Show me where the value is in a lifetime of contributing to a private pension?

cremeegg said:
This may seem off thread, but I suggest not.

22.5 years ago I invested €13,000 in an investment property, borrowing €115k. Since then I made repayments of €150k (it was a 15 year mortgage) and collected rent of €211k. The property today is worth €250 approx. I am still collecting rent on it.
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Sounds like it is only relevant, when the taxes, due on the rent are factored in, plus the other running costs, (LPT, maintenance, Insurance etc)which in many cases is up to circa 50%+of the rents received, as it appears the mortgage paid off, so no interest to write off against gross rents.
Others may argue the CGT due on the sale of the property may also relevant.
 
fayf said:
Sounds like it is only relevant, when the taxes, due on the rent are factored in, plus the other running costs, (LPT, maintenance, Insurance etc)which in many cases is up to circa 50%+of the rents received, as it appears the mortgage paid off, so no interest to write off against gross rents.
Others may argue the CGT due on the sale of the property may also relevant.
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Absolutely, thats why my next property investment will be in a pension wrapper.
 
SBarrett said:
But to give you a real life example, a client of mine invested €30,000 24.75 years ago. It's worth just over €100,000 when I did the review for him last week.
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Just to balance that a statement Sean,

Another real life example is,

I purchased a property for €30000 24 years ago, and I just let it run its course also, its value is €240k.

Just saying.
 
cremeegg said:
22.5 years ago I invested €13,000 in an investment property, borrowing €115k. Since then I made repayments of €150k (it was a 15 year mortgage) and collected rent of €211k. The property today is worth €250 approx. I am still collecting rent on it.
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There's a higher risk factor here, as when you borrowed your €115k, you had a liability of €115k and a potential loss of €128k; it was a leveraged investment. Investing €13k in a pension instead would mean a potential loss of €13k.

Not arguing for one over the other, but they're not really comparing the same thing at all.
 
NiallSparky said:
There's a higher risk factor here, as when you borrowed your €115k, you had a liability of €115k and a potential loss of €128k; it was a leveraged investment. Investing €13k in a pension instead would mean a potential loss of €13k.
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This is how most people think of leverage, but in the case of a mortgage for a fixed number of years it is quite simply incorrect.

The only liability I ever had was to meet the mortgage repayments. And for as long as I continued to meet that liability there was no possibility of my liability being any more or less than that. The capital value of the property had no effect on my liability, nor could it ever have done, subject always to my meeting my actual liability. My liability under the mortgage contract was clear from the outset and involved no risk (interest rate variations aside). An obligation to pay €8k a year is an obligation not a risk.

In the first year I had a liability of €8,400, and in the second year the same and so on subject only to varying interest rates. At no point did I ever have a liability for more than the repayments due on the mortgage.
 
kiabi1 said:
What my Statement of Reasonable Projection shows should I continue to contribute at the same level between now and retirement:
Projected Fund Value €738k
Projected Monthly Income for Life €2300
Projected Montly Income in today's prices assuming inflation of 2.5% €1310

Concern:
I think the key figure here is Projected Montly Income in today's prices assuming inflation of 2.5% which works out at €1310. It seems incredibly low considering the large amount of money I will have contributed up to my retirement date.
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The projected fund value is a useful figure for comparing with other types of investment. It depends on some assumptions, but so does any projection.

What you do with that ~750k when it reaches maturity is a whole other story. The projections for "Monthly Income for Life" assumes that you take your pot and spend it all on an annuity. This is just one option (a bad one), and it's not related to the pension.



By the by: is the 2.5% inflation assumption too pessimistic? It's been below 2% internationally since 2012 despite record low interest rates, and nobody expects it to go anywhere in the medium term. We'll have a technological revolution or two in the next 30 years, but I think the profits will be too concentrated to spur major consumer spending.
 
cremeegg said:
This is how most people think of leverage, but in the case of a mortgage for a fixed number of years it is quite simply incorrect.
...The capital value of the property had no effect on my liability, nor could it ever have done...
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If the value of your asset somehow dropped to zero, you would be out-of-pocket by €128k (less the 'dividend' of rental income or accommodation), right?

Genuine question, have I misunderstood the definition of liability?
 
trasneoir said:
If the value of your asset somehow dropped to zero, you would be out-of-pocket by €128k (less the 'dividend' of rental income or accommodation), right?
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Under any circumstances I was committed to spending €150k over 15 years plus the deposit at the beginning. That was the case no matter what the value of the asset did, there was no connection between the two.
 
cremeegg said:
Under any circumstances I was committed to spending €150k over 15 years plus the deposit at the beginning. That was the case no matter what the value of the asset did, there was no connection between the two.
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right but whether it was a good idea to do that or not is pretty dependent on the value of the asset.
 
LS400 said:
Another real life example is,

I purchased a property for €30000 24 years ago, and I just let it run its course also, its value is €240k.

Just saying.
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That's not plausible.

The ptsb/ESRI index showed growth of 240% 1996-2005, and the CSO index which started in 2005 shows prices more or less at the same level in 2019 as 2005. The biggest growth according to that index 1996-2005 was in Dublin, by 298% or about a factor of four, but no increase since then according to the CSO.

Unless you made serious renovations, there isn't a house that increased at double the rate of the market over the period.
 
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cremeegg said:
Just because it's mandated by the Central bank does not make it less misleading. Or the industry that produces this stuff more respectable. In 24 years time if annuity rates are 1% and the OP says to his provider "you projected 3.7% back in 2019" he will be met with a shrug of the shoulders.
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It is the Central Bank requirements that make them misleading! From the few people who actually read policy quotations, I have to spend my time explaining to them that most of the charges don't apply to their contract but the Central Bank says all possible charges have to be shown, even if they don't actually apply. The fact that the quote is sent with the life company logo adds gives extra weight to the document and less to what I am saying.


Steven
www.bluewaterfp.ie
 
cremeegg said:
This may seem off thread, but I suggest not.

22.5 years ago I invested €13,000 in an investment property, borrowing €115k. Since then I made repayments of €150k (it was a 15 year mortgage) and collected rent of €211k. The property today is worth €250 approx. I am still collecting rent on it.
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You should make a greater return as you have taken more risk, geared up your initial investment almost 9 times, taken on more work in the management of the property.

The example I gave, the client got a refund of €12,000 on his initial investment and then did absolutely nothing.


Steven
www.bluewaterfp.ie
 
SBarrett said:
The example I gave, the client got a refund of €12,000 on his initial investment and then did absolutely nothing.
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And good for him, if he was happy with that investment.

But my point is, you/he could have done better with the initial investment, if he was willing to take more risk. There will always be a need pension advisers. Many are happy enough to entrust you to make the right decisions with their money, and they will get by just fine. Im quite happy I didn't just leave it in the hands experts to facilitate my future, or I would be less well off financially today.

Yes there is more work involved for me, but its me that reaps the rewards if there are any.

So, I, many years ago started a pension and its still running to this day, and expect to see a modest reward when the time is right. I happy I didnt put all the eggs in one basket though.

We all could be a lot wealthier or poorer if we made different decisions years ago, no one really knows, they may have a good idea, but they dont really know for sure.
 
SBarrett said:
It is the Central Bank requirements that make them misleading!
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I get that, but Financial Advisors are the people the public deal with not the CB.

Financial Advisors represent the investment industry to the public and whatever the cause of the shortcomings of the industry, it is FAs who deliver them to the public. And that is FAs who make the effort to do their best, some compound the problems with added opacity (if that is a word).

Kudos to you Steven for engaging in debate on here under your own name especially. I hope you think it is worth the effort.
 
A point the pension regulators seemingly haven't come to realize is that annuities don't make sense when the rate offered is lower than just taking the total sum and dividing by expected pension term.

An alternative ARF like drawdown should be accessible to everyone when annuities aren't a viable alternative.
One simple rule could be if the annuity rate is less than the ARF draw down rate then use an ARF drawdown.

If annuities were to drop even lower and go into negative territory, as it stands if seems you could be forced to take out annuity where you pay the pension company a pension.

Clearly paying a negative pension would never happen - even in this country - but the point is annuities as a product only make sense if the annuity pays out more than simply taking the total pot and paying it out in installments.
 
A friend aged 66 recently cashed in a UK pension circa 30,000 when he went a few monthe later to buy an annuity from it, he was offered pathetic amounts ranging from 57 pounds a month to 66 pounds a month. There was no spouse element in that either. So he decided to put it in as good a savings account as he could find and allocates himself 125 pound weekly from his pot, double what the insurance company was going to give him. It really makes no sense at all.
 
ashambles said:
Clearly paying a negative pension would never happen - even in this country - but the point is annuities as a product only make sense if the annuity pays out more than simply taking the total pot and paying it out in installments.
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I think this is missing the point a bit. An annuity is insurance against two things: 1) living a long time; 2) investment losses.

It's all very well to say that you are just going to draw down your ARF and take out more than the annuity would pay. But the market could take a turn for the worse and/or you could live longer than you expect.

Buying and annuity and drawing down an ARF are not really substitutes. They are quite different investment strategies.
 
NoRegretsCoyote said:
They are quite different investment strategies.
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I realize they're two different strategies.

Say you're 65, you've a fund of 1m, and the annuity rate has fallen further to 1%. (Before anyone corrects me, I know this isn't the current rate for a basic annuity)

The safe traditional annuity must clearly be the wrong strategy in that case, i.e. you've spent 40 years building up 1m. At 1% you'd need to live to 165 to get a greater amount out than you've paid in.

So a 1% annuity would be daft. What rate it needs be below to start considering an annuity daft is a more subjective question.

But in my view in a the current low interest rate environment, an annuity is not the way to allow access to pension funds.
 
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