Irish independent
Mark O’Sullivan, Provest
30th january 2022
Q My son has been trying to buy a home for the last three years. He’s single, in his early 30’s and on a reasonable wage but given the runaway house prices of recent years, it’s proving impossible for him to buy. He’s renting in Dublin and the high cost of rent means it is very difficult for him to save up a deposit. To boost his chances of buying his own home, I’m considering giving him €30,000 towards his deposit – out of my pension fund. I’m currently 63-years-old and will be retiring in a couple of years. I have a defined contribution (DC) pension through my job and it’s the only private pension I have. My pension fund should be worth about €200,000 when I retire at the age of 65.I should also get the full State pension when I retire. Would it be wise to take €30,000 out of that €200,000 pot for my son now? I have about €20,000 in a savings account too, but I’d rather keep this money handy for my wife and I. Tom, Co Meath
A Your son, like so many others, is facing the dreaded property dilemma – saving as much as he can on one hand and paying out dead money for rent. You on the other hand have a similar dilemma in that your ability to access your pension cannot be achieved unless you leave your employment and retire your pension fund. Unfortunately, you are not able to access your pension fund unless you retire – that option is currently not available under legislation. So, it looks like that option will have to wait for another two years as you have another couple of years until you retire.
You could approach a lending institution such as your local credit union and take out a loan between now and your retirement, assuming you have an account with your credit union. This would involve repaying the loan in part over the next two years until you reach the age of 65 – at which stage, you could take the lump sum from your pension fund and pay back the lender.
An alternative would be to give your savings of €20,000 to your son now. There would be no Capital Acquisition Tax (CAT – the tax on gifts and inheritances) for him on this €20,000 gift from you as he would be below the current €335,000 CAT limit – as long as he has not already received any other substantial gifts from you. (A child can receive up to €335,000 in gifts or inheritances tax-free from their parent over their lifetime). You could then borrow the balance of €10,000 for two years, so that between the loan and your savings, you would have €30,000 to give him towards his deposit.
Too late for a self-employed man in his 40’s to set up a pension?
Q I’ve been self-employed all my life and am in my early Forties now. I never opened a pension. I’m a sole trader and make a profit of around €35,000 a year. Is it too late for me to set up a pension now? Also, I have heard the charges on personal pensions are much higher than on an employer-sponsored pension – is there any way to avoid or limit such charges? Seamus, Co Tipperary
A Firstly, remember that it is never too late to start a pension. Relying on the State pension of around €13,000 a year when you retire at age 67 or 68 years should not be a consideration if you can manage it at all, especially when you can plan now and benefit from a private pension in addition to the pension from the State.
You are correct that charges for an employer-sponsored pension can be very cost-effective. Where one works for a small or medium company, the costs associated with setting up and running their scheme should be similar to a personal pension – where you can ask your advisor to set the pension up on a fee basis with nil commission. There can be a large divergence in charges if you set your pension up on a commission basis, depending on the advisor. For example, some pension providers can take up to 50pc of the first two years of contributions you pay as commission, leaving you with significant ground to make up. So, ask the person setting up your pension to outline the costs of the various fee-based and commission-based options so you can make an informed decision.
I have run projections based on a nil commission pension with an initial annual contribution of €8,750, with indexation of 5pc (meaning your annual contribution increases by 5pc each year). With annual contributions of this level, your personal pension would have a value of about €302,160 by the time you retire (assuming you retire at 65 and your fund makes a gross investment return rate of 3.45pc a year up to your retirement age).
You can get tax relief on your pension contributions, depending on your age. So while the projected value of your pension fund would be €302,160 by the time you reach 65, with tax relief, it would have cost you only €135,647 to generate a pension of this size.
Should we reinvest our kids’ college savings pot into shares?
Q My husband and I have two children. We started to save for our children’s college bills when they were young. A good chunk of these savings went into State Savings products (10-year National Solidarity Bonds) – one of which has just matured. My eldest won’t start college for another seven years so I’m looking to reinvest the matured savings – but I won’t get much return if I reinvest them in State Savings or any other deposit account. Should I reinvest the savings into shares? Helen, Co Wexford
A We are currently in a low-interest environment and that includes State savings products but they are safe, have no charges and in the main do not attract Deposit Interest Retention Tax (DIRT).
Equities or shares are the best-performing asset class over the long run. However, in considering investments in shares, firstly you should consider your risk profile – namely your tolerance, need and capacity for risk. Ask yourself how would you react if equity markets fell in value – as happened in March 2020, when stock markets fell by 32pc on average. If there was such a fall in stock markets, would you switch your investment to cash or would you stay invested and monitor the investment? If the answer is the former, you should not invest in shares.
The more you trade in shares, the more expensive they will be as stockbrokers typically have a tiered charging structure. The fees you pay will also depend on whether you get an advisory service (where the stockbroker gives you advice on which shares you should buy) or execution-only service (where the stockbroker offers no advice on shares and simply buys the shares on your behalf). The execution-only service will be cheaper, but do you have the ability to stock pick?
As an alternative to buying shares, you could invest in a multi-asset fund (an investment fund which typically invests in a range of investment types, countries and markets). Diversifying across a broad range of assets and geographies not only expands the opportunities to make returns but can cushion also against losses by spreading the risk more broadly. The annual management charge on multi-asset funds should be in the region of 1pc per annum.