of your personal wealth is dependant on the property market.

Having an equity-based pension fund gives you some diversification.

PENSION CONTRIBUTIONS ARE A WASTE. the alternative

I think defined contribution type pensions are a waste of time.

Did you notice the pension brokers etc point out things like :
"Returns greater than deposit accounts cannot be guaranteed"
I think the only thing that guaranteed with these pensions is that the broker(s) make loads of money out of you.


Way back in 1998 I was 32 yrs old and decided I better start planning my future so when the company I was working for offered me to join their company pension scheme I decided to max my pension contributions according to my age.

5 and half years later the company wasn't doing very well so I left the company. My new employer wasn't interested in paying into this company pension so I started up a prsa this year and I'm paying into that.

Recently I checked up on the status of the company pension and what I could do with it.
SO I had a chat with the broker who originally setup the pension for me .
the total amount of money that I put in was €54605.
It was now worth €36,600.
Total charges was €19521.30
the broker gave himself a handy little commission of €7756.42 or 14% of what I put into the pension.

I think these charges are a total rip off especially when there was about 0% performance from the pension .

So I now reckon if I continue to make the max contributions for the rest of my working life the pension might not be worth anything when I retire so its just a waste of time.

So what's the alternative?

I've come across other people who are in a similar situation.
What people are starting to so is get a buy to let property using the equity of their home and rent it out.
I think there will always be a demand for rental property in cities around Ireland and there is the chance you'll have some income after paying tax man etc.
I think in hindsight I should have went off and bought a second property in 1998 instead of putting max contributions in a pension and be fleeced by pension charges.

PENSION CONTRIBUTIONS ARE A WASTE. the alternative

> Did you notice the pension brokers etc point out things like :
"Returns greater than deposit accounts cannot be guaranteed"

To be fair the standard illustration provided with any pension plan does point out that market performance cannot be predicted in advance and that there are no guarantees in terms of returns. As with any investment one needs to choose the risk/reward profile carefully so that it suits your needs. For anybody with more than a few years to go to retirement investing mainly or solely in equities (directly or indirectly) would generally be considered an appropriate strategy to provide for pension income.

> Total charges was €19521.30 the broker gave himself a handy little commission of €7756.42 or 14% of what I put into the pension. I think these charges are a total rip off especially when there was about 0% performance from the pension .

This simply serves to show how important it is to check (among other things) up front what the charging structure is on any pension scheme and that one should never depend on a broker other than an Authorised Advisor or perhaps a decent multi-agency intermediary for independent, objective advice. Did you do this when you took out this particular pension?

> What people are starting to so is get a buy to let property using the equity of their home and rent it out.

In many cases this could be an even riskier strategy than investing (presumably in equities but also in bonds, with profits funds etc.) through a pension fund with a reasonable charging structure and with as much pension investment advice that the individual needs. This is because people who own their own principal private residence who then plough a significant proportion of their wealth into another (investment) property are concentrating much of their overall wealth into a single asset class and usually geographic region (e.g. Irish property). This is in contrast to what is generally considered a prudent approach of diversifying one's investments across different asset classes and risk/reward profiles.

In my opinion (no rocket science here) investing in equities through a suitable pension scheme with a reasonable charging structure is ONE element in a well diversified portfolio and the main one best geared towards pension savings (particularly given the tax advantages to high rate taxpayers).

> I think in hindsight I should have went off and bought a second property in 1998 instead of putting max contributions in a pension and be fleeced by pension charges.

Hindsight is 20-20 vision. Past performance is no guide to future returns. It doesn't mean that property investment is the right thing to do no in all cases and instead of more conventional pension mechanisms.

Disclaimer: I do not work in finance in any capacity.

Re: PENSION CONTRIBUTIONS ARE A WASTE. the alternative

Members of occupational schemes have no control over charges. They're arranged by the trustees with the pensions broker. If the trustees are on the ball, you'll get low charges; if not, you'll get the type of situation described above.

Of course you could always opt out of a high charging occupational scheme and set up your own PRSA. The big drawback is that you'd also be walking away from the employer's contribution. And unless your PRSA contributions are made by payroll deduction, you'd also be walking away from the PRSI relief (PRSI relief is theoretically available for stand alone PRSAs but nobody seems to know how it works).

It can be difficult to work out the maths but my hunch is that the employer's contribution plus the PRSI relief should more than make up for the high changes on occupational schemes.

Re: PENSION CONTRIBUTIONS ARE A WASTE. the alternative

Also, don't forget that members have some control over the trustees. As a first step, the members should certainly make their views about high charges known to the trustees and give the trustees a chance to respond/act. Members can also force an election of member reps as trustees if their is sufficient demand.

Re: PENSION CONTRIBUTIONS ARE A WASTE. the alternative

> And unless your PRSA contributions are made by payroll deduction, you'd also be walking away from the PRSI relief (PRSI relief is theoretically available for stand alone PRSAs but nobody seems to know how it works).

That's not true although Welfare still haven't sorted out their processes for dealing with this yet so there are delays until they do so. PRSI/health levy relief IS available on standalone (non payroll based) PRSA and other personal pension contributions:

avc rip off

I totally agree with above i'm doing an avc scheme...the broker is ripping me off with charges and the pension company is also!
Its scandalous....basically legal robbery.
These people should be jailed.
A total ripoff.....alot people dont realise the charges until they are retired and the pension fund is worth very little.
Standard prsa only way to go!