Which is higher priority? Property or pension?

TTV

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http://www.independent.ie/business/personal-finance/some--home-truths-1058453.html

Interesting article in the Indo on the whole property vs pension debate, pretty definitive opinion on the advice of starting a pension early. Personally, I completely disagree and think it is never too early to start a pension.

The consensus of opinion seems to be that you can't be too young to start a pension.....
This is the advice of most financial advisors. This is the advice of the Pensions Board. This is the advice of the Government.
But this advice is wrong.
One of the main points I disgree with is -
When Johnny starts his first job at 23, his main financial objective is to buy a house and then to get his mortgage under control.
, that is a pretty sweeping statement and may be the financial objective of certain people but not of all the 23 year old Johnny's that I know.


I would love to hear other peoples views on this especially in the current climate and if people agree that holding off paying into a tax effecient pension scheme is better than gambling on the housing market to keep inflating so that the possiblity or releasing equity may be achieved. Do others agree that getting on the ladder is far more important than paying into a pension? Are the majority of the countries financial advisors wrong?
 

tiger

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Re: Property vs Pension

I think in "normal" times, e.g. when it doesn't look like we have a massive property bubble and the stock market isn't down 10-15%, it makes more sense to prioritise buying a home over beefing up the pension. (I hate the phrase "getting on the ladder"...).
 

TTV

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Re: Property vs Pension

care to expand on why it makes more sense? Also wondering when someone should ideally start a pension in relation to buying a house i.e. if they are to wait until the mortgage is managble and they have the best rates then what age would this typically be at? If people buy into the whole ladder methodology then what happens if they cannot trade up, do not build up enough equity to get the lower rates, do they hold off a pension indefinitely?
 
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geckko

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Re: Property vs Pension



This thread should be used for discussing the substantitive issue. Posts containing off-topic, irrelevant content will be deleted


Brendan

 

ClubMan

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Re: Property vs Pension

http://www.independent.ie/business/personal-finance/some--home-truths-1058453.html

Interesting article in the Indo on the whole property vs pension debate, pretty definitive opinion on the advice of starting a pension early. Personally, I completely disagree and think it is never too early to start a pension.
Just in case people did not notice - that article is by AAM founder, Brendan Burgess. Nothing new in his comments (see the AAM Guide to Savings & Investments) and nothing new in some people disagreeing with his analysis! :)

Also - the thread title is a bit misleading. I would have called it "Buy your own home before starting a pension" and not "Property versus Pension".
 

ClubMan

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Re: Property vs Pension

I think what is at issue here is that the article suggests that an individual should have either one or the other.
I don't think that the article (or the AAM Guide to Savings and Investments) says that at all. My understanding of what Brendan has said here and consistently in the past is that the ideal is that it's not either/or but having both (a PPR and a pension). Just a question of timing which to prioritise first. I would not disagree in general with the idea of prioritising getting a PPR over pension and other savings and then concentrating on the latter once the PPR mortgage is down to a "comfortable" level. However, as with most general rules of thumb, there will always be exceptions and nuances. For example if your employer will match pension contributions up to a certain level then it usually makes sense to contribute enough to avail of these - even when looking to buy your PPR - due to the tax benefits and long term investment advantages. And there is no point in scrimping and saving to fund either a PPR or a pension to the extent that your quality of life suffers due to lack of finances to live on! There are probably other gotchas too. General rules of thumb are all well and good but ultimately I believe that many individuals probably need to get independent, professional advice specifically tuned to their particular needs and circumstances.
But the above, almost alludes to pensions as being some sort of get rich scheme.
I don't take the same cynical reading from the quoted extract as you do to be honest. On the other hand I feel that the comment in the article is probably distracting from the real issues. In particular talk of "compound interest" in the context of most likely equity based pension funds is quite misleading since we are (hopefully!) taking capital growth and not interest.
 

TTV

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Re: Property vs Pension

Originally Posted by Clubman
I would not disagree in general with the idea of prioritising getting a PPR over pension and other savings and then concentrating on the latter once the PPR mortgage is down to a "comfortable" level.

My main gripe is how long does it take to get to a comfortable level? and what happens if the value of the house decreases thus preventing the person from obtaining a more favourable ltv? Should all the eggs be in one basket until such a time? This will of course be fine as long as property only goes up but you could be talking decades of time holding off on paying into a pension while paying out for a roof over your head.

I find the advice of getting on to the ladder as more important than spreading the risk and investment from early on as not only short sighted but as dangerous. Personally if a FA advised me to place all my money on property until it started paying off before starting a pension I would seriously wonder the motivation behind it.
 

magoko101

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Re: Property vs Pension

It's not so much a cyncial interpretation, as interpreting the words "magic of compound interest", in a fincancial advisory capacity, as a spot of scaremongering/exageration

I'm guessing the choice of words was possibly to dramatise his point but they probably were a pretty poor choice ... its the first time I've ever seen compound interest referred to as magic anyway...

of course... as far as I am aware, compound interest should be used in reference to deposit accounts and not pensions ...
 

TTV

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This article seems to have sparked debate in other places too..http://www.politics.ie/viewtopic.php?t=25474

They have a poll too - Pension or House: Which would you wish for first? , 80 - 20 in favour of house but I do think the wording of the poll is misleading. If I was to wish for something, a house or a pension I would wish for a house, but if I was to start preparing for one it would be a pension and already has been. I am in no rush to get a house and I dont think I should be nor should I hold of my pension until I get one.
 

Brendan Burgess

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I would take it as referring to the compounding effect of the return on any investment - deposits, equities or property.

People selling pensions use this and similar expressions. Here are the results for the "Magic of Compounding".

Brendan
 
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geckko

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Re: Property vs Pension

It's not so much a cyncial interpretation, as interpreting the words "magic of compound interest", in a fincancial advisory capacity, as a spot of scaremongering/exageration

I'm guessing the choice of words was possibly to dramatise his point but they probably were a pretty poor choice ... its the first time I've ever seen compound interest referred to as magic anyway...

of course... as far as I am aware, compound interest should be used in reference to deposit accounts and not pensions ...

Indeed.

The term that should be used is compound returns.

And there is nothing magic about it.
 

ClubMan

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My main gripe is how long does it take to get to a comfortable level?
In my opinion what is a comfortable level will vary from person to person so it's difficult to come up with rules of thumb that have general applicability.
and what happens if the value of the house decreases thus preventing the person from obtaining a more favourable ltv?
You mean it decreases at the same or faster rate than the capital outstanding is decreasing? I don't necessarily see this is a critical factor. As long as the individual can service the loan and is not planning to sell up/move in the short/medium term I see no obvious reason why they should worry unduly about such issues.
Should all the eggs be in one basket until such a time? This will of course be fine as long as property only goes up but you could be talking decades of time holding off on paying into a pension while paying out for a roof over your head.
But the capital outstanding is also reducing on an annuity mortgage.
I find the advice of getting on to the ladder as more important than spreading the risk and investment from early on as not only short sighted but as dangerous. Personally if a FA advised me to place all my money on property until it started paying off before starting a pension I would seriously wonder the motivation behind it.
You seem to be judging the PPR as mainly or solely an investment here. While I believe that it's important not to lose sight of the fact that one's PPR is an investment it is also much more than just that.
But shouldn't his refer to deposit accounts or the like instead of pensions, or am I being pedantic?
I agree with you and don't think that you are being pedantic. I find it disconcerting for people to use "compound interest" in relation to what are usually equity based investments.
 

magoko101

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So this "magic of compounding" refers to both the pension and property?

Can you clarify this?
"The consensus of opinion seems to be that you can't be too young to start a pension."
"
This is the advice of most financial advisors. This is the advice of the Pensions Board. This is the advice of the Government. But this advice is wrong."


So I should not contribute to a pension but solely save for a property when I am young?
 

magoko101

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Sorry Clubman... That was in reply to Brendans link/comment on "magic of compounding" above...

You type two quickly for me... ;)
 

TTV

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You seem to be judging the PPR as mainly or solely an investment here.
Exactly - the gist of the article is treating the PPR as an investment against a pension rather than as a home i.e. looking forward to when you can do equity release
If, at some later stage, you need money to start a business, for example, you can borrow cheaply using the security of your home.
or releasing money ala Miley from Glenroe
When you do retire, if you run out of cash, there are many options available to you to use the value of your property to fund your retirement.
The poll on the irishpolitics.ie site tries to compare a PPR/investment and home that it is against a pension but we are not arguing about the utility value of a house, rather whether to pay into it as an investment to the detriment of paying into a pention until such time as it has become manageable or as defined in the article
I would say that a comfortable mortgage is around twice your annual salary and around half the value of your home.
- rough question, how long before someone on 30k has the capital down to 60k on a 300k mortgage?
 

ClubMan

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rough question, how long before someone on 30k has the capital down to 60k on a 300k mortgage?
2033 if they start now on a €300K mortgage over 30 years at an assumed rate of 5%. I guess you'd need to factor in inflation, salary increases etc. to get a more accurate answer but the end result is probably the same - "a good while"!
 

TTV

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A good while is right, now if thats in Dublin - that 300k will get a 30 year old on 30k a nice shoebox (not that they should be getting loaned 10x :rolleyes: but hypothetically) that they can pay off until they are 56 before starting to invest in a pension for the next nine years knowing that property only goes up and that they can use their house to borrow more money on should they need it..

Either way going on the advice of the article I reckon it means without substantial rise in house prices people will be holding off starting a pension until far into their working life and I can hear the shrieks of the QFA's around the country as I type this. I dont think you'll find many people advising to hold off starting a pension until you are in your mid fifites and your mortgage repayment is now manageable..
 
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