Q. I am 64 years of age and will be retiring next March. I am presently unemployed. I have a pension fund which has built up over about 35 years at work. The value of the fund has recently reduced by approximately 5pc. The spread of investment is mostly in bonds.
My question is, what spread would you advise so that I can get some positive return? I do not want to lose money on this, but would like to have a positive return year-on-year.
A. This is a very common query at the moment, Michael, as bonds have traditionally been relied on as the safe investment within any portfolio. It is hard to achieve a positive return year-on-year without taking some risk. Returns are rarely smooth over time unless you invest in cash deposits.
Most pension schemes default to a large bond holding when members get close to retirement for this very reason.
However, there is a serious problem with this strategy right now, as bonds are in a significant bubble with very little upside and significant risks to your capital value. The likely trigger for a fall in bond prices will be an increase in interest rates.
Your strategy from now on should depend on how you expect to take your pension benefits in retirement. If you are going to purchase an annuity, it would be prudent to take the lowest risk option available at this point. That is probably a cash fund, if that is available in your scheme.
If you are planning to take a tax-free lump sum and transfer the balance to an Approved Retirement Fund (ARF), your investment time frame is longer and you should consider a more balanced mix of assets. Equities have a part to play in any medium-term, well-balanced portfolio, along with property, corporate bonds and alternative investment funds, all of which are a reasonable replacement for government bond funds.
Long-dated bond funds (that is, bonds with a maturity date more than five years from now) should be avoided at all costs. You should get advice on an appropriate mix for your own personal risk profile.
Q. I have €100,000 on deposit in a range of banks, and the interest rate is now so low I'm considering moving the funds.
I know markets have been doing well over the past few years, so is now a good time to invest?
Conor, Nenagh, Co Tipperary
A. While interest rates in Ireland have fallen significantly in the past 18 months, we still have some of the highest rates available in Europe at the moment. The term deposit rates being offered by Rabo Direct, Nationwide UK, KBC and Permanent TSB are all still well above inflation, after DIRT tax, so the real value of your savings is still being protected for the moment.
Clients who approach me generally worry that they are missing out on significant investment gains in other asset classes (equities, property) and that their hard-earned savings are not working hard enough.
The best home for these savings really depends on the investment term.
Long-term investment portfolios (of 10 years or more) can absorb risk and have time to ride out periods of volatility. This will allow more exposure to growth assets such as equities and property.
However, short-term investments do not have the time to recover from falls, and therefore have less ability to absorb risk.
Equity and bond markets look expensive just now, so the risk of a fall in capital values is higher than normal.
Investors sitting in cash at the moment have missed the boat to a certain extent and may be better off biding their time unless their circumstances have changed or they have a very long-time horizon.
Q. I've recently changed jobs, so I have some financial decisions to make on which I'd like some advice: first, what to do with my previous DC pension (such as the options to move it into new employer's scheme or into a personal retirement bond); and secondly, should I join my new company scheme?
A. Modern careers have evolved, particularly in the past 15 years, and employees are switching employers much more regularly than they did. This has led to more complications for retirement planning because an individual can end up with multiple pension funds from old employers and even periods of self-employment.
There are three options open to anyone who finds themselves in this position. First, they can leave each pension with their old employer (if allowed); secondly, they can move the fund to their new employer (if there is a scheme in place); and thirdly, they can move the funds to a retirement bond or PRSA (subject to some restrictions).
A retirement bond is just a pension fund in the individual's name that holds the existing pension pot in a segregated account. You cannot make future contributions to a retirement bond.
For my clients, the first thing to check is the new employer pension scheme. If there is a scheme in place, check the charges and investment choice within that scheme.
Large company pension schemes are often very competitively priced, and much cheaper than anything an individual can set up. If the new scheme is well-priced, it makes sense to consolidate old benefits into it. If there is not a scheme with your new employer, or it is not competitive, look at setting up a retirement bond.
As with all investment and pension decisions, look at the small print and make sure you understand the charges.
Commissions can be high for retirement bonds, and there is a wide range of providers to choose from.
Ideally, do some research yourself, or hire a fee-based advisor to do it for you.
David Quinn is managing director of Investwise