Monday 19 March 2018

The best pension options

Pension plans can be extremely complex in nature, so it is important to understand the basics to make sure your financial well-being is guaranteed for your retirement, writes Charlie Weston

Jackie Martin
knew she had
to act on her
finance for her
Business development manager Jackie Martin knew she had to act on her finance for her future

MANY of those who pay into a pension will admit they do not fully comprehend pension investment options and, more importantly, the effect of selecting a particular option and its impact on the overall pension fund performance.

Pensions can be complex in nature, so it is important to understand the basics.

Pension holders should feel secure in the knowledge that their pension fund is invested to suit their individual situation, according to director of IFG Corporate Pensions, Fionan O'Sullivan.

Pensions provide for your future financial security and often that of your spouse and, for that reason, should be treated with the importance they merit.

Those who wish to set up a pension, or are existing members of an occupational pension scheme, need a basic understanding of the options available and of what questions they should be asking. Here are five things you should know about pensions:

Fees and charges

The principal fees applied to occupational pensions are the initial charge on contributions and fund management charges.

Pension charges can significantly impact pension performance, Mr O'Sullivan said.

For example, a 0.5pc reduction in overall fund management fees could add 17pc to the final pension fund.

Similarly, over a period of 30 years, the same reduction in fees will increase their pension fund by almost 13pc.

Taking a typical employee on €50,000 who will need a fund of over €700,000 to retire on two-thirds of salary pension, the overall savings could hit €100,000.

The key is for scheme members to establish what they are paying for and what exactly they are getting in return.

Fund management

It is important to understand whether your pension is actively or passively managed, and understand what effect this will have on your retirement fund.

As the fund name suggests, actively managed funds employ a fund manager, whose job it is to manage the fund so that it out-performs the market.

Members usually incur high costs for this service and experience would indicate that, quite often, it does not out-perform the market, Mr O'Sullivan stressed.

"History has proven that, over the long term, 90pc of active fund managers do not beat the market return," he said.

Due to the heftier fees, members of these types of funds need to establish whether or not they are being managed correctly.

The higher costs associated with active management can have a significant impact on your overall fund balance at retirement, a factor often ignored or indeed misunderstood by members.

Actively managed fund charges can be as high as 0.75pc while passive fund charges would cost between 0.1pc to 0.2pc.

Attitude to risk

"I would advise you to take expert advice to ensure that your pension is designed to match your tolerance for risk," he added.

An example of a higher risk investment is an equity fund, which invests in company shares.

A lower risk fund would invest in deposits and short-term bonds.

The higher risk funds usually have more potential for longer-term growth, so the more risk you are willing to take with your investment, the greater the chance you can earn higher returns, Mr O'Sullivan said.

However, this also means that there is a higher risk associated with this strategy.

A pension expert can explain in more detail what these options will mean for you -- your choice will be dependent on a number of factors, primarily how far from or close to retirement you are.

Lifecycle stage

At all stages of our lives we adapt our behaviour according to our stage of life.

This should be mirrored in our attitude towards, and treatment of, our personal finances and -- in particular -- our pensions.

Your pension fund should be diversified at all times, however the asset allocation will vary depending on your age.

Typically pension holders will have a greater exposure to equities and other risky asset classes when they are younger.

And as a member progresses toward retirement, their asset mix becomes progressively less risky until such time as they are fully invested in low risk assets such as bonds and cash.

Irish Independent

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