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Category : News

5 Principles of Sound Investing

Investing today can be a bit of a minefield. You could end up paralysed by fear, worrying about the possible impact of the likes of Brexit, market fluctuations, elections here and abroad and terrorism threats! However as your financial adviser, we remain focused on your long-term investment and pension objectives, and always do our best to keep you on track to achieve them.

Of course we remain vigilant about all of these potentially damaging events, but all of the time we stick to some important principles that have stood the test of time for investors for many years now.

Learn the Market Cycle                  

The investment market usually (but not always) follows a typical cycle as shown below. While you obviously cannot rely on all of the different factors coming together as illustrated, this is a useful picture to bear in mind.

There are always anomalies, such as the unprecedented low interest rates that we’ve seen in the last few years, but remaining aware of the market cycle can help you to avoid letting greed or excessive caution cloud your judgement.

Marketycle

Diversification is key

There is always the temptation for investors to follow the latest and supposedly greatest hyped-up investment. This might be investing only in property (remember what happened in Ireland 10 years ago…) or indeed acting on a great share “tip” that you got. Putting all of your money into one area is an extremely risky strategy; if it goes wrong, you could lose the lot.

Always spread your risk and build your wealth through funds or pools of assets. This diversification will give you some protection against one of the companies you’re invested in, or even one of the asset classes going south.

Volatility is okay!

When people get fixated on short-term changes in their investment and pension assets, volatility can cause a lot of concern. The focus turns to those short-term dips in returns and investors get anxious.

However volatility is simply a feature of long-term investing. Markets will go up and down, the critical tactic is to stay invested and not react to short-term factors.

Trying to time markets is folly…time and again it has been proven that you are better off riding out the peaks and troughs, rather than trying to call them yourself. However if you really struggle with the volatility of your portfolio, it’s possible that you don’t have the right risk-adjusted portfolio for you in place. Give us a shout, as we’ll help you to identify your appetite for risk and will design a portfolio that will allow you to sleep at night!

Know the magic of compound interest                                                                

Compound interest has a huge impact on investment and pension portfolios. For this reason, it is really important to start investing early, and to keep investing. The more time each tranche of your investment has to grow allows the magic of compound interest to really deliver!

To help see the effect of compound interest, it’s worth remembering the ” Rule of 72″. This is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself. For example, the rule of 72 states that €100 invested at a 10%p.a. return would take 7.2 years ((72/10) = 7.2) to turn into €200.

Knowing this rule will help manage your expectations in relation to the performance of your portfolio or will help you identify the return needed to double your money in a specific timeframe.

Time and compound interest are great friends of investors!

Cash costs you money

Cash in the bank today is simply a missed opportunity. Yes it is a safe haven and staying true to the diversified portfolio principle, it makes sense to have an allocation of your portfolio in cash. But many investors today have too much of their money sitting in the bank, being eroded by inflation and very low interest rates.

You have long-term financial goals and probably need a level of investment growth to achieve them. Leaving your money sitting in cash is likely to undermine your chances of achieving your goals.
At the end of the day, investing is not always straightforward. Your emotions, doubts and behaviours can get in the way and undermine your likelihood of success. But that’s where we come in. As your independent financial adviser, we can be completely objective and can help you plot your course to help you ultimately achieve your investment goals. These are a few tips to help you along the way – we of course would be delighted to discuss any of these or indeed any aspect in relation to your investments.

Warning: If you invest in these funds you may lose some or all of the money you invest.

Warning: The value of your investment may go down as well as up.

 

Help your Kids to be Wealthier than You!

We all want the best for our children, as we help them every day to build up their social skills, develop relationships, maximise their education opportunities and most of all be happy children! We can also help them in a financial sense too. Below first of all are a few valuable lessons you can teach them about managing money, followed by two ways you can ensure they receive money from you more tax efficiently. Hopefully these will all help them have a healthy relationship with money into the future!
Teach your children about saving

Show your children the benefit of saving small amounts of money each week out of their pocket money. The old adage of “Look after the pennies and the pounds will look after themselves” stood us all in good stead over the years.

This teaches children that they cannot have everything they want on demand, and that by being patient and saving a few bob, they then get to enjoy more expensive toys / games / clothes than they could otherwise buy. They also tend to become more tuned in to making sure they aren’t just frittering their money away.
Teach them to be wary of borrowing

Borrowing money is a part of life and often makes good financial sense. Getting a mortgage to buy a home or even a loan for a car are often necessary. However borrowing money simply to support a lifestyle you cannot afford is a recipe for disaster.

Credit cards can feel cool to children! That is until they get their bill and suddenly realise the rates of interest being charged… Children should be taught about the dangers of credit cards in particular and loans in general, and that they are only suitable as part of a structured financial plan.
Educate them in your own financial errors.

Unfortunately we’ve all made financial mistakes over the years. Maybe too much property in the boom, maybe we didn’t get proper independent financial advice early enough in our lives.  Tell your children about lessons you’ve learned and how they can avoid making these same ones themselves.

Give money to them in a tax efficient way

One of the impacts of the economic crisis was a slashing of the amount of money that could pass tax free from a parent to a child either as a gift or as an inheritance on death. In the good old days, a parent could gift more than €500,000 to a child before any tax applied. However this lifetime tax-free threshold now stands at only €280,000.

Should you be in the fortunate position to help your child buy a house for example by gifting them money, the amount you give them will be set against the threshold. This will mean that at a late stage, such as when they inherit from you on your death, their tax bill will be bigger as they will have used up much of their threshold.

The answer may lie in how you gift the money to a child. Rather than giving your child a large sum of money in any one year that is offset against their lifetime threshold, it is more efficient to gift them a smaller amount of money each year. There is a “small gift exemption” that allows any individual to gift up to €3,000 to any other individual each year without impacting the lifetime threshold at all.

So two parents can gift €6,000 to each of their children each year tax free, and without impacting the lifetime threshold. So if you started this at birth, your child could enjoy the fruits of your savings of €120,000 (plus all growth on this) at age 20 without any tax implications. Now there’s a nice start to their adult lives!

Life assurance can help too

Even without gifts prior to death, these lower thresholds are causing problems for many families that are inheriting money from parents. Many families are facing sizeable inheritance tax bills, as a tax rate of 33% is applied to the inheritances received by individuals above the threshold. This has resulted in many family homes having to be sold by beneficiaries when they would have preferred to keep it, just in order to generate cash to pay the tax bill.

Life assurance is one of the best solutions to deal with this issue. In fact there is a specific type of policy (a section 72 life assurance policy) for this purpose. A section 72 policy does not form part of the estate, instead its purpose is solely to pay the inheritance tax liability. The premiums can be paid either by the parents or by the future beneficiaries. Having this cover in place should ensure that a tax bill won’t decide whether inherited assets can be retained or not.
If you can teach your kids a few valuable lessons about money and maximise the amount of money they will receive from you during your life and on death, there’s every chance they will end up wealthier than you one day!

What’s the Problem with Ireland’s State Pension System?

Ireland needs €440bn to address its pensions problem. Now has that got your attention? Particularly when you compare this to our National Debt figure, a (not so) meagre figure of €208bn that gets so much attention, and was such an important input into the policies of all of the parties in in the recent election.

The reason the pensions figure gets so little attention is because it is tomorrow’s problem, not today’s. But we can’t escape the fact that €440bn is the “hidden” state liability for public servant pensions and the shortfall in the Social Insurance Fund, which is used to pay old age pensions. If nothing changes, this money will have to be found in the future to pay all of our old state pensions and the pensions of all our public servants.

So how have we got here?

Changing demographics is a significant cause

There are a number of demographic factors that are exacerbating the problem in Ireland. Today we have 5 workers for every pensioner. These workers pay PRSI, which goes towards the payment of the pensions mentioned above, and even at this, the full cost of those pensions is not covered. However Ireland is ageing and by 2050, there will only be 2 workers for every pensioner. Which means much less PRSI going in, and much more pensions coming out. It just doesn’t add up.

And apart from this, we’re all living longer. In fact it is anticipated that 20% of people in their 30’s today will live to see 100 years of age! So pensions will need to be paid for longer.

So what’s being done about it?

Well, not enough really… There were some attempts made; the National Pensions Reserve Fund was set up to address this issue and had built up to a healthy €22bn. But this was then emptied to help address the economic collapse.

The qualifying age for the state pension has also been pushed out to 67 from 2021 and 68 from 2028. This is definitely a step in the right direction but not enough on its own.

Unfortunately it is estimated that the state pension needs to be reduced by 35% to become sustainable. Now what about all those election promises to raise the old age pension….


So what needs to be done?

Well if you found the above depressing, I’m afraid it gets no cheerier! But if we want a sustainable economy into the future, solutions such as the following will need to be implemented.

  1. State benefits will need to reduce. Both for state old age pensions and for public servants. They are simply unsustainable. Rather than cut benefits, could we instead increase PRSI? Well we could, but it would take a brave politician to do so! And any increase in PRSI contributions would impact the economy and would limit the ability to introduce other measures to boost savings. There are simply no easy choices here.
  2. We will all need to save more for retirement. As old age pensions decrease, we will need to personally make up the shortfall if we want to avoid poverty in retirement. At the moment in Ireland, it is estimated that 29% of working households are on track to retire without a significant adjustment in their lifestyles. Should old age pensions fall by 35%, this figure will increase to 52% of households. To avoid this negative adjustment in our lifestyles, we simply need to save more.
  3. Employers will need to play their part in helping to address the problem. Some form of auto-enrolment in a pension scheme, where both the employer and the employee pays is probably inevitable too. Yes people will always be able to opt out. However the default position should be that every worker is automatically included in a pension scheme.
  4. The progression from work to retirement will change. The days of the gold watch on your 65th birthday are gone. Instead we will see people easing into retirement over a period of time. People in their 60’s and their 70’s will continue to work, albeit working reduced hours. So careers will change as people work for longer and also work differently into the future.

And the biggest issue is that the longer we take in making these hard choices, the worse the problem gets. We simply can’t afford this €440bn problem.

5 Great Habits to Transform your Finances

There is a lot that you can do yourself to help build a stronger financial future! Here are a few ideas that if you can turn them into habits, will transform your every day relationship with money for the better.

Don’t be a financial drifter

Don’t just drift along spending money in an ad-hoc fashion as the need or desire arises. Instead set yourself some financial goals. Yes some might be big important goals such as retiring early or buying a second property. But they don’t all have to be long-term, big financial goals. Some might be around simply living within your means or building a small nest egg. And then, give yourself rewards along the way, if your goals result in better financial practices. If you achieve your objective of saving an additional amount ever month, treat yourself to a night out or a weekend away. Maybe better financial habits can pay for a winter holiday later in the year? Have a goal, track your progress and work towards it throughout the year. This will help to keep you motivated to continue the new better practices!

Understand your spending

This one probably sounds the easiest but actually is one of the most difficult to implement. If you want to gain a clear picture of your spending habits, you need to record your spending for a month or two. However the key to success here is to record every euro, not just approximate amounts. If you keep just a rough record, you’ll inevitably leave out some items or giving yourself the benefit of some big “rounding differences”! Instead if you diligently record every amount you spend, you’ll soon get a clear picture of where you’re possibly wasting money, and will quickly identify where easy savings can be made. Maybe it will show you how those two coffees a day during work (€7) are costing you €35 per week or approx. €1500 per year. You’ve got to earn €3,000 p.a. just for these?

Spend less than you earn

Sounds obvious but how many of us are living from month to month, dipping into the credit card to get us to payday? While it’s often not easy, we’ve all got to live within our means, keeping our expenses below the level of our income. While this mightn’t result in the luxurious lifestyle we all yearn, living beyond our means is only going to store up a whole host of trouble for the future.

Pay yourself first

With the economy back on track and the recent giveaway budget, hopefully everyone is starting to see an increase in his or her income again. This just might be the opportunity to start saving for the future by saving your increase in take-home pay. To make this happen though, you need to set up a direct debit / standing order for this money to leave your current account immediately after payday, effectively paying yourself first. Otherwise, the increased amount will just disappear, as you loosen your purse strings a bit…

Use your credit card… but pay it off every month.

This one requires financial discipline, so proceed with caution! This idea will only work if you diligently pay off your credit card in full every single month. Did you realise that your credit card can actually help you save money in this new era where free banking is harder to find? Because every time you go to the ATM, use your debit card or write a cheque, you may be racking up bank fees. Instead if you use your credit card for purchases and pay off your bill in full and on time each month, you avoid bank fees. However, this one is only for very disciplined people, as any slippage will result in extremely high interest charges that will quickly dwarf any savings you might have made.

Minimise your tax bill

Of course the biggest bill that we all have every month is a tax bill. If you are a PAYE worker, you don’t actually see it, but trust us, you are getting one every month that your employer is paying on your behalf! So make sure you take every opportunity to reduce your tax bill. Claim all of your medical expenses, understand the tax relief that you get on your pension contributions. Talk to us about the potential for tax effective income protection and life assurance planning. Look for every legitimate way to reduce your tax bill.

Of course there are many other steps that you can take to improve your finances. However we think that these 5 will help you see a real difference in your financial health. Can you afford to ignore them?

We’ll Get You on the Right Financial Track in 2016!

A New Year means New Year Resolutions. Getting back to the gym, maybe pounding the pavements, trying to improve your diet. Well if your financial health is not where you want it to be, a resolution that should be top of the list is to come and talk to us. And we suggest that you do this sooner rather than later if you want to see your financial health improving quickly.

 We start by listening
How can we help you? Well first of all, we’ll spend a lot of time listening to you. We will want to understand exactly what it is that you want to achieve with your money – are you looking to get back on an even keel, possibly squirrel away some money for your children’s education in the future or build up a nest egg for your retirement? Maybe you simply want to make sure all will be okay financially if you are unable to work or indeed if you get sick or die prematurely. Indeed you might simply want to gain more clarity and confidence about your financial future.

We help you to understand risk
We then place a significant focus on risk. We will help you to determine your own appetite for risk (how much you are happy to take) and your capacity for risk (how much you can afford to take). This is a key part of building your financial picture. We want you to achieve your potential outcomes, while at the same time ensure that you understand the relationship between risk and reward. We also want to make sure that you continue to get a good night’s sleep, and that events such as the current turmoil in the Chinese stock market don’t keep you awake at night!

Once we understand your financial goals and your risk profile, we’ll then want to determine where you are today in terms of your financial resources. We will want to clarify your earnings, what you spend every month, what financial assets you have and also get a picture of your debts.

It’s all about a plan…
At this stage we start earning our corn! Knowing where you are trying to get to financially and understanding where you are today, we will then develop a financial plan for you. This will set out a roadmap for you to achieve your financial goals.

Yes, this might result in some tough decisions for you, as we might recommend that you need to cut right back on what you are spending on holidays and other luxury purchases. We might demonstrate that you need to be saving more for the future, that your current level of saving is simply not enough to achieve your future goals. We’ll work through all the different challenges in your own financial roadmap with you, help you to prioritise your next steps and determine how best to move forwards.

And then we will put in place any financial products that might be needed to help you achieve your goals. These could be protection policies in case any unforeseen events occur, or a pension plan to save for your retirement. Maybe you don’t need new products at all. Often we find that existing products are absolutely suited to your needs, but maybe the fund strategy needs to be tweaked. Sometimes again, the solution lies completely away from products. We’ll point out if the solutions lie in your day to day management of your finances.

We’re now at the start line, not at the end!
Now you know your destination (your financial goals), your starting point (your financial situation today), you have your roadmap (your financial plan) and the vehicles to make it all happen (your financial solutions and products). So let your financial journey begin!

And that’s a key point; the journey has only just begun. We won’t just send you on your way alone. We will want to meet you year after year to review your progress towards your financial goals. We will adjust your plan as needed, and tweak some of the solutions as needed. And finally when you reach your financial objectives, and only then, our job is done!

So give us a call. Turn those good intentions into action and aim to leave 2016 more confident about your financial future and on the road to achieving your financial objectives.

Why Are You Just Giving Your Money to the Bank?

We really sat up and took note of some analysis carried out by the stockbroker Davy into the Irish banks that was carried out a few months ago. The analysis found that there is €50bn (yes €50 billion!) sitting in current accounts in Ireland. Yes current accounts, not deposit accounts! And how much do the banks pay you for this money that they in turn lend out at meaty enough interest rates? Absolutely nothing…

Why is this money just sitting there? Well the main reason is that traditionally people may have moved spare cash to deposit accounts where they then earn interest on it. However with interest rates pretty much at zero today, people just aren’t bothering. Savers are being offered on average only 0.31% p.a. in deposit accounts and don’t see it as worth the hassle of filling out the forms, getting copies of this, that and the other in order to move your money on to deposit… So what should you do?

You may like the feeling of security of having money in the bank, where at least the actual value of it is not going to fall. But really this is not a good strategy, as any inflation at all means you are losing money in real terms. The good news is that there are alternatives out there that are worth considering, and different strategies that you can use to further minimise any risk.

We really believe that it’s in situations such as these that we can really earn our corn, when faced with a challenge of helping cautious investors find a slightly riskier strategy, and ensuring you are still able to enjoy a good night’s sleep…

 

Be clear about your objectives

Why are you actually saving money? Is it for a big holiday next summer or is it for your children’s education in 10 years time? Or indeed are you thinking about your retirement? Your goals and objectives will sit at the heart of our advice, as they determine the strategy. And maybe they will determine that putting your money on deposit is in fact the right thing to do.

 

Be clear about risk

Once we’re clear on your objectives, we need to get clear about your attitude to risk. If you are a very cautious investor, this requires a different approach than that followed by more aggressive investors.

Your appetite for risk (how much you like to take) and your capacity for risk (how much you can afford to take) need to be carefully determined, as these will fundamentally change the required investment or savings vehicle needed and the type of assets that you might invest in.

If you are a very cautious investor who leaves money sitting in your current account, we’ll run through some alternative ways of saving your money. While they might mean slightly more risk, we’ll give you some proper perspective on this – when it is explained fully to you, you might decide that the alternatives are definitely better than your current approach.

 

We won’t try and time the markets

None of us have a crystal ball and if we knew when markets are about to fall, well we probably would have retired long ago! Nobody can time the markets. And as a result, this introduces risk if you are going to put money into the markets. Of course you are worried that you might invest, and then markets might start to slide, resulting in you losing money.

If this is a concern, we might recommend that you drip-feed your money into the markets over a period of time. As a result, if markets fall, you are buying into the market at a lower price with some of your money. This is a great way of smoothing out some of the highs and lows of the market, if you have concerns that markets are a bit high. This strategy known as “pound cost averaging” means that you actually buy less of the market if prices are high and more of the market when prices are low.

At the end of the day, leaving money sitting in your current account makes little sense. There are alternatives out there for everyone. We would welcome the opportunity to chat through these alternatives with you, and find the right one to meet your specific objectives and your attitude to risk. And no matter what happens, we’ll do our best to make sure your sleep is not disturbed!

Your older self would tell your younger self, “Start your pension planning early!”

The eyes of young people often glaze over when the subject of pensions is raised. After all, pensions are for old people, aren’t they? Well yes, the payment of pensions only happens when you retire. However to get to that point, you need to build up a pension fund. And that certainly is not a task for old people, in fact it is very much a young person’s game! Starting your pension early in life has numerous benefits.

Tax relief

None of us enjoy paying tax. Yes, we understand it is a necessary evil if we want our country to function, but we all want to legitimately reduce our own tax burden, and funding for a pension is probably the most effective way of doing so. If you are currently a 41% tax payer and decide to put €1,000 into a pension, the government are effectively contributing €410 to your pension as a result of the income tax avoided. So you want to start benefiting from this important tax break as soon as you possibly can.

Tax free growth

In addition, pension investments are not subject to DIRT tax. If you save in a bank, any interest earned is immediately taxed at 41%, significantly reducing the growth of your money. However pension funds are not subject to DIRT tax, so your investment builds up free of taxes. So again, availing of this important tax advantage as early as possible will deliver significant long-term benefits.

You can achieve more with less…

Well it’s probably quite obvious but the longer that you pay into a pension fund, the more you can expect to receive when you retire and the more likely you are to achieve your financial goals. Be realistic about how much it will take to achieve your goals. As a rough rule of thumb, you should aim to save “half your age”. So if you’re 30 years old, you should aim to save 15% of your income each year from now until retirement to build up a decent fund. If you wait until you are aged 50 to start, you should then aim to save 25% of your income each year. Of course, this is only a rough calculation. We will help you develop a far more tailored picture for you, taking account of any existing benefits that you’ve already built up and will help you to implement a plan that is right for your particular circumstances.

You can probably take on more risk

A contribution made to a pension plan in your 20’s or 30’s has the benefit of time on its side to grow very significantly from the time it is made, to your retirement age. And because you have this time on your side, you will probably be more willing to take some risk with your funds, with the aim of achieving higher growth rates.

These higher growth rates may be achieved through investing in the likes of equity (stock market) funds. If you had invested in the S&P 500 Index of shares from 1st January 1985 to 31st December 2014, your investment would have achieved a Compound Annual Growth Rate (annualised return) of 11.40 per annum over the 30 year period! Now of course previous returns are not necessarily a guide to future performance, but they give a sense of what can be achieved over a long timeframe. And on top of this, you then have the impact of compound interest…

Compound interest has a huge effect

The “Rule of 72” is a simple maths equation to determine how long an investment will take to double, given a fixed annual rate of interest. All that you have to do is divide 72 by the expected rate of return. The answer is the number of years it will take for the amount of money to double.

  • If you are young, aiming for a return of (say) 8% p.a., it will take 9 years for your investment to double (72/8% = 9 years)
  • However if you are older and rightly more cautious, you may only be aiming for a return of (say) 3% p.a. In this case it will take 24 years for your investment to double (72/3% = 24 years).

So starting early, having the opportunity to take on a bit more risk in the hope of achieving higher returns and then having the benefit of time can have a seriously positive impact on your pension fund. It really is a case of starting sooner rather than later! And then hopefully when retirement comes around, you’ll be able to put the feet up and enjoy your wisdom of youth!

It’s not all about Financial Products you know!!

Many of our clients approach us with pretty regular queries in relation to personal financial planning. You seek out our help in developing a financial plan, building a risk appropriate investment portfolio, planning for your retirement and protecting yourself, your family and your business against unforeseen events.

But sometimes our clients approach us about other financial challenges they might have, or indeed simply want to bounce ideas off us! We’re delighted to help and give you an opinion if we can. And if we can’t help you directly ourselves, we often know someone who can actually help you.

Here are some of the areas we’ve been asked about.

Tax Advice for Individuals

Business owners and professionals will usually have an accountant. Most PAYE workers don’t. That doesn’t mean that you can’t benefit from tax advice; some of you may want help in completing your tax returns, others may want general tax advice. We’ve been asked many tax questions over the years. With some of these, we may be able to give you the answer. However if we can’t help you ourselves, we have relationships with some accountancy and tax firms that will provide you with the services you need.

Advice about Bank Accounts

We came across a situation recently with a client where neither their bank manager nor their accountant had spoken to them about the importance of having multiple signatories on their bank accounts, both personal and business accounts. We believe that this is simple, practical advice in most situations, but of course each situation should be looked at on it’s own merits. Unfortunately in this particular case the client died and his wife ended up in an awful situation of being unable to access his / their money without jumping through all types of legal hoops… This is an area you should consider – would a death or incapacity of one of you be made worse by being unable to access cash in bank accounts?

Enduring Power of Attorney

This is a legal document that can be set up by a person during their life when in good mental health. It allows another specially appointed person to take actions on their behalf should they become incapacitated through illness in the future. This prevents assets being frozen and going under the control of the courts and allows the person acting on your behalf to make a range of personal care decisions on your behalf.

Anyone who has been through this situation, needing to access the assets of a relative who has lost their mental capacity (e.g. to pay for their care) will know the value of having an enduring power of attorney in place. It can be incredibly frustrating being unable to carry out simple actions on the person’s behalf without it.

At the same time, many people also draw up a “Living Will” which captures their preferences in relation to areas such as end of life care, their preferences in terms of resuscitation etc. when very ill or close to death.

We suggest that you give this some thought and if it is something you want to progress; the best place to start is with your solicitor. They will talk you through the process and then draw up the papers that are needed to put the enduring power of attorney in place.

A Will

Yes we still come across clients from time to time who don’t have a will in place. We always strongly suggest that you get this in place. It is a relatively simple process, usually carried out with the help of a solicitor. However the benefits are significant. It enables you to ensure your assets are distributed as you intend on your death and that this process is carried out as painlessly as possible.

These are just some of the areas that we’ve been asked about. While our primary role is to help you build a robust financial plan and then put in place financial solutions to achieve your financial objectives, we’ve a pretty broad perspective of a range of related areas. So don’t be afraid to ask! As we said earlier, if we can’t help you, we probably know someone who can.

Are pensions only good for tax breaks?

I think it’s true to say at this stage that most people are aware at some level of the significant tax benefits of pension planning. However, apart from obviously securing your lifestyle in retirement, are the tax benefits the only reason that pensions are good for you, or are there other reasons to start or continue your pension planning?

Quick recap of the tax benefits

The tax benefits of pension planning are significant and except for high earners, have been left relatively untouched. The main benefits (within certain limits) are;

  • Full tax relief available at your marginal rate on contributions
  • Your fund grows free of tax (no DIRT, CGT etc.)
  • A portion of your fund can be taken tax free at retirement
  • A structure can be put in place at retirement (Approved Retirement Fund – ARF), which enables tax efficient wealth transfer to your estate on death with any remaining fund.

However there are many other factors that make pension planning very attractive. Here are a few factors that increase the need for pensions, followed by an opportunity that is available to many self-employed individuals and company directors that passes some people by.

Life expectancy

Life expectancy has been increasing steadily in Ireland and is now 78 years for males and 82 for females. While this is undoubtedly good news, unfortunately it means that we will all need a bigger nest egg to see us through our golden years. More and more people will now be retired for 25-30 years. What size pension fund would you need to maintain your lifestyle for that period? Many people seriously under-estimate the size of their required fund to maintain a chosen lifestyle over such a long period of time.

State pension rates not increasing

Unfortunately long gone are the days when the annual budget heralded a small increase in the state contributory pension in line with inflation. In fact there hasn’t been an increase since 2009, with it currently stubbornly stuck at €230 per week and little prospect of an increase coming any time soon… Indeed in recent budgets, we saw a further whittling away of benefits enjoyed by pensioners, with more restricted access to medical cards and the removal of the phone allowance etc. This basically devalues the pension every year, making it even more important for people to carry out their own retirement planning.

Waiting longer for the State pension

One of the cutbacks in recent years, which received little attention, was the pushing out of the State pension age from 65 to 68, in instalments. The first cut happened in January 2014 – since then individuals have to be aged at least 66 to qualify for the Pension. From now on it increases in instalments to 68, depending on when you were born. The bottom line is that if you were born after 1960, the changes in comparison to pre-2014 mean that you have lost out on 3 years State Pension (say about €36,000 in today’s terms) or 2 years (say about €24,000) if you’re self employed. So if you are still planning on retiring at age 65 or before, you will have to fund for this lack of state benefits for these years yourself. A pension plan is probably the most appropriate and tax efficient way to do so.

And now for that opportunity!

Employing your spouse and gaining valuable tax and pension benefits

If you work for yourself but your spouse currently doesn’t work in the business, it may make financial sense for him or her to get involved in the business. There are a number of tax and pension planning advantages in your spouse working in your business in return for a taxable income:

  • As a married couple with two incomes, up to €67,600 of taxable income is subject to standard rate tax, but the limit for a married couple with one income is just €42,800. This means more of your total income is taxed at a lower rate if you are both working.
  • If you’re in a partnership or your business is a company, your spouse’s employment by your business may be insurable for PRSI purposes, which means he or she may qualify for a State Pension, or for a higher pension, in their own right in respect to these additional PRSI contributions.
  • The business may be able to set up an employer pension arrangement for him or her, and any contributions the business pays into it will be tax deductible as a business expense, within certain limits, without causing a Benefit in Kind for your spouse. Some or all of this retirement fund could be taken tax free by your spouse when he or she retires, subject to certain restrictions.

The Need for Advice

These are just a few thoughts on the value of pensions, over and above the much heralded tax benefits. Pensions are a very complex area, unnecessarily so in our opinion! As a result, it is our job as an adviser to clarify and find the right solution for clients. Please give us a call to help us find the right pension solution for you.

The language of Investments made simple

Spending all of our time advising clients in relation to their investments and pensions, researching markets and investment propositions, and meeting fund managers and investments specialists comes with a significant occupational hazard: the use of jargon!

So first of all, our apologies if you have been on the receiving end of jargon from us. We’re now going to put that right by explaining some of the main terms that we commonly use in relation to investment markets, to ensure we all have the same understanding of them.

Asset Classes

This is a term that is used to describe the different types of underlying investment funds that make up a typical investment portfolio. The most popular asset classes include the following;

  • Shares or Equity: Equity funds buy a fraction of the ownership of a range of companies. These shares (to denote a ‘share’ in the ownership) are typically traded on a stock exchange.
  • Bonds: Companies or governments issue these, where they effectively borrow money from investors in return for an agreed rate of return over an agreed period of time.
  • Cash: In a cash fund, the manager places money on deposit with a bank, across a range of varying maturity dates. This was seen as an absolutely secure means of investing, for which the returns gained are generally quite low. However as we’ve seen in Greece recently and their banking challenges, nothing is 100% secure…
  • Property: This is where an investment fund (usually) buys a number of properties and the performance of the fund is dependant on the rise or fall of the value of these properties and the income they produce from rent.
  • Currency: In a currency fund, the investment is based on the performance of a number of currencies in relation to each other. A specialist manager identifies opportunities based on his/her knowledge and expectation of currency movements.
  • High Yield funds: This is another type of equity fund that is made up solely of shares in companies that have a common characteristic – a history of having paid and/or an expectation of higher than normal levels of dividends in the future.
  • Absolute Return funds: These are funds that use complex investment instruments to invest in a range of asset classes. By using these instruments and investment methods, they can produce positive investment returns in both rising and falling stock markets. This approach is utilised widely by hedge funds.

Most investors don’t want to “bet the house” on the performance of a single asset class or worse still, the performance of a single share price. As a result, we would usually recommend a diversified portfolio to investors. Rather than having all your eggs in one basket, this approach spreads the investment amount over a number of asset classes, and within each asset class over a number of underlying investments. The aim is that if one company / sector / region / asset class underperforms; the whole investment is not significantly affected. People in Ireland who had a significant amount of their investments tied up in property in 2007 / 2008 probably rue not having a more diversified portfolio.

Portfolio Management Strategies

Active management is where a fund manager makes investment decisions in relation to investment assets with a view to outperforming an investment benchmark or peer group. In this strategy, they use their knowledge and expertise in relation to stock picking and market timing with the aim of beating their competitors.

Passive management on the other hand removes this need to get timing and stock picking right. Instead the investment fund simply mirrors the investment make-up of the benchmark to produce similar performance to the benchmark and achieve average returns. This reduces the risk of outperformance or underperformance against the benchmark. This investment strategy has gained in popularity, as seen through the growth of a range of index-tracking funds.

Investment Styles

The two most popular investment styles are value investing and growth investing.

Value Investing is where the fund manager seeks to buy shares or other securities that appear to be under-priced or “cheap” when they examine the shares using their investment analysis tools.  Warren Buffett has long been a proponent of this investment style.

Growth investing on the other hand is where fund managers invest in companies where they expect significant growth in the share price, even where the share price may look expensive using their investment analysis tools. This investment style fell out of favour somewhat after the dot-com bubble burst, where the expected growth of companies never materialised.

These are just a snapshot of some of the most often used terms / jargon used by us in discussing investments with clients. There are of course many more, and please never be afraid to ask us to slow down and explain them fully to you!

However it is of course one thing understanding the terms, another altogether knowing which is the right approach for you. But that is where our expertise comes in, understanding your specific investment objectives, determining your appetite and attitude in relation to taking risk and then guiding you towards the best investment solutions to fit your own requirements. You just can’t beat good, independent advice!

If there are any other terms that you would like explained, please just ask!