20th February 2019 GDPR & Privacy Section

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Budget 2018 – How will it affect you?

Below is a brief summary of the main points announced in today’s Budget -:

  • Standard rate income tax band increased by €750 for 2018, giving a tax saving in 2018 of €150 for higher rate taxpayers.
  • Earned income tax credit for the self-employed and proprietary directors increased by €200 to €1,150 for 2018.
  •  The lower USC bands and tax rates will be reduced in 2018. The maximum saving for higher earners is €178 pa.
  • DIRT rate reduced to 37% in 2018 but no change announced in the exit tax rate of 41%.
  • All State Pensions to increase by €5 pw from the end of March 2018. This will make the maximum State Pension €12,695 pa, or just €5 pa under the €12,700 pa specified income limit for the ARF option.
  • Stamp Duty on the purchase of commercial (i.e. non-residential) property is increased from 2% to 6% with effect from midnight 10th October 2017.
  • Mortgage interest tax relief for those who bought their homes between 2004 and 2012 is being phased out between 2018 and 2020. The relief will finish for these borrowers at the end of 2020.
  • No change in CAT thresholds.
  • New tax efficient share option scheme (called KEEP) will be introduced in 2018 for employees of unquoted SMEs.
  • No changes announced in private pension tax reliefs or taxation of benefits.

Use the calculator below to see exactly what impact today’s Budget is likely to have on your pocket-: http://www.thejournal.ie/budget-2018/

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Women fear they won’t have enough to fund retirement

Large numbers of women are worried they will not have enough money when they retire, with fewer men concerned about a funds shortfall.

Most women are unsure of how much they will need for a comfortable retirement, according to research from pensions provider Aviva.

It showed a huge gender gap in Ireland when it comes to preparations for retirement.

But the survey, carried out among 1,000 adults by Ipsos Mori for Aviva, found that just 8pc of women say they are taking steps to ensure they have an adequate level of income during retirement.

Around a third of women say they are not setting aside money for retirement on a regular basis. Just 18pc of men are failing to prepare for retirement.

A quarter of women have given no consideration to how much they would need to live comfortably in retirement. The comparable figure for men is 14pc.Four out 10 women say they don’t understand pensions, compared to 27pc of men.

Head of life and pensions at Aviva Ann O’Keeffe said the gender pay gap was getting a lot of attention.

“But we also need to focus on the knock-on effect of this pay gap on pensions, given its implications for the welfare of our ageing female population.”

She said the gender pension gap was hardly surprising, given that women earn less than men.

“It is worrying that women are so unprepared and lacking information on how best to prepare for their retirement,” she said.

Ms O’Keeffe encouraged all workers to start saving as early as possible and to not opt out of any workplace pension scheme.

Reference: Independent.ie

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9 Financial Habits Every 30-Something Should Have

 

As a 30 something, the best time to start thinking about your retirement and future financial security is… well….yesterday.

Of course, it’s not the most exciting topic when you’re young and have to consider things like mortgages, weddings and children, which require more urgent financial attention.

The reality is, however, the sooner you embrace the, the better. Not only will it take one of those big ‘life admin’ weights off your shoulders, but an early start brings great benefits.

State pension age is on the increase (set to be 68 after 2028), as is our life expectancy. Irish men and women are expected to life to 78 and 82, respectively and surviving for that long on the current state pension personal rate of €230.30 per week, seems like an unimaginable stretch.

So if you’re new to the world of retirement planning and feeling a little bit more ready to get started, here are some things you can do now that your older self will thank you for.

  1. Know where you currently stand

Pensions seem complicated when you don’t know anything about them, but there’s plenty of information online and it’s always worth asking those around you too. The most important thing to know, when you’re getting started, is whether you have or are eligible for a pension and what the contributions are. If you are in the public sector, you’ll be covered by the public sector pension but if you work in the private sector, this may be more unclear. If you’re unsure, talk to your employer or HR department to understand your current position.

Calculator and notebook

If there is an option to join a company pension scheme, you should strongly consider this, as it’s basically free money for future you. Take an interest in the scheme and understand your contributions. It might automatically be set to a minimum of 1% of your earnings. If you feel like you can increase this, you should.

  1. Calculate and set a budget

Once you know where you stand, the next step is to figure out exactly how much you need to put away each month to secure the kind of comfortable future you want after retirement age. Irish Life has a very handy pension calculator which will take you through everything. All you need to know is your annual salary and basic information about your existing pension, if you have one.

It can tell you how much you need to save on a monthly basis to reach your goal. By having this information in front of you and knowing how much you need to save, the reality of retirement planning will seem a little bit easier to take on.

Set budget for retirement

  1. Set up a pension

No matter if you have all the savings in the world it’s still worth having a pension, as a pension receives income tax relief, if you’re eligible. This basically means you’ll pay less tax if you have money in your pension. For example, if you invest €100 in your pension, you’ll get €20 off your tax bill. And the relief is even greater for higher rate taxpayers.

If your employer is matching your pension contributions, you should contribute as much as you can to benefit fully from this.

  1. Pay off your debts

Retirement planning is not just about setting up and having a pension. Having control over your current finances will help stand you in better stead in later life.

If you have any debts, make it your priority to clear all of these before you do anything else. Start with the ones with the highest interest rates first as they’ll be costing you most, longterm. From there, try to avoid when possible, purchasing items on credit or getting loans that you don’t absolutely need.

online banking

  1. Ask for more money

It’s not a conversation that anyone wants to have but if you don’t negotiate your salary, you’re not only undermining your potential income but your savings too. Having an extra €100 or more per month to put towards your savings can make a significant impact on your financial security in later life.

  1. Save as much as you possibly can

Even though buying that new pair of shoes may seem more appealing, it is worth saving as much as you can, while you can – before you have to come to terms with the big life expenses such as mortgages and weddings and your money has to stretch much further.

Every time your wage increases, or if you manage to clear a monthly expense, put this towards your savings. If not, you’ll find you’re just unnecessarily spending this extra cash with nothing to show for it.

Save money - piggy bank

  1. Consider investing

For most people entering into the world of savings and investment for the first time, setting up a pension is often the first step. But once you have that set up, it might also be worth considering other investments to add a little bit extra to your pockets, so you can afford to put away extra for your retirement. Of course, with investment, there is greater risk but there’s also greater reward. We have some great investment information and resources at IrishLife.ie to suit investors of all types and levels of experience.

  1. Buy a home and buy wisely

We know, we know – in Ireland, this is much easier said than done, as the average age of first time buyers has risen to 34.

But if you have the chance to get a foothold on the property ladder, buying a home is a solid investment for your future, retired self. If you manage to pay it off well before retirement age, you’ll be able to save more and will have considerably less expenses. If you’re buying a house that you don’t currently want to live in, but want to rent out instead, consider if it may be somewhere you could comfortably settle later in life, for greater practicality.

House

  1. Talk to a professional

To maximise the potential of your retirement plans, it’s always best to talk to a professional who understands pensions, investments and savings inside out and can give you the best advice. At Irish Life, we have hundreds of thousands of pre-retirement pension customers in Ireland so we have a detailed understanding of how to cater for customers of varying needs and levels of expertise when it comes to finance.

As much as taking to friends, family members and colleagues can help guide you, discussing your situation and your goals with a professional will give you that extra bit of confidence in your decisions.

Reference: Irish Life

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Charlie Weston: Ten things women need to know about pensions

Females will have 38pc less than men to live on at retirement

Stock image

Women get a raw deal on pensions. Fewer of them work outside the home, and they often get paid less when they do take up paid employment. Many work only part-time.

All this means that the gender pay gap feeds into the pension issue. So when they get to retire they typically have a third less to live on than men.

A pensions gap of 38pc exists, according to the Irish Human Rights and Equality Commission.

But there are ways women can make the best of a bad situation by ensuring they maximise the value from the State pension, and any supplementary scheme, whether they are in the workforce or not.

Here are 10 things women need to know about pensions.

1 The State Pension

The State contributory pension is regarded as relatively generous. For those who have 48 annual PRSI contributions, the weekly payment is €238.30. This is the payment for people who qualified for pensions before September 2012. You get it from the age of 66. The means-tested State pension non-contributory is a payment for people aged over 66 who do not qualify for a State contributory pension or who qualify for only a reduced contributory pension based on their insurance record.

2 But women often get less than men

Women are losing large amounts of money from their retirement payments due to austerity cuts. A recent report from Age Action estimated that 23,000 females have been hit with lower payments due to changes to State pension eligibility rules in 2012.

Changes made by the previous government make it more difficult to qualify for a full pension. On average, retired workers have lost more than €1,500 a year, with women suffering the biggest hit, according to Age Action.

In 2012, the then-government changed the eligibility criteria for the contributory State pension. It moved to an “averaging rule” to calculate the number of contributions made by a worker.

“Under the old system, if you had an average of 20 contributions a year, you would be entitled to €228.70. But after 2012, this dropped to €198.60, a cut of more than €30 each week,” Age Action’s Justin Moran said.

3 Homemaker scheme worth checking out

The homemaker scheme makes it easier for women who have spent time outside the workforce caring for children to qualify for the contributory State pension. The scheme protects your contributions by disregarding any years spent providing full-time care for a child under 12, or a disabled person over the age of 12.

Read More: ‘I have 20 years of work left … I can afford some risk’

Up to 20 years can be disregarded when the yearly average number of contributions for a contributory pension is being calculated, which can help you qualify for State pension, or a higher rate of pension. Typically, you won’t have to apply for it. If you are already claiming child benefit, carer’s allowance or carer’s benefit, or a respite care grant, you will automatically be entitled to it.

4 Low pension coverage among women

Just a third of women own a pension, according to research. This means that two-thirds of women do not have a supplementary pension. This is despite the fact that women make up almost half of the workforce. Men are much more likely to have a pension. Part of the problem is that women are far less likely to discuss retirement planning with friends.

5 Most women don’t know how to start a pension

A worrying 71pc of women don’t know how to start a pension, according to a survey commissioned by Standard Life. There are two options in the private sector. If you are a PAYE employee your company may have an existing occupational pension scheme. Typically, the employer makes a contribution to this on behalf of the employee.

Large companies often contribute between 5pc and 9pc of annual salary to the pension. If you are earning €50,000 a year this works out at between €2,500 and €5,000 a year. Alternatively, the employer has to offer you access to a pension scheme even if it doesn’t contribute to it. That’s the legal requirement and has been for the past 15 years. Most women are unaware of this extremely important point, according to Aileen Power of Standard Life.

6 the Pension age has gone up

The State pension is now 66, up from 65 previously.

For those retiring from 2021 on it goes to 67.

For those retiring from 2028 the State pension will not be paid until 68.

However, many employers are still sending employees into retirement at the age of 65.

That is why the Citizens’ Assembly called recently for the abolition of the mandatory retirement age.

7 You may have to work until you are 70

People should not get the State pension until they reach the age of 70, a State-supported think tank has recommended. Moving the statutory retirement age to 70 would counteract a fall in the workforce and the rise in the number of pensioners, the Economic and Social Research Institute said recently.

Read More: ‘I wanted to retire by 50 so I could enjoy life. My advice? Start saving’

The chances are that this will be introduced. Currently, there are around six workers for every pensioner. Over the next 30 years this is due to fall to around two workers for every pensioner, adding to the costs of State pensions.

8 Maternity leave should not affect pension rights

If you get maternity benefit, you will get State pensions credits automatically. But this ends after 26 weeks. This means that if you take further unpaid leave, you will need to get your employer to complete the application form for maternity leave credits when you get back to work.

If you are taking parental leave, you should also be entitled to credits. But you have to apply for these.

9 You may get a spouse’s pension

If you are married but do not qualify for a pension, you may be entitled to what is called a “qualified adult” pension. This can be up to €213.50 for those over the age of 66. The payment is means-tested.

However, the concept of women being dependent on their husband in retirement is not appealing for women. If your husband has died and was a member of a defined-benefit pension scheme, you are likely to be entitled to a spouse’s pension, usually half the amount he got in retirement.

10 Pensions adjustment order

A court may make a pension adjustment order in the case of judicial separation, divorce and dissolution proceedings. This designates part of the pension to be paid to a spouse and dependent children.

The judge decides how much of the pension should be designated, according to the Courts Service.

The effect of such an order is that the designated part of the pension remains in the pension scheme but is payable to a spouse and children when the other spouse reaches pension age or dies.

Reference: Irish Independent

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Why an early savings habit will set you up for the future

Pensions are like a marathon says Zurich’s Rose Leonard, if you want to do one you are going to have to start training now. The first mile is the hardest but once you have developed the habit, it gets easier.

The debate around the pension time bomb and the challenges facing the economy when it comes to pensions continues unabated. The biggest challenge is the changing demographics with people living longer. Life expectancy is increasing with men’s life expectancy up from 78 years of age in 2011 to 85 years in 2046. For women that number has jumped too, and females can now expect to live until at least 89 years as opposed to 82 in 2011*. Obviously this is great news, but are we considering the impact on the cost of supporting the retired population, and will the State pension sustain those in retirement for a longer period of time?

With increased life expectancy combined with forecasted birth rates expected to produce a doubling of the proportion of retired people to workers by 2050, a renewed focus on encouraging long-term savings is what is urgently required.

“Today there are about five people working for every one person retired. In less than 40 years’ time we will probably have about two people working for every one person retired,” Rose Leonard, head of distribution and customer relationship management at Zurich says.

 

Rose Leonard, head of distribution and customer relationship management at Zurich

 

Rose Leonard, head of distribution and customer relationship management at Zurich

This changing demographic will place a considerable financial burden on the State and tax payer. “Because people are living a lot longer they are going to need a lot more financial support in retirement, but they haven’t started to save earlier and we have to address that problem now,” she warns.
One of the main ways this problem can be addressed according to Leonard is for people to accept responsibility themselves and start saving earlier. “My advice to employees would be to join their pension scheme as early as possible. If an employer doesn’t provide a pension scheme, it would be worth considering starting a personal pension. People need to develop a habit of long-term savings really from their mid-20s.”

Communication & engagement

Leonard agrees that engaging people in the conversation around pensions can be another challenge. “It is true that a lot of people haven’t engaged in the conversation at all”, she says “and part of that might be because it’s a bit complicated.” According to Leonard, those that haven’t engaged tend to be younger, and people starting to show an interest in pensions when they reach the age of 50 is too late. “If you retire at 65 you could live for another 30 years so you need to be able to provide a replacement income for those 30 years in retirement. Starting to save long-term in your 20s is the best approach.”

For the millennial generation – who live very much in the here and now – why should they be planning now for their retirement many decades from now? “People in their 20s need to put time aside to understand the cost of pensions long-term and they need to develop a habit of long-term saving. It’s like running a marathon – you might say you would like to run a marathon in 2018, and if you do, you need to start training now,” Leonard explains.

Admittedly, most people don’t want to think about getting old and for the majority of people retirement is far from their minds. But the reality is that most people do grow old and live well into their old age and have a good long retirement. So encouraging people to think about how they can enjoy their life in retirement is key.

Leonard agrees that central to engagement is how pension providers break down the barrier and demystify the process. “In Zurich, we pride ourselves on communication. Our mantra when it comes to pension schemes is ‘communicate, communicate, communicate’. It’s important for companies like Zurich to keep our message clear and simple and I feel that’s something that we are very strong at.”

A universal system

There has been much discussion in Ireland around the introduction of auto enrolment, whereby a universal, workplace retirement saving system for workers without supplementary retirement provision, would be in place. Essentially, an automatic pension scheme would make it compulsory for employers to automatically enrol their eligible workers into a pension scheme.

“When we talk about auto enrolment the question is should we have a universal retirement scheme in Ireland whereby employers would automatically enrol their employees into this scheme,” Leonard asks? “The consensus among the government, the industry, and other bodies is that there should be a universal retirement scheme whereby members would be automatically enrolled.”

Leonard argues that those people in their 20s and 30s that don’t want to think about retirement would benefit from automatic enrolment, and it would encourage them to develop a habit of saving for the future. “We spoke earlier about whether or not the State pension will be sustainable, and when you consider that there are 17,000 new pensioners year-on-year, then it probably isn’t sustainable; something has to be done – we all have to accept responsibility for saving in the long-term.” A final piece of advice from Leonard for those thinking of starting a pension: “Start today,” she declares.

 

In order to help provide for your retirement, starting a pension is one of the smartest financial decisions you can make. When choosing a pension, having all the information you need is key. Sound advice is invaluable, so it’s a good idea to seek advice from a financial advisor. Talk to your company’s scheme advisor or an independent financial advisor who will guide you through the process and help you select the right pension plan for your circumstances. You can find a local financial advisor near you with the Zurich Advisor Finder. Alternatively, Zurich’s Financial Planning Team can provide you with more information about Zurich’s pension plans and options. For more information visit www.zurichlife.ie.

Reference: The Irish Times

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Planning to retire in style? Managing your income in retirement is key

As people live longer it’s more important than ever to take an active part in planning our retirement funds, says Pòl Ó Briain of Zurich

‘Getting financial advice is not the preserve of the wealthy’. Photograph: iStock

In our parents’ generation, retirees lucky enough to have a pension had little option but to use it to buy an annuity. This provided them with a guaranteed income for life. About the only decision to be made on retirement was what brand of watch to look for!
The advent of Approved Retirement Funds (ARFs) changed all that. A more flexible retirement option, they allow the retiree to remain invested during retirement, drawing down an income as and when they need it. The flipside, however, is that ARFs require ongoing financial decision-making throughout retirement.

“Annuities were very popular in the past, and indeed for some people they remain the preferred option,” says Pòl Ó Briain, head of retail products with life and pensions company Zurich.

Pòl Ó Briain, head of retail products with life and pensions company Zurich

Pòl Ó Briain, head of retail products with life and pensions company Zurich
However, the annuity rate – which, together with the amount of money you have accumulated in your pension fund, determines the fixed payment you receive each month in retirement – is set according to the prevailing interest rates. These have remained at historic lows for nearly a decade.

“As a result, annuities are increasingly perceived as not offering good value, particularly if you want to provide a pension for your spouse in the event of your death. You can quickly find that what looks like a very healthy pension fund at retirement may not provide you with as much annual income as you might have expected,” says Ó Briain.

On top of that, once an annuity is purchased there’s no transferring an annuity to your estate. “Plus, with an annuity, once you set it up, that’s it, there’s no going back,” he says.

With an ARF any money left in the fund after your death passes to your estate. On the downside you stand to lose out if the value of your investment falls.

Given that retirees typically see their income-generating capacity reduced, ARFs require a more active approach to managing investments.

And while an annuity may provide a lower income at outset than an ARF, it does at least have the advantage of providing that guaranteed income for life. With an ARF there is the risk of exhausting the pot of money due to poor management of withdrawals or poor investment performance.

As people live longer, they are going to need to take more action to ensure their funds last throughout their retirement. “You need to ensure you are investing your ARF in an appropriate way, taking into consideration your overall risk tolerance,” says Ó Briain.

It’s important to have regular reviews with a financial broker or advisor, to ensure you are managing your retirement funds in the most effective way

When annuities were the norm, the bulk of pension decisions were made as people approached the final years of their career. Traditionally, retirement savers would move from higher risk investments to lower risk options, de-risking in the years approaching retirement. It was seen as important to shield savings from market volatility before the purchase of an annuity.

Now however, if you decide an ARF is the better option for you, that de-risking strategy may need to change, to reflect the fact that you are going to remain invested post-retirement, possibly for decades.

Post retirement, ongoing decisions will be required. “It’s important to have regular reviews with a financial broker or advisor, to ensure you are managing your retirement funds in the most effective way,” he says.

Getting financial advice is not the preserve of the wealthy, nor are ARFs themselves, he points out. “There is still a misconception that ARFs were introduced for people with a lot of money, but that is not the case,” he says.

As people live longer in retirement generally, it’s more important than ever that they take an active approach to their retirement funds. “For example, if you have an ARF investment fund of €100,000 and you plan on taking €10,000 a year to live on, which might seem reasonable, it’s not going to last 20 years,” he says.

“You therefore have to figure out the best way to manage your money, being conscious both of your tolerance for risk and your capacity for loss, which is why having an advisor to assist you will become so important in retirement. After all, while you are still working in an organisation, you are likely to have all sorts of workplace supports to help as you approach retirement. When you are in retirement, you no longer have that support.”

Changes to an individual’s health and personal circumstances as they age will also require regular review. In some cases those who eschewed an annuity when they first retired may want to consider one at a later stage – especially as annuity rates increase with age. If so, the option of converting some or all of an ARF to an annuity may be worth exploring.

Managing ARFs throughout retirement is increasingly likely to be the norm.  As ever when it comes to retirement, the best advice is to take advice. “It is most certainly not something that should be done without proper guidance,” says Ó Briain.

Reference: The Irish Times

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Generation Rent: The importance of being earnest

Couple looking at a house

Generation Rent: The importance of being earnest

17/08/2017

According to Savills 18% of people in Ireland now live in private rental accommodation, which is 497,111 households. With no real history of long-term letting or leases and the introduction of Rent Pressure Zones to try to slow down rent increases, the growing concern is how renters can protect themselves in this progressively volatile market.

A report from Goodbody Stockbrokers in May showed that the average price of a house is set to soar, escalating by 10% this year and by another 8pc by the end of 2018. In turn, more people are renting accommodation, with an earnest focus on saving to get onto the property ladder.

The rise of generation rent is evident but it is a culture that before now was not commonplace in Ireland. Traditionally, third level students aged 18-25 years and single people aged 20-35 years was the profile of renters. This profile has extended to include individuals and young families in their 30s, 40s and 50s. Other mainland European countries, such as Germany, have had a longer history with long-term renting, where accommodation leases are available for up to 10 years and subletting apartments to hold onto a lease is the norm. The introduction of longer rental leases here could be a solution by offering more security to renters and landlords, both benefitting from the longer-term arrangement.

According to daft.ie, our rented sector can be split into categories: ‘movers’ and ‘stayers’. One of the main reason people choose not to move regularly is if rents are rising rapidly in the market and there is a lack of availability, even if the accommodation they are in is not 100% suited to their needs. The former Minister for Housing Simon Coveney brought in Rent Pressure Zones (RPZs) in reaction to the increasing market rents, which came into effect in December 2016. This means that rent increases in these areas can be capped at 4% annually, and is seen as another reason why the amount of stayers has risen significantly.

Stated in the Daft.ie rent price report for Q1 of 2017: “Since 2013, market rents nationally have risen by just over 50%. However, sitting rents have increased by just 27%. In other words, those who have stayed in the same lease have enjoyed a discount relative to market rents, with rents increasing by just half the increase seen on the market.”

Sitting tenants now enjoy not only a discount relative to the market rent, but also protection of that lower rent into the future. Meanwhile, movers in the private rented sector face not only far higher rents but almost no availability in the market.”

Rent Pressure Zones

At a recent off-site strategy meeting with the now Minister for Housing Eamonn Murphy, it was suggested that a new city be formed in the midlands to help with the “choke” on Dublin. However, while the capital remains the most expensive place to rent, prices across the country have also seen increases but with varying degrees. Figures from Daft.ie, show that in Dublin, rents are now an average of 15.4% above their previous peak while in Cork and Galway cities, rents are 9.7% and 17.8% above levels recorded nine years ago. Outside the cities, the average rent is 3% above its previous peak.

In the three of the counties closest to Dublin – Meath, Kildare and Louth – rents have increased by more than 60% since 2012, which is to be expected considering a lot of people have turned to commuting from further distances in order to be able to find accommodation and affordable rent.

All three cities in Munster saw their rents increase by at least 10% in the year, as did Waterford, Cork and Clare counties. However, fewer than 800 homes were available to rent in Munster on May 1st, a decrease of almost 100 on the same date a year earlier. In fact, Ronan Lyons from Daft.ie reported that there were “fewer than 3,100 properties available to rent nationwide on May 1st compared to 4,000 three months previously.”

Getting protection

With a concerning fluctuation in the number of houses available, for sale or let, the importance of protection for generation rent is crucially important. The rental market is an added pressure in itself for renters, leaving them vulnerable in many ways. But how would they cope if, for example, they became ill and couldn’t pay the rent?

Renters like mortgage holders need similar protection and a life insurance policy could be used to offer that much-needed security. Zurich Life offers serious illness cover that enables you to gain assistance at a time when you need it most. If you have to stop work due to a serious illness diagnosis, this cover provides you with financial support that could cover your rent during your treatment.

Regardless of your living arrangements, a life insurance plan can be used to protect you and your family from financial strain should you become ill and are unable to provide for them. There is no reason why as renters, you can’t have similar financial protection to mortgage holders. To find out more about the right protection plan for you visit Zurich Life or speak to a financial broker.

Reference: ZurichLife

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Investing a lump sum: wait, drip feed or take the plunge?

New research shows waiting for a correction is often profitable but can prove costly

Overall, the potential costs associated with waiting greatly outweigh the benefits.
Overall, the potential costs associated with waiting greatly outweigh the benefits.

You have a decent pot of money earning next to nothing in the bank. Frustrated, you want to invest in a diversified portfolio, but you’re worried you might buy just before a sudden market drop. Should you wait for a correction? Should you drip feed your money over time? Or should you just invest all the money now, and be done with it?

Being nervous about investing a large amount of money is understandable, especially in the current environment.

Merrill Lynch’s August fund manager survey shows a record percentage believe global equities to be overvalued. Almost all valuation metrics indicate the US stock market – the largest in the world – to be overvalued relative to history. It could hardly be otherwise: the ongoing bull market is in its ninth year, making it the second-longest rally in history, and stocks have surged some 250 per cent over that period.

At the same time, caution can backfire. Legendary fund manager Peter Lynch once quipped that “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves”. Was Lynch right? Or is there a case for waiting out an expensive market?

Wait for correction?

Quantitative expert and Elm Partners founder Victor Haghani recently investigated, his curiosity piqued by a client who had some investable cash but who wanted to wait for a correction before putting it to work. Haghani was sceptical: although double-digit corrections are common, they may happen at a much higher price point, or take so long the investor loses patience and gets “pushed in” at a much higher level.

As it happens, Haghani found it is often profitable to wait. He looked at previous times where markets were expensive, defined as one standard deviation above their cyclically-adjusted price-earnings (Cape) ratio. In 56 per cent of cases, he found, stocks would have fallen 10 per cent below your entry price at some stage over the next three years.

However, waiting can also prove costly. In the 44 per cent of cases where the correction doesn’t happen, Haghani found, stocks went on to appreciate by about 30 per cent – much greater than the average amount you would have saved by waiting. Haghani ran a number of other tests, tweaking the criteria regarding time horizon and correction size. He found the longer you are prepared to wait for a correction to occur, or the bigger the correction for which you are waiting, the higher the average cost.

Overall, the potential costs associated with waiting greatly outweigh the benefits. If your plan is to wait for a lower entry point, be prepared to accept there’s a good chance it will cost you a fair amount of money.

Easing into stocks

What about the drip-feeding approach, whereby you gradually invest your money over a period of time? Euro-cost averaging (ECA) has an intuitive appeal, in that your money buys more shares when prices are low and less when prices are high. More often than not, however, stocks rise in value; doesn’t this mean that if you delay investing your money, you will miss out on some of the gains associated with investing?

Short answer: yes. A 2014 analysis conducted by New York-based Alliance Bernstein found that since 1926, stocks averaged annual gains of 12.2 per cent. If you’d invested your money over a 12-month period via fixed monthly instalments, however, average annual returns fall to 8.1 per cent.

“The costs were even higher in strong markets”, the firm added.

A recently updated Vanguard report, ‘Invest now or temporarily hold your cash?’, comes to the same conclusion. Vanguard looked at three national stock markets – the US, the UK and Australia – and examined the performance of a balanced portfolio consisting of 60 per cent equities, 40 per cent bonds. Investing immediately, as opposed to drip-feeding money over a 6- or 12-month period, led to better returns approximately two-thirds of the time.

The results were even worse if you averaged in over a three-year period: in such instances, investing immediately won out 92 per cent of the time. Vanguard also examined alternative asset allocations – for example, 100 per cent equities, 100 per cent bonds or a 50:50 stock-bonds portfolio – but the results were essentially unchanged.

Clearly, averaging into investments over time typically hurts returns, but advocates argue it can lower risk, protecting cautious investors in the occasional instances when markets stumble. One overlooked danger, however, is that averaging into an expensive stock market can backfire, resulting in more shares being purchased closer to a market top.

Many strategists argue stocks are in the late-cycle phase of the bull market, but this phase can last a long time. Furthermore, recession risk appears minimal at the moment and almost none of the traditional bear market indicators are present, according to Citibank’s global bear market checklist. Accordingly, investors need to be alive to the danger that the ECA approach will result in them buying shares at successively higher prices over time, closer to the eventual market peak.

Still, easing one’s money into the market beats the lump sum approach in almost one-third of cases, according to Vanguard’s study. Occasionally, in very poor markets, the savings involved are substantial. However, Alliance Bernstein’s research shows the results are asymmetrical – although ECA can save you money in poor markets, it tends to cost you a lot more in strong markets.

Overall, then, the slowly-does-it approach to investing typically hurts returns. It will save you money on occasions, but not as much as it will cost you when markets are strong.

ECA holds psychological but not economic appeal, although that doesn’t mean the strategy is without merit. Behavioural economists have shown that for investors, the pain of a euro lost is roughly twice as great as the joy of a euro gained. This loss aversion means the mere prospect – however remote – of buying just before a sharp fall is likely to give would-be investors sleepless nights. Drip-feeding into investments over time eases this tension, and gradually gaining investment exposure will always be preferable to no exposure at all.

World’s worst timer

Finally, it’s worth remembering that even if you do invest a lump sum immediately before a big market decline, time is on the side of long-term investors. In his 2015 book A Wealth of Common Sense, Ben Carlson details the case of a fictional investor, Bob, who invested only at market peaks. Bob invested $6,000 at the market top in 1972, just before stocks halved in 1973-74. He didn’t sell and invested another $46,000 in savings in October 1987; within months, stocks tanked 34 per cent. Again, he didn’t sell, and invested another $68,000 in late 1999. The dotcom bubble then burst; by late 2002, stocks had halved. Undaunted, he held on and invested another $64,000 in October 2007, just before the biggest crash since the 1930s depression.

Bob may have been “the world’s worst market timer”, but he did okay; by 2015, his total investment of $184,000 was worth $1.1 million. It may be the stuff of nightmares but there are, it seems, worse things than investing at market peaks.

Reference: The Irish Times

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‘When it comes to women and pensions, things are not improving’

The current pay gap in Ireland between men and women is estimated at 14.1 per cent. The gap between the value of men’s and women’s pensions is more than two and a half times that, at 37 per cent*.

At its Celtic Tiger highest, pension coverage for women was 51 per cent. That has since fallen to 46 per cent, while 55 per cent of men have pensions. To put it more starkly, the Central Statistics Office (CSO) indicates that women are 80 per cent more likely to be impoverished at age 65 than men. Women aged 75 to 79 are three times more likely to be so.

“When it comes to women and pensions, things are not improving. If anything, they are getting worse,” says Kristen Foran, national sales director of Zurich Life Assurance.

Traditionally there have been a variety of reasons why women’s pensions – both in terms of coverage and value – lag men’s. This includes women’s greater presence in the home, doing unpaid work there that leaves them reliant, perhaps, on their husband’s pension.

Some women experience gaps in their employment history when they have children. Such time out leads to gaps not just in private pensions, but in State pension entitlements too. Only 16 per cent of people entitled to the State contributory pension are women, points out Foran. Homemakers are not entitled to any kind of ‘pension credit’.

Even where women do have a pension, its performance over time typically lags that of men. Here research indicates that women are typically more risk averse in terms of how much they contribute to their pensions fund, and how they wish it to be managed.**

Women’s retirement prospects vary by sector too. Of women aged between 45 and 54 in the education sector, one in four (25 per cent) have no pension. In the health sector that rises to almost one in three (32 per cent). Surprisingly, women working in the financial and business sector, who might be expected to know more about financial security, fare even worse, with 39 per cent of women in this age group having no pension*.

That climbs to 62 per cent for women working in retail and wholesale. In the hospitality sector – a major employer – less than one woman in five of this age group have a pension.

What should really set alarm bells ringing for women is not the fact that things are this bad, but that, “if anything, they are getting worse,” says Foran.

Part of her job as national sales director at Zurich is to try and figure out why this might be. In truth, she only has to talk to her girlfriends to find out. “Part of it is that women don’t want to think about pensions because they typically don’t want to think about getting older. More than that though is the fact that they tend to have priorities other than themselves, typically children and family,” says Foran.

Any time she mentions the importance of pensions to her peers, she’s met with the same stock replies: “They’ll all say, ‘Sure who can afford it?’ And that all their money is going into their kids, so it goes on the long finger.”

“It’s important for women to start having that conversation about what kind of retirement they envisage. Women are living longer than men, so our needs are greater.”

Marketing professionals know of the truth in the old adage that men buy for themselves and women buy for everybody else. This too may be part of the problem. “We don’t prioritise ourselves, and now we are the squeezed generation – women with both kids and eldercare commitments,” says Foran.

But there is another issue with the pensions industry that she also believes is preventing women from ensuring they have independence – in the form of financial security – in retirement.

Pensions are sold, not bought, she points out. “No one comes banging on the door looking to buy a pension. The value of it has to be explained, which means they have to be sold. Does the industry need to look at communicating better to women and developing pension plans designed to suit their needs? It would certainly help to increase engagement from women,” Foran says.

Consequently, one of the most effective ways to bridge the pension gender gap would be if more advisors were women. “The fact is, where women do advise on pensions, they are really good at it because they are strong on the empathy side and they understand women’s needs and concerns,” she says. “If we had more female advisors in the industry it would go a long way towards helping women’s status in relation to pensions.”

In the meantime, social media might help. “Women are the social junkies of the world and if you look at the top 100 digital influencers in Ireland, the majority are women. We can see social media as a really powerful way of getting this message out to women,” in a communications style that suits them, and that comes via a referral network they trust.

In many ways, for women of a certain age in Ireland, talk of pensions is almost as taboo as talk of menopause, she admits. “Yet if you think about it, on US TV shows like Friends you hear people talking about their 401K retirement plans all the time. It’s a much more prevalent topic of conversation there. Here women don’t want to talk about it. But it’s important for women to start having that conversation about what kind of retirement they envisage. Women are living longer than men, so our needs are greater.”

The first step towards figuring out what those needs are is for women to visualise the kind of retirement they want. By her own estimate, Foran reckons she’d need the State pension and a minimum pension fund of €20,000 a year to be able to enjoy retirement.

“Wouldn’t it be nice to feel financially secure and live the life you’ve always dreamt of in retirement,” Foran asks? “Planning your pension now is the first and most important step to fulfilling this dream.”

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What can I do with my pension if moving job?

Q&A: Dominic Coyle, Irish Times, 1st August 2017

‘I’m hoping you can give me some general guidance on a pension matter. I will be leaving my job next month after 10 years to return to college.

I have a defined pension contribution with my employer (Investment fund name Dynamic Pension and investment with Zurich). The current value stands at approx €65,000. Do I just leave it sitting there and transfer it to a new employer when I start a job in two years hopefully? Or someone mentioned to me about converting it to cash so that it doesn’t lose its value?

Pensions are foreign territory, so any help would be greatly appreciated!’

Ms M.O’D., email

 

Pensions are foreign territory to pretty much everyone, not least because there are so many different scenarios and the industry itself does little or nothing to make them more readily understandable.

I can pretty much guarantee that, regardless of what I say to you, someone in the industry will contact me to tell me that there was a different approach that I should have considered.

For this reason – and more importantly because you have significant savings of €65,000 tied up in this pension – it is important that you talk to an independent financial adviser, not be someone from Zurich which, naturally, cannot consider itself independent as it currently manages your fund.

 

Having said all that, there are a few things you should consider .

The Dynamic fund in which you are invested seems to have performed at or above average over the past decade or so. That’s hardly surprising as it is currently 92 per cent invested in stock market shares, or equities as they are also known. Stock markets have enjoyed sustained growth in recent years, and generally outperform other asset classes over the long term.

This is fine if you are younger with a reasonably long horizon before retirement. As you come nearer to retirement age – and you have less time to recover from nasty investment shocks – most advisers will move you away from equity-heavy funds to something with a lower risk profile, generally with a heavier weighting of cash and government bonds.

As you don’t give me any indication of age and retirement expectations, I can’t comment further. What I can say is that the Zurich Dynamic fund is classed as medium to high risk by the company itself, with a ranking of 5 on a scale of 1-7. You can find an explanation of Zurich risk rankings here: https://www.zurichlife.ie/funds/risk-ratings/.

As this is a defined contribution scheme organised through your current employer I assume you will have been given some advice of selecting this fund in the first place, and are happy to take on a reasonable amount of investment risk in the hope of securing higher investment returns – though your comment about “foreign territory” does make me wonder.

 

So what are your options now?

In general, when you leave an employer – and assuming you have been there more than two years, as you have been – you have three alternatives:

1. Leave it there: you can leave the pension where it is in your employer’s scheme and it will continue to grow (or diminish) according to market movement. It may well be open to you to move the savings within the employer’s fund to a slightly lower risk investment option if you are concerned about volatility, but you should certainly take professional advice before doing so. You will not be able to add further to this fund once you have left your current job.

When you retire, as with any other pension you have at that time, you will be able to draw some of it down in cash and take the rest by way of an annual annuity payment or transfer it into an Approved Retirement Fund where it can remain invested and, hopefully, continue to grow.

2. Purchase a buy-out bond: a buy-out bond, or a personal retirement bond as it is also known, allows you to transfer your current benefits to a personal pension plan controlled by you. You can change the way it is invested but you cannot add further to it. Your choices at retirement are the same as with any of the other options.

3. Transfer to a new employer’s pension scheme: obviously this is not relevant during the time of your study but you could still transfer from your current scheme to a new employer’s scheme when you secure work after your course. Any decision to do so would be based on the investment options offered by the new employer compared to your existing one and the charges involved.

 

In your particular case a fourth option is available. You can transfer the money for your current pension fund to a Personal Retirement Savings Account (PRSA). As I understand it, this is confined to people with less than 15 years’ service with their employer, which seems to cover you.

Given the size of your fund, however, you would need to secure something called a Certificate of Comparison highlighting the advantages and disadvantages of such a move. It examines the benefits you are likely to receive under your current scheme and the benefits likely to accrue within a PRSA. It comes with a written statement explaining why a transfer to a PRSA is in your best interest. That certificate and statement could cost you €2,000 or more.

The advantage of a PRSA over, say, a buyout bond is flexibility in that you can continue to add to the PRSA even while in college if you choose but also when you go back to work. You also have considerable control over how it is invested.

However, unsurprisingly, charges on individual PRSAs tend to be higher than you would encounter in group schemes, say with an employer. Also, an employment-based pension scheme generally offers additional benefits such a death in service and permanent health insurance should you no longer be able to work due to illness or injury.

There is also the question of whether your new employer would be willing to make contributions to a PRSA if they already fund an occupational scheme. Employer contributions are a big factor in helping your fund grow.

So, which option should you choose?

That all really depends on you, but you should consider carefully the charges associated with any of the options before selecting one. Charges eat into investment returns, and a small difference in charge can have a large impact on your final pension fund. If you are paying more the fund needs to be delivering a notably better return to overcome that impact.

You also mention the prospect of converting it into cash “so that it doesn’t lose its value”. Two things arise.

First, as you are in your current scheme more than two years, you cannot liquidate it – i.e. get your cash back, albeit after tax. The money is now locked into a pension fund of one sort or another until retirement.

You could transfer the money – possibly even within your current employer’s scheme or else through a buyout bond or a PRSA – so that it is invested only in cash. You would eliminate a lot of the volatility inherent in a fund invested heavily in equities. However, you would also be sacrificing any opportunity for that investment to grow as it will need to to provide a reasonable retirement income.

And the scheme will still lose its value. The impact of inflation will eat into the value of cash anyway. While inflation is low currently, it still has a cumulative impact over time, and policymakers are actively trying to raise the rate of inflation to around 2 per cent per annum.

In addition, a cash fund still has management charges even if they are lower than with an actively-managed equity fund, and those will also eat into the value of your pension.

Personally I don’t think a 100 per cent switch into cash makes any sense for you, but that is speaking as a journalist who writes in this area and not as a qualified professional investment adviser.

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