I am very fortunate to have plenty of friends, and lots of acquaintances. I really consider this one of the gifts of life, to have such an eclectic mix of people in one's life. It leads to lots of fun, variety and entertainment generally! One such friend, who is a very educated and academic individual recently advised me that he was never going to buy (nor start, invest or join) a pension because they are 'a pure and unadulterated torture, I'd rather buy sheep'! I was a bit stumped initially, and then massively amused as i pictured the scene!
To me, this valid perception points to the very problem with pensions in general; people don't engage with them, and this is reflected in the fact that unless one is enrolled in an Occupational Pension Scheme in work the take-up rate is shockingly low. The Irish Government and many State Bodies are terribly worried that Irish pensions are at such a low take-up level, indeed so is everyone except those that aren't in one!!
Here are 5 undeniable facts for you about pensions:
1) People don't understand them
2) They are a pure torture and complex, even for the experts
3) There are charges to be paid on all pensions, sometimes hefty ones which can erode up to 25% (or more) of the final fund value
4) You may lose a good chunk of money you save if 'things' go 'south' and you have a knee-jerk reaction
5) You may pay tax on the way out, effectively reversing a lot of the tax relief you got on the way 'in'
If you weren't already, then you certainly aren't a fan now! But this is only one side of the story, after all, there is more than one way to shear a sheep!
(Mam wont be too happy when she sees they were using her carpet!)
Here are some more facts for you to consider about pensions:
- You invest money into a pension. You claim and get generous tax relief based on how much you are putting in each year and what tax rate you pay. Your net salary increases, or your tax reduces accordingly.
- You direct the money into a suitable fund within the pension (this often contains equities and bonds and stuff!). Your pension value increases or decreases in value over time based on how the fund performs and how much you put in.
- You pick one with lots of ups and downs (generally more growth over long term), or one which is more steady-eddie (generally less growth over long term). Picking the fund wisely is key, make sure you know how volatile the fund is likely to be, and be prepared for ups and downs, knowing that it's aim is to grow until you 'cash-out' when you retire, not today or tomorrow, so relax!
- You can put in place 'safety-valves' which will reduce the volatility of the fund automatically as you get older and closer to the point where you cash-out.
- Generally these funds have performed well well above deposit rates ove rthe long term, even after recessions, disasters and wars, and even after charges....
- You will pay charges, shop around to make sure you get the best deal you can for the amount you are willing to pay. Some 'funds' will be more expensive than others, some providers more expensive than others. You need to do your homework (some things never go away!)
- When you get to retirement age you want to take money out of it in order to buy your rashers and bread and stuff once your income stops! Dependent on your scheme and circumstances at that stage you can take a quarter of it tax free and the remainder leave in another fund and draw it down as you need it (most popular & tax efficient option). The other option is to buy a 'pension' giving you a monthly amount per annum for the rest of your days (less popular option).
- If planned for you may be able to legitimately withdraw your entire fund without paying any significant tax
We can dig deeper and make this complex, we really can but I'm not going there, there's no need right now. I want you to understand the principle of retirement planning via pensions.
It can be really straight-forward, it can be effective, it can give great returns, it can be the right way to go about it.
To finish on more facts; It is cleaner than sheep, less noisy, and ultimately should keep growing for you well after the poor oul' sheep has met his maker....
As always, thanks for reading and sharing.
Please do get in touch with any specific topics you want 'covered' (no pun intended!)
Finally, here's a link to Irish Consumer Advice site, focusing on the basics of pensions, what to consider and how to start looking. Definitely worth a look........