Jill Kerby

Tax-relief gives pension the edge over repayment 

JH from Cork writes: I am 31 and employed full-time and avail of a company pension scheme. I recently had a pension meeting with the company and it seems that I will need to increase my contributions to get a decent return. I was thinking of doing this while the top rate tax relief exists. Currently I contribute 4.5% and the company contributes 2.5% but that only gives me projected earnings of 12% of my current wage once I retire. An extra 3% contribution would cost me €75 a month, an adjustment I could handle. My question is, what level of my own wage should I be investing as a general rule, and is it realistic to expect a decent return from these pensions in the long run. Would I be better off repaying my mortgage at a faster rate and then saving more once that is paid off?  Currently the mortgage will be paid off when I am 53. If there are other options that are better at this stage please let me know.

You are very lucky that your pension review has taken place at the age of 31 and not 51 - you’ve plenty of time to adjust and increase your contributions and work out an effective investment strategy.   

Go to the Pensions Board website, www.pensionsboard.ie and click on their pension calculators. By its reckoning, based on today’s money terms, a 31 year old male, earning, say, €50,000 a year, with an existing fund of, say, €20,000, should be contributing 17%, not 7% of salary into a pension every year in order to secure a retirement income, worth two thirds of final salary or €33,330 at age 65.  This income includes the state pension worth €11,976 but does not make provision for a spouse’s pension.  Even if you were satisfied with only 50% of your final salary or €25,000 a year at retirement, of which nearly half was accounted for by the state pension, you would still need to contribute at least 10% of salary. By filling out your actual details, you should get some idea of the level of funding you need to make for a comfortable retirement. 

It appears that you are on schedule to pay off your mortgage long before retirement, but with mortgage interest rates likely to rise, you might want to consider fixing your mortgage rate if you have a variable rate loan.  Over the next 22 years inflation will also play its part in reducing the real cost of your mortgage and if you can afford a fixed rate you will be in an ideal position to benefit from such an impact, all the while secure in knowing exactly the size of your repayment for the fixed term.

No prizes here

DMcD writes from Dundalk: I am a regular purchaser of prize bonds.
I am now thinking of investing a significant part of my life savings in them.
How safe would my money be? In recent times I have been confused as to where to find safety.

Prize Bonds are guaranteed by the Irish state, just like deposits in An Post and up to €100,000 deposited in Irish banks. You can check the Financial Regulator’s consumer website for details of the bank guarantee schemes: http://www.itsyourmoney.ie/index.jsp?n=757&p=125  

Your Prize Bonds participate in tax free weekly and monthly draws but they pay no ongoing interest and are vulnerable to inflation, which will eat away at the purchasing power of every bond.  Just 2.8% of the entire value of all prize bonds is repaid, though not necessarily to every prize bond holder. Someone who purchased 2000 pounds worth of prize bonds 30 years ago – a down payment on a small house back then – may have received some winnings over the year – or not – but if they encashed their original stake today, that original £2000 might provide a down payment on a modest, family sized car. 

By all means hold some Prize Bonds, but leaving your entire life savings in any single asset – cash, property, stocks and shares, precious metals or Prize Bonds is not advisable.  Finally, the state of Ireland’s finances is so precarious that voluntarily handing over all your savings to the government, strikes me as foolhardy.

Golden Future

FO’S writes from Dublin: I will inherit approximately €80,000 shortly and not sure where we should put this money. I read your recent reply regarding the purchase of gold, but it does seem expensive at the moment. I am also worried about the stability of the Irish banks and the euro, and am considering depositing some of the money in banks in Newry and the likes of RaboDirect or Nationwide UK here in the south, but would prefer if I could open a sterling account in Dublin rather than travel to Newry. Is gold still a good investment?

As with any windfall, you need to take advantage of your good fortune by reviewing your immediate financial position as well as considering what to do with this money in the medium or longer term.  If you have expensive debt – like a credit card, hire purchase contract or even a high cost personal loan – you should consider clearing it and thus avoid future interest payments. Next, if you don’t already have one, you might want to set aside some of the money into a contingency savings fund – a good bank account into which you ideally have three to six months worth of discretionary income that is only earmarked for emergencies, such as car troubles or a furnace repair, illness or even temporary unemployment. 

Once you’ve reduced your debts and have an emergency fund in place, you can concentrate on investing and/or spending your inheritance.  You don’t say how old you are, but this money may be an important source of retirement funding.  Tax incentives for Revenue approved pension funds will be reduced from next year for higher earners, so this may be the last year for you to top up an existing private or occupational pension.  If your pension is already in place, funded and on target, you’re in the enviable position of being an investor who can take your time to pick and choose assets that will hopefully perform well and increase your wealth.  Take that time to investigate all the different options that should include precious metals, if only because they are a ‘real money’ substitute for the increasingly devalued and debased paper and ink currencies that are issued by indebted governments and are backed by nothing but empty promises.

I suggest you seek a good, independent, fee-based advisor who can help guide you through the various low cost investment funds, ETFs, shares, bonds, commodities, etc that might suit your needs, expectations and budget. 

Don’t take the easy route and just leave all your money in cash, or purchase the first investment fund that is recommended.  Finally, most of the retail banks will allow you to open a non-euro account  (RaboDirect and Nationwide UK do not offer this facility) but be sure to ask what interest rate, if any, is paid and whether there are any other fees or charges.