Q I will be retiring at the end of this year and have built up a substantial fund in my workplace pension plan. I was planning to use the pension fund to buy a property to rent to generate income, but I heard that a recent change in the rules has meant that I can no longer buy a property with my pension. Is there anything I can do?
Ony, County Meath
AN Quick answer: the recent changes do not affect you at all and you can still buy a property with your pension fund according to your original plan. Last April, an EU directive known as IORP II was transposed into Irish law. It does not prohibit a pension fund from buying property, but does stipulate that, for any new investment selection, no more than 50 percent may be invested in property.
In my opinion, this is prudent. Diversification, or not putting all your eggs in one basket, It’s very important. Those of us old enough to remember 2007 and 2008 will remember that many Irish people got into trouble by overinvesting in property, often with large loans attached. Therefore, limiting the part of a pension fund that can be invested in property will protect people.
That said, it is important to note that the IORP II regulations only apply to company or company pension plans. The new rules do not apply to any other type of pension plan at all. Therefore, PRSAs are not affected, as are purchase bonuses, personal pensions and – most relevant to you – Approved Retirement Funds (ARFs) for retirees.
Any of these types of pension products can be invested in property exactly as before. If you want to buy a property with your pension fund when you retire, nothing has changed and you can still do it. Property has long been a popular investment to hold within a pension fund, as the fund does not pay income tax on rental income, nor does it pay capital gains tax on profits when the property is finally settled. for Sale.
It is also possible to buy a property and lease it to a local authority on a long-term lease, providing what is effectively a state-guaranteed income.
That said, just because you can doesn’t always follow that you should. Just as health food packaging tells you it can be beneficial as part of a balanced diet, property should be viewed as an asset as part of a balanced portfolio.
Are our lives overinsured?
PA Over the years, my husband and I have amassed a small collection of life insurance policies. We have a mortgage protection policy, two life insurance policies, one of which also has critical illness coverage, and has an income protection policy. My job provides income protection as part of the pension plan. We are paying several hundred euros a month on all these policies and I am wondering if we should cancel some of them or consolidate some to save money.
Geoff, County Kildare
AN Without knowing the full details of your financial circumstances, income and expenses, assets and debts, number of financial dependents (for example, children, elderly parents), I can’t tell you if you have too much coverage, too little coverage, or just enough, but I can tell you how to set this yourself.
First, make a list of all the policies you have. Find out exactly what each one covers and how much you’re paying for it. If you’re not sure, just check your bank statements, choose the names of the direct debit life insurance companies, and call each one to find out.
Then calculate what financial position you would be in if one of the insured events actually occurred. For example, suppose his take-home pay is €3,000 per month and he is 10 years away from retirement. The mortgage repayment is €600 per month. If he were to die, his household income would be reduced by his salary of €3,000 per month. The mortgage protection policy would presumably pay off the mortgage, thus freeing up €600 a month. The State Widow’s Pension would pay her husband about €900 a month.
In effect, your household income would be reduced by €1,500 per month for 10 years. That’s a loss of around €180,000. You must have that level of additional life coverage at a minimum.
You can do a similar exercise for the other coverages: critical illness coverage and income protection. That’s a very basic way of doing what’s known in the industry as a needs analysis.
Alternatively, a good financial broker will be able to carry out a more detailed needs analysis for you, taking into account other relevant factors such as the value of your pension funds, savings, how long your dependents will be financially dependent on you, etc. .
What happened to my pension statements?
Q I recently received my annual statement from my workplace pension plan. Due to Covid-19, there have been no salary increases since 2019, so there has been no change in my pension contributions since then. But the projected pensions on the return are lower on this year’s annual return when I compare it to last year’s return. Why would this be?
Fionnuala, Co Dublin
AN Pension planning is, by nature, a long-term process. There is no way to know in advance how your pension funds will perform, as they depend on future investment conditions.
So when preparing pension projections, pension plan managers use assumptions. One of the assumptions is the annual growth rate of your pension funds. Pension providers rely on the guidelines issued by the Society of Irish Actuaries for the growth rates they assume in projections.
It is important that the assumed future growth of the funds is not overly optimistic as this could give you an unrealistic expectation. For example, if the administrator of a pension plan gave you projections of what your pension would be in 20 years and assumed that the fund would grow 20% per year, the projected pension would look very promising and you could start making plans to buy a yacht and moor it in Monte Carlo once you retire.
But such projections would almost certainly be unrealistic, and the actual pension you receive at retirement would be significantly less. This is why the Irish Actuarial Society attempts to use future growth rate assumptions that are likely to be realistic.
In March of this year, the Company revised down said assumed growth rates. For equity funds, the future growth rate assumption was lowered from 5% to 4.5%. For fixed income funds it was reduced from 2.5% to 1%. For cash funds it was reduced from 1pc to zero.
In short, on your annual statement, the current value of your pension fund should have increased, but the projected future values would have decreased because the assumptions used to calculate these values are more cautious than last year.