Lockdowns and pandemics tend to halt aspirations, intentions even dreams. Have you visited the current state of your pension fund ? Followed all the steps, been saving wisely, but now find yourself deflated to realise your nest egg is less of an ostrich, more of a bluetit ? Maybe you’ve worked hard but haven’t been squirrelling away as much as you should have, and now want to make the money you’ve got work hard for you. Whatever your situation, padding up your pension is never a bad idea. John Lowe of MoneyDoctors.ie explains.
Let’s be clear: in the 2016 Census we saw the greatest population increase in those over the age of 65. By 2026, more than 16% of Irish citizens will be of pensionable age; by the year 2050, that will have risen to 1.8million people. To put it simply, it’s highly unlikely the government will be able to afford to subsidise the lives of its aging population, even at the 2021 rate of €248.30 per week. And with recent rumblings of the age of retirement increasing and the state pension jumping to 70 by the turn of the decade, it’s looking more and more likely that the most important element of your long-term budget should be planning a financially sensible, safe and sufficient pension fund.
Why now?
“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain
First things first: the unpredictability of investing in stocks means they’re not for everyone – and that’s ok! All jokes aside, last year, the stock market averaged a return on investment of 8% – not too shabby with all that went on in 2020.
But it’s important to note that share prices are still nervously high. Deposit rates are going nowhere – and are likely to stay that way. Savvy pension investors everywhere are looking for alternatives; so, if you can aim higher and stay safe – why not try it out?
Where to begin?
First off: don’t panic! There are plenty of ways to diversify and get a decent return on your investment – without getting bogged down by all the options, and without taking too many risks.
We’ve all heard that wry advice, “The quickest way to double your money is to fold it over and put it back in your pocket”. It might sound safe; and yet, trusting your savings to cash is one way to ensure the least lucrative return on your investment. Take a look at the current best savings options from Irish providers:
| Account type | Provider | Interest rate | Notes |
| Fixed Term Deposit – 10 Year National Solidarity Bond | Irish Government (National Treasury Management Agency) | 0.98% AER (10% return after 10 years) | Maximum € 120K per person |
| Fixed Term Deposit – 12 month Fixed | Ulster Bank | 0.2% | Minimum investment €5,000 |
| Regular Saver –
Min € 100 – Max € 1,000 pm |
Ulster Bank | 0.85% | 1 withdrawal per annum |
| Demand a/c –
Instant withdrawal |
KBC Bank
Permanent TSB |
0.01% | Maximum €100K |
When you take DIRT tax (33%) into consideration, deposit accounts only eat into your capital over time – meaning the meagre returns you see above will be set to diminish even further.
Remember, the best time to save money is when you have some. When even the best regular saving account in Ireland promises only an interest rate of just 0.85% (net 0.5695% after DIRT), you have to get creative. If you’re within sight of pensionable age and have some available funds, there are some suggestions you can easily work into your pension plan.
Of course do not forget the BEST reason for investing in your pension is the tax relief you receive on your contributions. If you are on the higher rate its 40%…. that’s 40% up before you start ! So last year you earned 48% – not bad for one year. You should try and maximise your eligible threshold to obtain tax relief on those contributions. ( e.g. if you are aged between 30 and 40 you can invest up to 20% of your net relevant annual earnings into your fund to maximise that tax relief )
Loan notes
Consider an alternative to the 12-month fixed rate option from Ulster Bank. You have the minimum of €10,000 to invest, but you’re looking for a slightly less paltry return than that of 0.2%. Now is your chance to take a less traditional route. As an investment opportunity, loan notes for those with self-administered pension schemes (SSAPs) are an ideal option for those seeking higher-yield, shorter-term options but with a measured acceptable risk element.
Think of a property owner seeking to take out a loan against an unencumbered building or piece of land. He knows the property is worth around €1m and wants to borrow €500,000, but is unable to source the funds from a high-street bank, for whatever reasons. A pension fund holder is sourced who is willing to lend to the borrower. The borrower then signs a loan note agreement whereby he pays a coupon of 10% (annual interest) to the pension fund holder for the term agreed, at the end of which the full amount originally borrowed is repaid. All costs would be paid by the borrower too. This is a win-win for both sides: the borrower accesses money from an asset, while the pension fund holder receives a far greater return for his pension fund than he would from a deposit account. And the best part? It’s totally secure, as a first charge is put in place on the property and the 10% is tax free for your pension.
By opting in as an investor on this loan note, your return is guaranteed in a way that stocks never will be. Monthly interest can also be requested so that at the end of the loan term, the original capital borrowed is the only sum outstanding to be repaid.
Higher stakes
For those with Small Self Administered Pension schemes (SSAPs) or Self Invested Pensions (SIPs), a slightly larger investment may be possible. If the option of loan notes appeals to you and you’re of the good fortune to have a little more money (and time) to play with, now is the time to seize the opportunity to make the most of it. Rather than simply investing in a single-property venture, you can also avail of the chance to sink your teeth into syndicated commercial property deals as well as individual direct loans. But caveat emptor. Take professional advice.
While this may require a higher investment on your part, it’s worth remembering that it also equates to a higher return, delivered at set intervals over the term of the project. For example, with a slightly longer lead time of 36 months, this type of loan note enables you to plan for a number of years down the line. Knowing that each year will earn you a coupon equal to an agreed-upon interest percentage of your investment, you can rely on an income each year until your original investment is returned to you. So, an initial investment of €50,000 with a coupon of 9% would earn you € 4,500 per annum for each of the 3 years. Investments in loan notes need careful consideration. The paperwork is important so there are no surprises along the way.
What about me?
If you’re thinking, “I’m struggling to keep on track as it is – I don’t have the luxury of €50,000 to play around with!” – don’t despair! If you’re reaching retirement age and have been paying into a private pension or PRSA all your life, you’ll know that you can take up to 25% of your fund as a tax-free lump sum, up to the limit of € 200,000. If you are fortunate enough that your 25% is more than € 200,000 then the balance of a possible further € 300,000 can be taken at 20% tax rate, meaning you have € 1.5million to invest in an annuity or ARF/ AMRF. Many people use this to help out their children or pay off a mortgage, but if you’re one of those fortunate enough to have already taken care of such responsibilities, this could be your fast-track into loan note investments. By taking a portion of the lump sum that you can afford to spare temporarily, and rerouting it into a new investment, you could very well find yourself with a healthy windfall just a couple of years down the line – even with the tax, the return could be 700% greater than that available in a cash fund. Investing your ARF (Approved Retirement Fund) or AMRF in a loan note has the added advantage of the returns being tax free. Remember too with your taking the monthly imputed distributions ( annually 4% from age 60, and 5% from age 70 ) plus the annual management charges ( c. 1.5% ) you will need to grow your ARF otherwise you could run out of money.
As Warren Buffett says, “Price is what you pay. Value is what you get.” Your pension should be your reward to yourself at the end of a long road of work. Make sure you get what you deserve. If you need help, call me.