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What to do about €40,000 pension dive?

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Worried senior couple checking their bills at home

Worried senior couple checking their bills at home

Worried senior couple checking their bills at home

Query: I was made redundant when my company ceased trading a few years ago. My defined benefit pension (which had a value of €240,000 at the time I was made redundant) was offloaded to a buy-out bond with the following asset allocation: 50pc equity, 1pc cash and 49pc property fund. Two weeks ago, the value of that fund was down €40,000. I was told not to panic and to stay with it. I wanted to convert my entire fund to cash, but was told that if I did so, it would drastically reduce the value of my fund and that it would take weeks to change over. What should I do? - Niall, Co Meath

Answer: I know it is very disconcerting and worrying to see the value of your funds fall - the Covid-19 pandemic has had a huge impact on investment markets and will likely continue to do so for the foreseeable future. Without knowing your age or how far away you are from drawing down your retirement benefits, I think you should consider the following points.

If you now transfer your entire fund to a cash fund, you would be crystallising a loss and eliminating the opportunity for the fund value to increase over time if it remained invested in the market. Also, the return on a cash fund is likely to be negative with interest rates near zero.

Furthermore, fund charges should also be taken into consideration. To move your investments, you have to be right twice: that is, know when to get out of the markets, and then when to get back into them.

We have been down this road before - and not too long ago for that matter. Remember back to 2008 when the global financial crisis caused huge losses in pension and investment funds? These funds rebounded significantly over time, however, and time is the most important thing when it comes to investing.

Regarding your allocation to property, many property funds have recently imposed deferrals on fund switches so right now, you might not even be able to change your asset allocation within the fund.

Finally, it would be a good idea to sit down with an independent financial planner to look at your overall financial situation and develop a bespoke financial plan.

 

Is it wise to invest in shares?

Query: We are a married couple in our 40s, with young kids. We purchased an apartment in Dublin as an investment in 2014 and as possible student accommodation for the kids if they go to college. We have used about €45,000 that had accumulated from children's allowance payments over the years to pay down the mortgage on this property, as the interest rates on the mortgage were around 5pc and the interest earned on the NTMA savings accounts for the children's allowance money was less than 1pc interest. We also made occasional extra payments off the mortgage from our own cashflow. We would like to use some of the rent from the apartment now to build up a fund for the kids in lieu of what we withdrew to pay off the mortgage. We're thinking of saving around €500 a month from the rent for this purpose for the next 10 years. We would be open to investing in shares or other options as interest rates are hopeless at the moment and the money wouldn't be needed for a while as the oldest child is 12 years old now. What investment advice would you give here? Also, given the recent volatility on stock markets as a result of the coronavirus crisis, are shares a good thing to consider at the moment? - Sheila, Co Cork

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Answer: It was prudent of you to pay down the mortgage when the rate was so high and the deposit rate was low, so well done. I wouldn't agree with investing in specific individual shares as I think it is very high risk, lacks diversification and could be costly in terms of fees.

You could look at a diversified managed fund from one of the major life assurance companies which would invest in a mixture of equities, property, government and corporate bonds, and alternative assets for example. Savings plans like these will benefit from euro cost averaging whereby you are buying into the investment plan at 12 different points in time over the year, thus reducing potential volatility in the investment.

If you do a savings plan and make a profit, it will be liable for exit tax on the eighth year anniversary or maturity of the policy. Exit tax is currently charged at a rate of 41pc on the gain made. The returns you make on a yearly basis within the fund are not liable for DIRT (Deposit Interest Retention Tax) or income tax.

Should you opt for a diversified managed fund (or indeed any other type of investment), it is very important that you understand the charges that you will face - and the risk which you take on with the investment. It would be prudent to get some independent financial advice before you make any decision here.

 

Investment advice for children

Query: I HAVE four children aged 26, 24, 22 and 20. They are each receiving an inheritance of €35,000. I am allowing each of them to use wisely €5,000 from each of their €35,000 inheritance - but I want them to invest the €30,000 for the goal of using it as a deposit for a house in the future. The 26-year-old is working abroad, the middle two should be finished in college this year - and the youngest is still in college. How would the children best invest their money? - Mary, Co Limerick

Answer: t is important that your children manage their inheritance as wisely as possible and that they develop good financial habits (if they haven't done so already) as this will stand to them throughout their lives. Presuming the eldest child may be buying a house in the next three to five years, perhaps he or she should leave the money on deposit to make it as accessible as possible. We won't know the full economic impact of the Covid-19 pandemic on the property market for some time but it's possible that an opportunity to purchase could arise in the near future.

For the younger children, a house purchase could be potentially seven to 10 years away, so for them I would recommend a highly-diversified investment portfolio which would invest in a mix of assets. This will give them a chance to grow their money in order to beat inflation and gain a better return than currently offered by deposit accounts.

It's important that your children fully understand -and are comfortable with - any risk they take on with such a fund, as well as any charges they face. Getting independent financial advice here ahead of any investment decisions would be wise.

Some good financial habits you could encourage your children to develop could include always saving between a fifth and a third of what they earn, never taking on more debt than they can handle, avoiding expensive debt (such as credit cards and overdrafts), keeping track of their income and spending, living within their means, and paying their bills on time.

  • Email your questions to  lmcbride@independent.ie or write to 'Your Questions,  Sunday Independent Business, 27-32 Talbot Street, Dublin 1'. 
  • While we will endeavour to place your questions with the most appropriate expert for your query, this column is not intended to replace professional advice.

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