Pensions - how good an investment realistically?

steadstill

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I presume we can't mention specific companies in this, but are all the main Irish pension providers very similar in what they offer?

And are there viable alternatives?

Some context:

  • I'm looking at about 20 years before retirement.

  • I have a work colleague who is using an investment broker/portfolio as an alternative.

  • My pension is fairly standard, with typical risk with a well known provider. I did some maths around it - what jumps out is the fees are a very low percentage on paper, but by the time I retire they will accumulate to about one third of the total pension value. Taking into consideration the tax break that goes with pensions, I'll more-or-less get back what I put in (and that value can go up or down etc etc). In general, is this what I should expect?

  • I had a company pension before, for about 6 years, with a well known broker. I left the company, the (frozen) pension amount I got was about 20% lower than what I calculated it should be. When I asked them about it, they said it was due to economic conditions - but overall the global economy was healthy for the investment lifespan
 

Steven Barrett

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  • I have a work colleague who is using an investment broker/portfolio as an alternative.

most of the options available that your work colleague has are also available under a pension. Except your employer can't contribute to the investment account without it being taxed as income. Your contributions won't attract tax relief.

People give out about their pensions all the time and when I have a look at it, they are invested in conservative investments that don't make any money. So what do they expect? People who invest in equities will make more money in the long term but will experience more ups and downs than those who invest in bonds. Risk and reward are related and you can't make higher than expected returns without taking higher than expected risk.


Steven
www.bluewaterfp.ie
 

AJAM

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Because of their tax treatment, Pensions are the best available investment in Ireland.
But to get the most benefit from them (IMO) you need to be heavily invested in equities. Keep your "safe" or low risk investments outside of your pension as taxes are not as big of a factor for low return investments.

Steven do you think that for people who are not investment savy and lets say are in the default lifestyle strategy in their employers pension, that those people would benefit hugely from 1 hour investment advice with someone like yourself?

My guess is that the answer is yes. When I was much younger, a friend of mine offered to do a pro bono check on my pension (he was trying to become a financial advisor and wanted experience looking at real world examples). He pointed out some very basic mistakes I was making
  • Not taking the full employer match
  • Investing in very low risk bond funds even though I was very young
  • Investing spare after tax money in taxable accounts instead of maxing out my pre tax pension contributions
That meeting changed everything for me and I think it is one of the main reasons that I will have a very comfortable retirement.
 

Steven Barrett

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Steven do you think that for people who are not investment savy and lets say are in the default lifestyle strategy in their employers pension, that those people would benefit hugely from 1 hour investment advice with someone like yourself?
Giving an hour of advice isn't what I do and isn't worth my while. Just like people wouldn't get an hour of advice off an accountant or solicitor. You wouldn't ring a plumber to get a few pointers in how to do something.

Cheers
Steven
 

Allpartied

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258
most of the options available that your work colleague has are also available under a pension. Except your employer can't contribute to the investment account without it being taxed as income. Your contributions won't attract tax relief.

People give out about their pensions all the time and when I have a look at it, they are invested in conservative investments that don't make any money. So what do they expect? People who invest in equities will make more money in the long term but will experience more ups and downs than those who invest in bonds. Risk and reward are related and you can't make higher than expected returns without taking higher than expected risk.


Steven
www.bluewaterfp.ie

There seems to be an assumption that taking more risks will, inevitably, produce better returns.
This is, inherently, contradictory. More risk, surely means that you might get better returns. But you might lose money. Maybe lots of money.
There seems to be some doubt about the long term likelihood of equities outperforming bonds. Indeed, there is some evidence that bonds have outperformed equities over the last 20 years. Bonds, remember, have, virtually, no risk and produce a guaranteed return.



I still think that a state guaranteed retirement bond, issued via the State Savings Scheme, would be hugely popular. It would incur minimal management fees, and yet it would still qualify for the tax relief.
 

Shirazman

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I still think that a state guaranteed retirement bond, issued via the State Savings Scheme, would be hugely popular. It would incur minimal management fees, and yet it would still qualify for the tax relief.

Of course tt would be hugely popular! But would it be fair competition for the commercial financial organisations? And, if not, then would the EU allow it?
 
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Gordon Gekko

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And it would yield nothing in terms of return, bringing us right back to the OP’s ‘complaint’.
 

Allpartied

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But would it be fair to the commercial financial organisations? And, if not, then would the EU allow it?
Surely, it would be up to them to prove that their fees, their expertise and their management of monies would be worth the additional cost.

If we are facing a pensions crisis, then all options should be on the table.
 

Allpartied

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And it would yield nothing in terms of return, bringing us right back to the OP’s ‘complaint’.

Did you read the quoted article?
Over the last 20 years, bonds have outperformed equities.
And there is a real chance that the same thing will happen over the next 20 years.
 

Steven Barrett

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There seems to be an assumption that taking more risks will, inevitably, produce better returns.
This is, inherently, contradictory. More risk, surely means that you might get better returns. But you might lose money. Maybe lots of money.
There seems to be some doubt about the long term likelihood of equities outperforming bonds. Indeed, there is some evidence that bonds have outperformed equities over the last 20 years. Bonds, remember, have, virtually, no risk and produce a guaranteed return.



I still think that a state guaranteed retirement bond, issued via the State Savings Scheme, would be hugely popular. It would incur minimal management fees, and yet it would still qualify for the tax relief.
You can't say that bonds produce a better return and have no risk. of course they have a risk. A very simple one is that interest rates increase. If you are in a long term bond, it can have a massive impact on the value of your bond. There is also inflation risk as well as default risk. As bond investors chase a yield in the current environment, they are investing in riskier bonds.
 

Shirazman

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Surely, it would be up to them to prove that their fees, their expertise and their management of monies would be worth the additional cost.

If we are facing a pensions crisis, then all options should be on the table.

I would imagine that the onus would be on the State to satisfy the EU that its fully guaranteed, no risk, pension offering wasn't unfair competition.
 
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Allpartied

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You can't say that bonds produce a better return and have no risk. of course they have a risk. A very simple one is that interest rates increase. If you are in a long term bond, it can have a massive impact on the value of your bond. There is also inflation risk as well as default risk. As bond investors chase a yield in the current environment, they are investing in riskier bonds.

But that's not risk as most people understand it.
If I put 100 euros on a stock and 20 years later it's worth 50 Euros, that's a loss.
If I put 100 euros on a bond and 20 years later it's worth 110 Euros, that's a gain.
Of course, inflation is a risk, but the inflation risk can be managed by drip feeding investments into bonds, over time. Which is the way most pension investments operate.
Anyway, it would just be another option for people. Many people, as you have indicated, invest their money in very low risk instruments and are very risk averse. At the moment, if you want to invest your pension in Irish Govt bonds, you have to employ a financial institution and pay them a fee. I don't see why the state can't offer a direct route for these people and it would, at least, encourage more people to engage with their pensions.
The SSIA initiative showed that when the govt thinks outside the box, they can influence huge numbers of people to save money, for the future.
 

jpd

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Putting your savings into national Savings is the equivalent of buying a government bond
 

Gordon Gekko

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But that's not risk as most people understand it.
If I put 100 euros on a stock and 20 years later it's worth 50 Euros, that's a loss.
If I put 100 euros on a bond and 20 years later it's worth 110 Euros, that's a gain.
Of course, inflation is a risk, but the inflation risk can be managed by drip feeding investments into bonds, over time. Which is the way most pension investments operate.
Anyway, it would just be another option for people. Many people, as you have indicated, invest their money in very low risk instruments and are very risk averse. At the moment, if you want to invest your pension in Irish Govt bonds, you have to employ a financial institution and pay them a fee. I don't see why the state can't offer a direct route for these people and it would, at least, encourage more people to engage with their pensions.
The SSIA initiative showed that when the govt thinks outside the box, they can influence huge numbers of people to save money, for the future.
Something like tax relief maybe?
 

Steven Barrett

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But that's not risk as most people understand it.
If I put 100 euros on a stock and 20 years later it's worth 50 Euros, that's a loss.
If I put 100 euros on a bond and 20 years later it's worth 110 Euros, that's a gain.
It's only a loss if you sell your stock at that point. You could have sold it at a higher or lower price before of after that 20 year period. Bonds will also fluctuate in value during the term of the bond but we do know that if it is a 20 year bond, you will get your €100 back at the end, not a penny more, not a penny less. Of course, your €100 in 20 years time won't be worth what it was 20 years previously.

But that's not risk as most people understand it.
It still doesn't mean it's not there. Ignorance is not an excuse and doesn't mean the risk doesn't go away because you aren't aware of it.

There will always be measurements of time that you will be able to find where a less risky asset class has outperformed a riskier one. I bet for that one example that article quotes, there are hundreds of other 20 year time periods (if using 240 monthly periods) where equities have outperformed. If I look at 01/01/200 - 31/12/2009, cash is the best place to be

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But if I was investing all the way to today, cash would have been the worst place to keep my money

1635341965600.png
 

Allpartied

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Something like tax relief maybe?
But the tax relief is only available , if you buy a private pension product. That comes with fees, and all sorts of complex options.
The private market forces have been allowed unfettered access to this tax relief and use it, quite openly, as a major selling point for their products.
And yet, they have failed, miserably, to engage 50% of the population.
Time for govt to step up and provide a state backed pension bond. Use the SSIA type incentive, which people clearly understood, and aim the product at people aged 50 and over, who have no pension arrangements.
 

Sarenco

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I bet for that one example that article quotes, there are hundreds of other 20 year time periods (if using 240 monthly periods) where equities have outperformed.
In the US, historically stocks beat bonds in just over 90% of 20-year rolling periods (per Jeremy Siegel).

The discussion in this thread may be of interest on this topic -
 

Gordon Gekko

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But the tax relief is only available , if you buy a private pension product. That comes with fees, and all sorts of complex options.
The private market forces have been allowed unfettered access to this tax relief and use it, quite openly, as a major selling point for their products.
And yet, they have failed, miserably, to engage 50% of the population.
Time for govt to step up and provide a state backed pension bond. Use the SSIA type incentive, which people clearly understood, and aim the product at people aged 50 and over, who have no pension arrangements.
- For a lot of that 50%, the State Pension is enough

- There’s also an element of personal responsibility; some people should get up off their backsides and organise their own affairs rather than waiting for the State to spoonfeed them
 
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