Buy out bond

Tippsportsfan

I currently have a buy out bond worth €17000 ( after cost if leaving current one)I am 39 years old and willing to take risk to try get most out of it before I take out the least risky one when time comes. My current buy out bond is making approx 5% per year profit but was thinking of taking more risk in a property bond so would like people's opinions please.
Thanks.

garrettod

Hi,

Do you have other pension pots, or is this the only one ?

If it's the only one, then you are mad to invest it all in property, or any other single class of asset.

If you want potentially higher returns, you must be prepared to accept notably more risk. Try a mix of quoted equities, property and other alternative assets. The ratio invested in the various asset classes plays more of a part in the potential return, than the individual investments (i.e. a single share). If it were me, I would weight it something like 70% / 20% / 10%. Over the long term (25 yrs plus), you can expect growth of 7% - 8% pa on average, but expect to see individual years show significant losses along the way.

The real underlying concern for you here though, is that you need to be growing your pension fund significantly - which means putting money into a pension vehicle regularly. Have a look at the Pension Authority's website and in particular, put some figures into the calculator on this page . Assuming you are working, there are generous tax breaks to help you make these contributions.

Most pension advisors suggest that you aim to have a fund sufficient to provide you with 66% of your final salary, prior to retirement. Some would argue that you can deduct the current state pension from that amount (however, there are no guarantees that the state pension will still be available in it's current form, in 25 years or more, given the population is living longer, there will be more old people in the country in the future etc.).

Based on current low bond yields and longer life expectancy, I'd suggest that you multiply your desired annual pension by at least 30 times, to get a back of the envelope calculation on how much of a pension fund you should be trying to accumulate. Others may suggest that you can do this based on say 20 times, but I reckon that's not sufficient.

Hope this helps

Tippsportsfan

Hi Garrett,
This is my only pension from a previous employment that I transferred into a Zurich life dynamic fund on advice from a financial advisor, I am currently employed and have to wait another 12 months before I can join the company one. Should I just stay in the fund I am in and join company one when time comes as been honest I wouldn't be able to commit to paying into a monthly one ?.
Thanks for advice.

garrettod

Tippsportsfan wrote: »

Hi Garrett,
This is my only pension from a previous employment that I transferred into a Zurich life dynamic fund on advice from a financial advisor, I am currently employed and have to wait another 12 months before I can join the company one. Should I just stay in the fund I am in and join company one when time comes as been honest I wouldn't be able to commit to paying into a monthly one ?.
Thanks for advice.

Hi,

I am not overly familiar with that Zurich product, but I'm sure it's as good as most others. They are a reputable company etc.

You can make individual payments into a private fund, while waiting to join the company one in a year's time. Any pension advisor can arrange one for you and they are simple enough. I would urge you to do this, as every year counts and particularly, when you consider the tax breaks.

No one wants more bills, everyone reckons they can't afford to save for retirement, but with due respect here, you are 39 so getting close to half way through your working life and you've only got €17k saved. That's less than 5% of what you need in retirement. Every year you wait, you are putting a larger burden on yourself, perhaps even making it a near impossible task (unless you've other plans for retirement outside of an actual pension).

If you are in the higher tax bracket, then paying in €100pm would only cost you about €55pm after tax relief is applied. Over 12 months that's €1,200 and by investing it this year, you have potentially got 28 years of growth, so in theory that could be worth over €3.6k when compounding is considered. That's potentially €3.6k for payments of circa €660 now !

By all means join the company pension plan when the opportunity arises and max out whatever opportunities are there for you, but in the interim, I would be doing something myself ... no matter how small

Tippsportsfan

Thanks Garrett,
Will look into what your saying. Just one last question, if the bond I am in at the moment has a 8-10% average return what would return be on 26 year policy.

garrettod

Tippsportsfan wrote: »

Thanks Garrett,
Will look into what your saying. Just one last question, if the bond I am in at the moment has a 8-10% average return what would return be on 26 year policy.

Hi,

Firstly, I'd be amazed if the Buy Out Bond that you are currently invested in, is returning 8% - 10% pa, over the medium to long term.

Over the long term, you can expect the following guideline returns:

Quoted equities 7% - 8% pa
Property 5% pa
Other Alternatives 5% - 6% pa
Corporate and State Bonds (combined) 4% pa
Cash (and near cash) 1% - 2% pa

So, in order for the investment that you hold to be returning an average of 8% - 10% pa, then their investment managers need to be beating the market significantly and on an ongoing basis. The odds of that are similar to the odds of winning the Lotto, imho.

Few investment managers beat average returns on an occasional basis, not alone on a consistent basis.

However, if we said an average return of 8% pa over the long term, then a 26 year investment might see your €17k increase to circa €50k. I think that's about the best you could hope for and depends on a few things, including your investment strategy (i.e. that you've invested heavily in equities and not primarily in cash / deposit accounts )

Tippsportsfan

Thanks Garrett for all your help and advice really appreciate it.