A personal view from Ian Cooke, head of investments at FBD Financial Solutions.
Hands up who finds pensions interesting? On the basis that practically no one is reading this with an upright arm, it may be more interesting to look at the most common, and costly, mistakes when it comes to pensions.
Not starting early enough
The longer you delay, the more it costs you to build a good-sized pension. This is because of compound interest, which Albert Einstein called “the most powerful force in the universe”.
Let’s assume you pay €125 a month into a pension until age 65 and the fund grows 4% a year after charges. What’s the difference If you start contributing at age 20, 30, 40 or 50? Roughly speaking, every 10-year delay wipes out half of your fund’s potential growth.
Of course, these are just projections – the actual return could be less or more than this. The figures show the values in today’s terms, without considering inflation, which will reduce the spending power of money over time.
Not contributing regularly
Most farmers tend to speak to their accountant before the tax deadline to be told you should put €X into your pension this year. They then proceed to put in a lump sum of €X and forget about pensions until October next year. There are at least three important problems with this:
- It’s all a big rush and while tax is saved, not enough attention is paid to selecting the investment that will determine your return.
- You do not benefit from averaging-in your investment, which can dramatically reduce market risk.
- It’s painful to have to write one large cheque for the pension company – a regular direct debit is much less painful and attracts the same tax relief.
The solution? Contribute something to your pension each month. It might even save you money.
Not shopping around
Many pension providers offer restricted advice. For example, AIB, Ulster Bank and Permanent TSB are now all tied to Irish Life for pension business. There’s nothing wrong with Irish Life, but you really should shop around.
However, not all pension funds deliver the same results. Consider the pensions below which are listed in the same category.
Let’s examine the pension savings we identified last year again.
This client was immediately €917 better off by moving from the bank pension to the most suitable option on the market for him. On the basis of continuing annual contributions of €6,756 and 6% growth, the independent pension will be worth almost €100,000 more on retirement due to lesser fees and charges.
This is a difficult one to address – it may even merit a supplement to itself. We are all subject to certain biases – it so happens that these biases mean we are show to address our financial futures even if we know we should.
One way being used to tackle the pension crisis in the US is a campaign devised by leading academics in the field of behavioural economics. It involves committing today to taking an action in the future.
The campaign is called “Save More Tomorrow” and it works because a small commitment now has been demonstrated to help get things done later.
Adopt this approach and do one thing now by contacting an independent adviser – pick a definite date and keep the appointment.