Advice on Interest rates and starting a pension

Vasco

Hello,

I was hoping if someone could offer me some advice on two points.

I currently have a mortgage with AIB and am on the low variable rate which is great. I'm hearing that the Banks will soon start putting up the interest rates and when they do they will continue to go up.

Should I fix in now before they do and if so for how long?

Secondly I want to start a pension. However I have been discouraged by hearing stories of people getting their pensions wiped out recently and this seems to happen every ten years or so for one reason or another.

I would like to start a pension that I can put variable amounts into. Increase the amounts when I'm flush and decrease when I’m broke. (No I’m not a professional gambler) My income fluctuates allot depending on what contract I get, but can be quite high sometimes.

I know nothing of pensions or how they work. any advice would be greatly appreciated.

I'm 29yrs.

Thank you.

Long Onion

Vasco wrote: »

Hello,

I was hoping if someone could offer me some advice on two points.

I currently have a mortgage with AIB and am on the low variable rate which is great. I'm hearing that the Banks will soon start putting up the interest rates and when they do they will continue to go up.

Should I fix in now before they do and if so for how long?

Fixing your mortgage is essentially an insurance policy which gives you certainty of premium at times where interest rates are uncertain. The lenders will charge a premium above and beyond the standard for this peace of mind, the actual amount of that premuim will be determined by the likelihood of future rises.

Those on a traker would be badly avised to move to a fixed rate without a written guarantee that they can revert to the tracker once the fixed period expires. For those on variable rates, the issue is slightly fuzzier.

Following the ECB's decision to leave rates on hold yesterday and the accompanying post-meeting statement, the common view is that rate rises from this source are unlikey in the near term. As regards the Irish banks decision, it appears that those covered under the government guarantee scheme have been instructed to refrain from ratcheting up mortgage rates at present.

That being said, IL&P broke ranks recently and, in the medium to long term it is not sustainable for the banks to continue to offer current depost rates without increasing borrwings rates. In my opinion there will be variable rate rises in the early part of the new year post the first phase of NAMA.

You have a dilemma in the meantime - then banks are already aware of when they are going to increase the rates and this is already factored into the fixed rates on offer, the unknown for them is the ECB rate, the more likely it looks, the higher the rate on the fixed offerings will be. If we are to believe the current consensus, there is unlikey to be a move here at all until the back end of next year so. You will likely pay 12 months of a premium without any tangible saving.

Personally, I don't like fixed rates, the bank rarely lose on these so the customer ends up paying over the odds. The question is whether you are willing to pay a premium for the peace of mind - my gut feeling tells me the best course of action is to get a quotation for a fixed rate and compare it with your current offering - what ever the extra cost is, begin to put it in a deposit account nowand build up a 'war chest' on which you can earn good interest (if placed in a regular saver account) and use to supplement your current payments when rates do begin to rise. I have met very, very few people who have ended up financially better off after choosing a fixed rate.

If you do decide that the peace of mind is worth the extra cost, then my advice is to switch to a fixed rate now, or in the very near future, rates are as low as they will go so there is no risk of losing out on the downside and, as mentioned above, the banks have already factored in domestinc raises to the fixed rate offerings.

Vasco wrote: »

Secondly I want to start a pension. However I have been discouraged by hearing stories of people getting their pensions wiped out recently and this seems to happen every ten years or so for one reason or another.

I would like to start a pension that I can put variable amounts into. Increase the amounts when I'm flush and decrease when I’m broke. (No I’m not a professional gambler) My income fluctuates allot depending on what contract I get, but can be quite high sometimes.

I know nothing of pensions or how they work. any advice would be greatly appreciated.

I'm 29yrs.

Thank you.

Some people have suffered losses in their 'pension values' due to recent market volatility, this is not such a worry for those who have some distance to go to retirement (though it may help them revaluate their attitude to risk) but it has more serious repercussions for those due to retire in the near future. Before you are put off the idea of pensions by the negative media (You rarely see the positive gains plastered on the front pages) there are a number of matters to consider.

1) Tax relief. Should you take out a personal pension (or PRSA) your contributions (provided they stay within revenue approved limits) will qualify for tax relief at your marginal rate. For a higher rate tax payer, once tax, levy and PRSI relief are factored in, the state, effectively funds 49% of your pension for you.

This represents an immediate return on your pension of 49% even if your fund does not grow at all! It, conversely means that your fund would have to fall in value by 50% or more before you have lost any of your own money. Few pensions that have been invested for over 10 years have suffered this degree of loss (unless they have been to narrowly focused)

2) Investment choice. Many people are not fully aware of the options available to them. There is no requirement to invest your pension in risk based funds and you could choose to leave them in a deposit account or in some gilt or bond fund. The interest yields in these funds are rarely attractive for a long term investor but, when you factor in the above mentioned tax reliefs, it is still excellent value and removes a huge degree of risk.

3) Lifestyle options. Many pension offerings offer an automatic facility whereby your fund is gradually transferred into a secure option as you get closer to retirement - this helps shield against sudden falls in value in the years immediately preceeding your retirement. If you are unlikely to take an active interest in your pension administration, these can be a good way to shiled yourself.

Overall, pensions are an excellent and very efficient way to save for your future but good advice and a realistic attitude is essential before taking one out. Higher rate tax payers are crazy if they do not take advantage of the reliefs available. PRSA plans are available as an alternative to personal pensions, as to which is the best option, you should seek some advice and comparative quotations.

As regards the issue of flexibility of funding, my advice would be to set up an affordable regular monthly payment to take advantage of lower fees and charges whilst spreading the risk of overpaying for units in your fund, you can top up accordingly at the end of the tax year with a one off lumpsum, determined by your tax liability and cashflow.

V Good Post.

100gSoma

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Long Onion

Glad to be of help.