Pensions - Don't rush your investment decision to meet a tax deadline!

It is “pension’s season” yet again and the airwaves are filled with advertisements reminding us all of the approaching deadline (October 31st or November 17th, dependent upon how you make your returns) and that we must make contributions before that date. My regular readers will know I am a fan of the Retirement Tax Concessions and I feel that more people should be taking advantage of them than do so at present.

Ostensibly, what a pension allows you to do is AVOID 100% of the income tax you would normally pay on contributions you make to the scheme, and then to AVOID 100% of both Income and Capital Gains Tax as you make investments and grow your assets. In reality, the tax treatment of a retirement fund means that the SAME money, invested in the SAME asset, delivering the SAME investment return, will deliver DOUBLE the return to you than had you made the investment personally (with after tax money, which is then taxed annually on growth).

The tax breaks here are, it must be said, FANTASTIC and yet, in my experience, most people who have pensions are less than happy with their end results. How can this be?

The reality is that it is NOT the tax breaks that are the problem, when used properly, they simply GUARANTEE you make MORE money than is possible via any other saving method. However, unfortunately, it is the CHARGES levied on off-the-shelf pensions, together with generic investment funds, that are more designed for the Manager’s benefit than the investor/saver, that lead to disappointment.

In the next few days, literally millions upon millions of Irish taxpayer’s money will be allocated to off-the-shelf pensions, by investors/savers who will give little or, dare I say it, NO thought to the investment strategy. The contributions will be paid as they are less painful than paying tax and the decision will be rushed due to the approaching deadline. In years to come, these people will most likely, in my opinion, be the one's disappointed with the results as they are surprised that the investment strategy chosen, to which they gave little or no time or attention when the pension was purchased, has failed to deliver for them. 

What I want to say to all people about to invest millions is “SEPARATE THE TAX DECISION FROM THE INVESTMENT ONE”, by all means make the payment and secure the tax concessions, but don’t make the investment decision until you have the time and energy to put into that very important decision. Delay that decision until you can identify ALL costs and charges and so ensure you are receiving value for money. Then meet with a really impartial financial planner (like me) and let them help you choose an investment mix that is right for you and your needs.

This is possible by making sure the agent/company you use to make the contribution BEFORE the deadline invest in the Cash Fund for now. Get confirmation of the following: -

• You can make a Cash Fund investment today and switch later, to any fund (or suite of funds) the insurer offers without cost or penalty.
• That the unit price of the Cash Fund is guaranteed and so cannot fall from the price on the day you make the contribution, thus ensuring your contribution will be intact (and not have major fees levied upon it) by the time you do make a longer-term decision.
• That 100% of your funds will be applied to the Cash Fund and that 100% of those funds will still be available to switch to another fund as and when you eventually make the investment decision.

It should be perfectly possible for any agent and/or institution to offer you these terms and conditions and if your existing one does not, or will not, then maybe it is time to speak to an alternative provider.

Once you do this and get confirmation of these details, which must be "in writing" on the letterhead of the agent/company, you now have the time to apply a proper planning process to identifying your Tolerance, Capacity and Need for investment risk (please read my RISK post, posted August 30th last, as it outlines the risk assessment process that leads to investments being chosen for YOU) and so to make the very best decision possible. Seek out the assistance of a truly impartial planner/adviser (I meet anyone on a no-foal, no-fee, basis, so it costs nothing to talk) to help, as he/she is neither paid to sell the off-the-shelf pension nor to promote the generic, one-size-fits-all, investment funds where more than 90%+ of pension investments in Ireland currently reside.

Paul A. Overy QFA, FLIA

October 2016