Should I stop/reduce my payments into PRSA

[MandaC]

I have a standard PRSA with Irish Life which I took out only at the start of this year. It is invested in the standard Fund(Consensus Fund S)

Since I took it out my value has dropped over 25%.

I am paying €400 per month into it before tax relief. Given the current state of the market, should I reduce my payments or freeze this.

I know Pension is for the long haul (I have almost 28 years left on it) but to be honest I am sorry I took the thing out now instead of just sticking my money in the Bank. Only good thing has been that I get the tax relief, I suppose.

 

[raydar0608]

Hi,
I too am paying 400 euro per month into an RAC. I work in IT and to be honest I dont think I will ever retire, as studies show when you retire, your life expentancy reduces. So whats the point in having a pension??

Should I reduce the amount payed in?

 

[carpedeum]

I have a similar Irish Life PRSA policy to MandaC and am also questioning the point of continuing.

Perhaps someone can answer this question which might allay our worries: is it true that more investment units are bought with a monthly contribution at present since the value of the fund has dropped as I assume have the unit prices and, therefore, we would have more units than had the values remained high?

 

[johnnygman]

I have a similar Irish Life PRSA policy to MandaC and am also questioning the point of continuing.

Perhaps someone can answer this question which might allay our worries: is it true that more investment units are bought with a monthly contribution at present since the value of the fund has dropped as I assume have the unit prices and, therefore, we would have more units than had the values remained high?

The Unit price would naturally be lower given the large falls in the underlying assets at this time and yes you would be able to buy more units for =the same contribution amount, given the long term nature of a pension plan it would not be wise to try and time the markets.
It would be advisable to continue with your current funding if affordable given the tax benifits of pension contributions.

As to the person who says they will never retire, that must be one heck of a job where can i get one of those?

 

[DerKaiser]

I have a standard PRSA with Irish Life which I took out only at the start of this year. It is invested in the standard Fund(Consensus Fund S)

Since I took it out my value has dropped over 25%.

I am paying €400 per month into it before tax relief. Given the current state of the market, should I reduce my payments or freeze this.

I know Pension is for the long haul (I have almost 28 years left on it) but to be honest I am sorry I took the thing out now instead of just sticking my money in the Bank. Only good thing has been that I get the tax relief, I suppose.

Personally I think you'll drive yourself mad worrying about the value of your pension now. You have 28 years to go, stock market performances this year will have a negligible impact on your final proceeds compared to what happens say in the final 5 to 10 years i.e. the 2030s!

Sounds like you don't have much appetite for risk, better to find that out early. You can redirect all future premiums into a more secure fund, something that invests in cash or, more appropriately, government bonds. This way you'll have plenty of security and benefit from the tax relief also.

 

[therock]

Well stock markets have been running at record highs in recent years, and a lot of those highs were on the back of bank stocks.

Bank stocks are now on the decline and the question is will they rise to the same level in the future. The fundamental point is, are bank stocks a sound investment going forward. Do we all know the full extent of the sub prime crisis? Are all the banks safe here and abroad?

If you believe that the banks are safe (and remember the rest of the economy and companies quoted on the stock market depend on the banks), then by all means stick with the stock market.

If however you believe that the stock market reached historic highs recently and for the next few years couldn't possibly reach those highs again and that we saw the top of the cycle in terms of faith in banking stocks, then I don't think a stock market invested pension is the way forward.

International economies are contracting: Ireland, Britain, the US and others. The markets usually reflect optimism or pessimism. If economies are contracting, naturally there is going to be pessimism. The longer it continues, the deeper ingrained the pessimism becomes and the more unlikely rallies are. My feeling is that economies will keep contracting until they hit some kind of bottom and then turn around and not before. And pessimism will have to work its way out of the system.

The truth is none of us know going forward if all the problems with sub prime and all that is in the past or if there is more to come. I mean just how long can governments keep funding banks especially in the US which are essentially bankrupt?

So individuals have to make their own personal judgements on whether having their pension stuck in the stock market is the right thing to do, and not just listen to the advice of vested interests who will tell you to let them invest your pension in the stock market, because it hasn't failed in the fast.

Personally, for what it's worth, I think bank shares were overinflated much like the .com bubble shares were over inflated, and the bank share prices were high because a lot of people who invested in them weren't in the know about their exposure to sub prime. So if you have confidence in the banks, invest in the market, if not, you probably shouldn't.

PS I am not a vested interest!

 

[johnnygman]

[Personally, for what it's worth, I think bank shares were overinflated much like the .com bubble shares were over inflated, and the bank share prices were high because a lot of people who invested in them weren't in the know about their exposure to sub prime. So if you have confidence in the banks, invest in the market, if not, you probably shouldn't.

PS I am not a vested interest![/quote]

Luckily its not worth much, if only great minds like yours were around in the banking commumity maybe this global crisis would have been averted all would be rosy in the banking sector

If you are concerned about market performance switch to a cash fund with no risk on your investment performance (again not advisable for someone investing long term), it makes no sense to stop your contributions if you are a high rate tax payer, surely anyone can see the benefit in that.....

 

[shaking]

MandaC might make you feel a bit better:
Assuming you took your PRSA out at the start of January and have paid €400 in a month you've invested €4,000 so far. If that's lost 25% your fund should be worth somewhere around €3,000. If you're on the lower tax rate you've actually paid in €2,960 (Tax relief 20% & PRSI relief 6%) if you're on the higher rate you've paid in €2,120 (Tax relief 41% & PRSI relief 6%) . So either way you've made money

As Derkaiser says you have a long way to go retirement and will worry no end if you keep checking your values. These things come in cycles, if you are risk adverse redirect your funds to a low risk fund. Otherwise you need to think of the upside which is you're getting more units for your money now then you did at the start of the year.

 

[MandaC]

No its actually worse - I pay €333 per month - but what is cheesing me off is that I paid a lump sum of €5,000 bonus through work (whereby I had an option of taking this another way and would have got the value of the full €5k) so out of that €5K I thrown away a quarter of this ie, €1,250. My fund is actually down approx €2,500 since February.

I phoned Irish Life and I can either down or suspend the payments or switch to a cash funds.

My poor boss is up for retirement this year and his fund has literally evaporated before his eyes. I know the funds can rise and fall, but what if there was another financial meltdown like this one in the year I am due to retire?

Have discovered I dont like these risks and will stick with the Bank from now on I think.

 

[therock]

[Personally, for what it's worth, I think bank shares were overinflated much like the .com bubble shares were over inflated, and the bank share prices were high because a lot of people who invested in them weren't in the know about their exposure to sub prime. So if you have confidence in the banks, invest in the market, if not, you probably shouldn't.

PS I am not a vested interest!

Luckily its not worth much, if only great minds like yours were around in the banking commumity maybe this global crisis would have been averted all would be rosy in the banking sector

If you are concerned about market performance switch to a cash fund with no risk on your investment performance (again not advisable for someone investing long term), it makes no sense to stop your contributions if you are a high rate tax payer, surely anyone can see the benefit in that..... [/quote]

Ah sounds like you want to get into a personal slagging match re your opinion vs my opinion.

Question, are you a vested interest, ie, what is your profession? If you are in the business of selling pensions then personally I wouldn't even listen to what you have to say because you are not neutral.

Ok so the stock market crashes and your invested pension disappears overnight leaving you with nothing to live on in retirement...but you have the advantage of a few thousand a year now in tax rebates. Really, do you think that's the way to go.

If your pension was worth 400,000 last year, it's worth 300,000 this year. If it's worth 300,000 this year, if things continue, it will be worth 255,000 next year. And the year after that it will be worth 165,000. I don't think tax rebates will make up for those kinds of losses and encouraging people to stick with stock market invested PRSAs is irresponsible until the subprime mess is sorted.

My point is PRSAs invested in the stock market are not safe, is that ok?

 

[LDFerguson]

I am a broker and among lots of other things, I arrange pensions for people. But let's get something abundantly clear - there are some excellent deals out there (e.g. ECB + 1% with no DIRT tax) for pension funds that are simply placed on deposit. So you can get your tax relief but your money is on deposit with an Irish bank and the deposit is guaranteed by the Government like any other. It doesn't make a blind bit of difference to me whether someone goes into a deposit fund or a stock-market / equity based fund, so my advice isn't coloured by such interests.

In my capacity as a self-employed person, I have just made my annual contribution to my own pension fund. Over 75% of it is invested in equities - I increased the equity content this year over last. Why? Because stock markets are cyclical in nature. The reasons change as to why stock market crashes occur. Investor behaviour and the end result stays the same.

The herd mentality of investing goes something like this: (1) Stock markets go up for a few years running. (2) People listen to others who invested from near the start of the bull run and feel they missed out. They invest. (3) The increased demand for shares as more people jump on the bandwagon starts pushing prices out of the realms of actual valuation and into the realms of supply & demand, i.e. speculation. (4) This continues for a while, causing a bubble. "Commentators" come up with explanations as to how things can continue to rise inexorably. (5) The bubble bursts and those who got in last fall furthest. (6) Negative sentiment takes over and the "commentators" come up with explanations as to how things may take forever to recover. (7) Lots of people get scared and sell up, for fear of losing money. This causes things to spiral downwards, far below true valuation. (8) The underlying problem that caused the bubble to burst gets sorted. (9) Experienced investors have been investing since (5) and continue to do so. The majority are still too scared. (10) Share prices return to realistic levels. (11) Go back to (1).

The smart money is not made by attempting to time the markets or by jumping into a fund which has just had three or four good years.

In an 82-year period, from the start of 1926 to the end of 2007, the S&P 500 index went up in 59 calendar years and down in 23 years. So, in more than one in four years, anyone tracking this index would have seen negative returns.

Yet in that 82-year period, the index rose by an average of more than 10.3 per cent per year. In other words, despite 23 negative years, the average after 82 years was still strongly positive - an overall increase of 300,000 per cent. Inflation over the same 82-year period averaged just over 3 per cent per year, so the real return was well ahead of inflation.

The current downturn is just another in a long line. I've no idea how long it will take to recover. But I'm confident that it will.

 

[johnnygman]

Luckily its not worth much, if only great minds like yours were around in the banking commumity maybe this global crisis would have been averted all would be rosy in the banking sector

If you are concerned about market performance switch to a cash fund with no risk on your investment performance (again not advisable for someone investing long term), it makes no sense to stop your contributions if you are a high rate tax payer, surely anyone can see the benefit in that.....

Ah sounds like you want to get into a personal slagging match re your opinion vs my opinion.

Question, are you a vested interest, ie, what is your profession? If you are in the business of selling pensions then personally I wouldn't even listen to what you have to say because you are not neutral.

Ok so the stock market crashes and your invested pension disappears overnight leaving you with nothing to live on in retirement...but you have the advantage of a few thousand a year now in tax rebates. Really, do you think that's the way to go.

If your pension was worth 400,000 last year, it's worth 300,000 this year. If it's worth 300,000 this year, if things continue, it will be worth 255,000 next year. And the year after that it will be worth 165,000. I don't think tax rebates will make up for those kinds of losses and encouraging people to stick with stock market invested PRSAs is irresponsible until the subprime mess is sorted.

My point is PRSAs invested in the stock market are not safe, is that ok?[/quote]


What part cash & depposit based funds didnt you understand, i thought i made that point earlier, a person doing a PRSA does not have to invest in the markets if they are concerned about risk, although as LDferguson points out this is the correct strategy over the long term, By the way i am an accountant and a QFA for what it's worth, i do believe in pensions for people over the long term. I think the problem here is fear and lack of knowledge, no one wants to see people lose money, but you have to put it into context over the long term.
Your comment re losing 41% etc are not benificial to anyone trying to decide on a strategy to fund for retirement.
I do not want a slagging match my friend your entitled to your opionion of course

 

[elcato]

No its actually worse - I pay €333 per month - but what is cheesing me off is that I paid a lump sum of €5,000 bonus through work (whereby I had an option of taking this another way and would have got the value of the full €5k) so out of that €5K I thrown away a quarter of this ie, €1,250. My fund is actually down approx €2,500 since February.

That 5k was tax free so depending on what tax bracket you were on you gained 1k or 2.2k straight away so you haven't 'thrown away' €1,250 as such. Of course in a years time you could be saying that it's worth 10k now. That's the nature of the beast.

 

[therock]

What part cash & depposit based funds didnt you understand, i thought i made that point earlier, a person doing a PRSA does not have to invest in the markets if they are concerned about risk, although as LDferguson points out this is the correct strategy over the long term, By the way i am an accountant and a QFA for what it's worth, i do believe in pensions for people over the long term. I think the problem here is fear and lack of knowledge, no one wants to see people lose money, but you have to put it into context over the long term.
Your comment re losing 41% etc are not benificial to anyone trying to decide on a strategy to fund for retirement.
I do not want a slagging match my friend your entitled to your opionion of course

It is the correct strategy in the long term, but an improvement on that strategy is to suspend your payments until the market hits rock bottom...the general consensus among the 'experts' here and in the US (following the news helps!) is that we are in a period of great uncertainty similar to 1929. So now is not the time to put your eggs into the stock market, through a PRSA or anything else.

Most people who put into a PRSA don't feel they have the nessecary knowledge to decide if the stock market is the place to invest it, and usually their fund manager, basing their decision on years of experience decides on the stock market. That's fine when everything is stable. Everything is not stable now and many people unfortunately have lost a lot of money in their pensions.

Pension Fund Managers make mistakes too you know.

I agree eveyone is entitled to their opinion. And like I say people should make up their own minds...I don't tell people they are dumb for having one opinion or another. Anyways I won't be keeping up this discussion, as I doubt either of us will persuade the other.

 

[sanne]

**Suspending contributions to a pension plan at this time is a terrible idea**

Based on the simple fundamentals of "buy low - sell high" the contributions you made in the last year are poised to do just fine between now and your planned retirement date. You see, every time you make a payroll contribution you are reducing the average cost of the shares you originally purchased when the market was falling. If you stop contributing now you wont be able to take advantages of the opportunity to buy these shares at the lower prices they are now available. When the market does recover (which we all know may take many years) the shares purchased at the lower price will offset any loss you made by purchasing at the higher price.

Off course it is really heartbreaking to see you balance dwindle particularly when we all work so hard to make those pension contributions - the fact is by investing in a low interest bearing bank account (or safe pension fund) as suggested above will not leave you with enough money to retire.

Stick with your contributions, or if you have the extra cash increase your contributions while you have the chance to buy shares at these discount prices.

 

[Compass]

If you're on the lower tax rate you've actually paid in €2,960 (Tax relief 20% & PRSI relief 6%) if you're on the higher rate you've paid in €2,120 (Tax relief 41% & PRSI relief 6%) . So either way you've made money

I'm never sure about that logic. Surely the tax relief attached to pension contributions is just tax deferred. You don't pay tax on it now but you will when you come to draw down the pension - so the only advantage is that you might be paying then at the lower rate. Surely the tax advantage on the whole is only the difference at most between the lower and higher rates at best?

 

[askalot]

Personally I will keep up my pension contributions, the deciding factor being tax relief. Having said that, I have twenty years to go before retirement and would not be as certain as some posters about the returns I will see. The latest crash will see the introduction of much needed new regulation which may have the impact of slowing growth in the financial sector, property and consumer spending; the areas that drove recent stock market growth.

Even taking historical figures as some rough guide of where we might be headed doesn't offer too much cheer. Have a look here at an analysis of The Great Depression and Dow Jones Industrial Average :

[broken link removed]

A key point is:
'Stock prices recovered from 1942-1966. They didn't return to their 1929 high until 1954'.

I've looked for but could not find a figure for the average return for a pension taken out in 1925 and maturing in 1955 but maybe somebody has the figure to hand.

 

[MandaC]

That 5k was tax free so depending on what tax bracket you were on you gained 1k or 2.2k straight away so you haven't 'thrown away' €1,250 as such. Of course in a years time you could be saying that it's worth 10k now. That's the nature of the beast.

I had an option of taking €5K cash (no tax) or paying €5k into pension. By paying the €5K into pension I lost out on a quarter of my payment due to fall in the market in 10 months whereby it would have been better for me to pay the full €5k cash off my mortgage in January.

Looking at the Budget yesterday, what is the point in paying money into your pension now, when you would probably be better off being on social welfare and taking the benefit of medical card or being slightly over the limit because of a private pension you have saved for for years and having to pay for your own medical card out of it.

 

[Bronte]

My poor boss is up for retirement this year and his fund has literally evaporated before his eyes. I know the funds can rise and fall, but what if there was another financial meltdown like this one in the year I am due to retire?

In my opinion you have your answer right there.

People who sell pensions never talk about this. (except LD who once did when I mentioned this aspect of pensions)

 

[LDFerguson]

I'm never sure about that logic. Surely the tax relief attached to pension contributions is just tax deferred. You don't pay tax on it now but you will when you come to draw down the pension - so the only advantage is that you might be paying then at the lower rate. Surely the tax advantage on the whole is only the difference at most between the lower and higher rates at best?

In practice, may people will be tax exempt in retirement. A 65-year old married couple can receive income up to €40,000 per year and pay no tax whatsoever. Many people will be in this bracket.

If your pension income will be greater than the tax exemption threshold, at least 25% of your pension fund will be tax-free. So you'll only pay tax on the balance. So if you're in the 20% band, the effective rate is really 15% or less, as you'll still have all your tax credits, including an extra one for being over 65.

Even if you're lucky enough to have a sizeable pension that will bring you into the 41% rate, only some of it will be taxed at 41% - usual banding applies.

Then there's the fact that investments within a pension fund are themselves exempt from DIRT tax, CGT and Exit Tax, all of which have been increased in the last Budget.