Colm Power Director, Financial Planning
19th October, 2020
Autumn is the time of year for getting back to things. Back to school, back to work, back to the routine. It’s also a time when a lot of people re-engage with their pension plans. Notwithstanding the recent volatility in equity markets, strong returns in most asset classes have boosted the value of many Irish pensions this year. With this in mind, we take a look at the steps that might help you hit your retirement targets.
It is particularly important to appreciate the level of investment risk contained in your plan, and the best way to do this is a complete review of your asset allocation. Can you easily access information in relation to equities, bonds, cash and alternatives for your overall pension investments? (Not just the individual funds you may hold.) If not, it may be difficult to understand how much risk you are exposed to.
When asset prices are rising, there is always the danger of ‘risk drift’. This is where strong returns in one particular asset class leads to an ever-increasing concentration of the overall retirement fund in that class. It may be necessary to realign pension investments with a spread more appropriate to the desired level of risk.
Overconcentration is also an issue for pension investors who are close to retirement. Many are invested in lifestyle strategies – the default option in many group defined benefit schemes – and have latterly seen a large, automated transition towards long dated bonds. While this may suit anyone wishing to buy an annuity, more and more retirees are opting to remain invested in retirement through an Approved Retirement Fund (ARF).
Many of these lifestyle funds have sold off heavily in recent months as yields have increased on long term bonds. The Bank of America Merrill Lynch says that 84% of global fund managers now think bonds are overvalued, indicating that yields are expected to rise further while bond prices and funds with exposure to long dated bonds will fall. Understanding your exposure to this risk is critical. It’s not just lifestyle funds that hold high levels of long dated bonds – many other pension funds have significant exposures – and many of our clients are ensuring that their pension investment strategy matches their intended retirement strategy.
Action – Ask your adviser to help you gather all the information for a full review of your pension investment strategy
To get an understanding of how much savings will be required to meet your objectives, some questions are necessary:
A good Financial Plan will take into account your financial background, establish your retirement objectives and give you greater clarity around decision-making. Using forecasting tools, your plan can also project the likely value of your savings at retirement and the level of income they could reasonably be expected to support.
Remember though that plans can change! You should be flexible and consider a range of scenarios to help the decision-making process:
Making Additional Voluntary Contributions to your pension is one way of building retirement savings while reducing the income tax liability. Contributions can be made on 2019 earnings up to 31st October 2020, and up to 12th November 2020 if tax returns are filed online. Contributions are calculated as a percentage of your net relevant earnings in 2019, and are also determined by your age:
* Earnings are capped at €115,000 for these purposes.
Action – Ask your adviser to discuss and develop a Financial Plan tailored to your needs
More and more defined benefit pension schemes are either closing to new members or winding up, while using pension savings to buy a guaranteed annuity income is more expensive – and less attractive – than ever before. For many people this means keeping pensions savings invested after retirement in an ARF during retirement, and taking responsibility for providing their own annual income.
When it comes to important – and sometimes complex – investment planning, it is worth considering how your spouse would manage if you were not around. Would they be comfortable stepping into your financial shoes and managing the retirement portfolio?
It is important that your spouse understands the reasoning behind investment strategy, and the best way to do this is to include them in the process. If you work with a financial advisor, make sure both partners attend meetings. This will introduce them to an expert whom they know and trust; it will also help them to develop crucial knowledge about how to build a bespoke, diversified investment portfolio and how to stick with the plan during periods of market volatility.
The nightmare scenario, where your spouse is forced to plunge into an unknown world of investments at an already distressing time, is enough to motivate most to engage early together.
Action – make sure your spouse is involved in your retirement decisions as someday they may need to take over completely
The main reason our clients are investing time to build the right strategy and working with our advisers is to reduce the worry that comes with major financial decisions. Taking the right steps now towards your retirement plan will give you confidence. It will give you comfort. Ultimately, it will make it easier to enjoy retirement – something we all want.
Request a call below
Request a call
Warning: The value of your investment may go down as well as up. If you invest in this product you may lose some or all of the money you invest.
Warning: The information in this article does not purport to be financial advice and does not take into account the investment objectives, knowledge and experience or financial situation of any particular person. You should seek advice in the context of your own personal circumstances prior to making any financial or investment decision from your own adviser. The tax information contained in this article is based on Davy’s current understanding of the tax legislation in Ireland and the Revenue interpretation thereof. It is provided by way of general guidance only and is neither exhaustive nor definitive and is subject to change without notice. It is not a substitute for professional advice. You should consult your tax adviser about the rules that apply in your individual circumstances. Davy is not responsible for the interpretation of this information and any submissions made by you or a third party on your behalf thereon.
25 July, 2024
14 October, 2020
22 April, 2020