Could someone explain pension investments simply to me?

batman1

I have a pension but not much knowledge of them. I understand the tax relief and how the pension is used in retirement etc.

Perhaps more of a general investment question but I was looking at a couple of statements today and was just curious after as to how it all actually works as I pay my monthly amount into it.
For example, last year it said it was worth 161k and I'd paid in 143k. This year it's 163k and i've paid in 154k. If that continued would that mean that next year I'd be paying in more than the value as I pay in just over 11k per year.

This might be a complete silly question....

garrettod

batman1 wrote: »

I have a pension but not much knowledge of them. I understand the tax relief and how the pension is used in retirement etc.

Perhaps more of a general investment question but I was looking at a couple of statements today and was just curious after as to how it all actually works as I pay my monthly amount into it.
For example, last year it said it was worth 161k and I'd paid in 143k. This year it's 163k and i've paid in 154k. If that continued would that mean that next year I'd be paying in more than the value as I pay in just over 11k per year.

This might be a complete silly question....

Hi,

It's not a silly question - unfortunitely, pensions can be quite confusing.

What's happened is that the total of your pension fund has lost value, since a year earlier. It will continue to increase, and decrease, over time, based on the value of the underlying investments (most likely stocks and bonds).

There are a few basic questions that should govern how your pension funds are invested. Your answers to these questions may change over time, and the way your funds are invested, can also change over time.

The questions are based around such things as:

* what age you are?

* how you feel about risk?

* what your plans are for retirement?

* how secure your income is?

etc etc.

Depending on your answers, you'll be categorised as having a certain risk weighting appetite (typically between 1-7, with the higher number representing the greater appetite for risk).

In very simple terms, the theory is that younger people should invest in higher risk, then gradually reduce risk, as they get older, so by the time they reach retirement, their fund is very low to zero risk.

garrettod

There's some useful information on the following website

https://www.pensionsauthority.ie/en/lifecycle/investment_risk_and_reward/investment_risk/

Geuze

Find the names of the funds your contributions are in.

Find out the associated fees/charges.

Happyhouse22

Going to have a go at answering this - it’s a huge question so probably won’t get too far but worth attempting.
First think to say is I am a complete beginner to this- 8 weeks ago I know absolutely nothing about pensions and was somewhat sceptical about them , but after lots of research in places like ask about money, reading blogs and listening to podcasts (I especially recommend informed decisions with Paddy Delaney) I have some ideas now

- Firstly because of the tax relief investing in a pension is absolutely beneficial. Sounds like you get this but think it is worth saying, if you are a 40% tax payer and contribute 11,000 it only costs you 6,600 so already you are on a winner.

- Most pension schemes in Ireland have their money invested with insurance companies in managed funds. These funds have a myriad of charges that eat into your money. Charges I have come across include an annual management charge AMC which is usually between 0.5% and 2%. The lower this is the better as with a 2% charge your fund needs to make a 2% profit just to break even.
The next thing to look out for is allocation rate. This means how much of your contribution is actually allocated to your pension. This can be as low as 95% which means for every 100 euro you contribute 95 goes to your fund and the other 5 is just taken. This is obviously terrible and you really need to find a pension that offers 100% allocation, I think some even offer 101% and 102% - but these will have other charges.
Some pensions also have fixed admin charges, from what I have seen these are pretty low,Say €60 per year- and their relative impact diminishes as the fund increases.

- Usually different types of funds are available to invest in, from low risk to high risk. Low risk usually involves investing your money in cash or bonds and high risk funds invest in equities.Many funds offer a mix of these (and other asset classes) weighted depending on your risk profile My completely amateur research suggests that really with a long term horizon you should be investing in almost entirely in. equities - over the long term equities have always historically risen and while there maybe be big falls over a year or two or even five, over a 30 year period they always rise, in contrast investing your pension in lower risk options almost guarantees that it’s value will be diminished by inflation.

So basically if your pension pot is not growing it’s because of a) charges and b) it’s invested in the wrong things. That said for your pot to only grow by 2,000 last year despite contributing 11,000 seems crazy as stock markets generally rose last year so maybe something else was going on. What kind of funds is your pension invested in?

Wanderer78

batman1 wrote:

This might be a complete silly question....

Pensions are investment funds, and markets vary, covid is probably throwing markets all over the shop. they're complex ponzi schemes for all the world, and by the looks of things, won't be able to pay out what's actually needed, so there's a good chance, we ll all end up in sh1tter together regarding them

OP, are you investing in a very low risk pension investment?

I'd expect to see a much bigger return for the money invested. At least double the investment. And double would be a low return in today's market.

That's the first thing I'd change unless you are a few years from retirement.

My guess you are investing in a cautious growth fund, or even cash. Maybe bonds if they haven't performed well recently.

Try to find out the investment funds you are paying into, and the percentage going into each.

Henry Ford III

Get proper advice O.P.

Investment is a huge area and the specifics of your situation would only be available to the insurer and person or business who advised you to invest.

Those are the best places to start.

The J Stands for Jay

Wanderer78 wrote: »

Pensions are investment funds, and markets vary, covid is probably throwing markets all over the shop. they're complex ponzi schemes for all the world, and by the looks of things, won't be able to pay out what's actually needed, so there's a good chance, we ll all end up in sh1tter together regarding them

Think your mixing up private pensions and government pensions here, pal.

Wanderer78

McGaggs wrote: »

Think your mixing up private pensions and government pensions here, pal.

all pension funds are in the same boat, we better start thinking what to do about it, and fast

Buddy Bubs

I'd get advice from the provider or from an independent advisor.
Sounds like you're paying in for quite a while and apart from a few years at tail end of decade coming up to 2010, there have been great investment returns. Covid this year was a temporary setback but markets have recovered.

The growth in my pension funds exceeds what you have said there by some distance.

Even a PRSA I had before I had occupational pension that I paid 7k into over 2 years back in 2006/2007 has 14k in it now, I get statements on that twice a year.

garrettod

Hi Everyone,

It all depends on what the original posters funds are invested in - posting general statements about performance, without knowing the specifics, isn't helpful.

If the original poster is heavily invested in things like higher risk growth stocks, they probably have dropped back on last year - consider the electric vehicle market, for example, prices are down on the likes of Tesla etc. The same can be said for retail (commercial) properties. That's not to say that the original poster may not be invested in the wrong stocks, or other investments, but no one knows atm.

If the original poster is willing, perhaps they could post details of what age group they are in (nearest decade is fine), what pension company they are with, what fund they are invested in.

Also, what investment options they have - this, and also the annual charges, will be available from the pension provider, if not already known. When asking about actual charges, all for a break down of all applicable fees.

Wanderer78

Wanderer78 wrote: »

Pensions are investment funds, and markets vary, covid is probably throwing markets all over the shop. they're complex ponzi schemes for all the world, and by the looks of things, won't be able to pay out what's actually needed, so there's a good chance, we ll all end up in sh1tter together regarding them

OP, I'd ignore this tbh.



Speak to a professional would be the best advice.

Wanderer78

6 wrote: »

OP, I'd ignore this tbh.



Speak to a professional would be the best advice.

really, everything is just fine with funds, when governments and employers are all running from them!

yes, it makes sense to get professional advice, but....

Wanderer78

Wanderer78 wrote: »

really, everything is just fine with funds, when governments and employers are all running from them!

yes, it makes sense to get professional advice, but....

No offence, but you clearly don't know what you are talking about.

It's definitely not helping the OP anyway.

---

OP, as I said get professional advice. You'll also get good information over at the Askaboutmoney site. The regulars over there are very knowledgeable. Good luck

Henry Ford III

Happyhouse22 wrote: »

.....So basically if your pension pot is not growing it’s because of a) charges and b) it’s invested in the wrong things. That said for your pot to only grow by 2,000 last year despite contributing 11,000 seems crazy as stock markets generally rose last year so maybe something else was going on. What kind of funds is your pension invested in?

Nonsense.

Whilst charges will inevitably have an effect on growth they are not the most important consideration.

Wanderer78

6 wrote: »

No offence, but you clearly don't know what you are talking about.

It's definitely not helping the OP anyway.

---

OP, as I said get professional advice. You'll also get good information over at the Askaboutmoney site. The regulars over there are very knowledgeable. Good luck

pension funds are in trouble, this is clearly obvious, we need a rethink, and fast

thebiggestjim

Henry Ford III wrote: »

Get proper advice O.P.

Investment is a huge area and the specifics of your situation would only be available to the insurer and person or business who advised you to invest.

Those are the best places to start.

O.P. - ordinarily I would agree with this 100% but not when it comes to pension investments in Ireland. I have spoken to three different pension advisers in Ireland and have been lied to by all three about fees and the appropriate funds to invest in (actively managed vs. passively managed). A lot of people will be receiving nasty shocks when they see what type of incomes their pensions will support in retirement after Tax (yes you will be taxed on pension income by the Irish government). Step 1 for you O.P. is to educate yourself on what you can control and pull those levers to give yourself the best return possible, you have started that process here. There are 3 levers I believe Irish pension investors should focus on, most of the rest is just noise IMHO.

1. Diversify your portfolio across asset classes and across regions: Passively managed funds offer better returns in the long run compared to actively managed funds. Your pension advisor in Ireland will not tell you this as they don't make much money off Passively managed funds. (Google away if you need more info on this)
2. Keep your fees low: An annual management charge of anything above 0.25% is criminal and will hugely eat away at your final pension pot. This point is where pension advisor lies really comes to the fore. Test is out if you like. Play stupid with your pension advisor and ask them what you should invest in. There is not a pension advisor in Ireland that will recommend a low cost passively managed fund.
3. Rebalance your portfolio over time (a long time): In your 30s you should be 90% stocks 10% bonds. In your late 50s / early 60s you should start changing this ratio gradually so that when you retire this ratio is 10% stocks 90% bonds depending on your risk tolerance.

Hope this helps.

Henry Ford III

Wanderer78 wrote: »

Pensions are investment funds, and markets vary, covid is probably throwing markets all over the shop. they're complex ponzi schemes for all the world, and by the looks of things, won't be able to pay out what's actually needed, so there's a good chance, we ll all end up in sh1tter together regarding them

Be factually accurate please.

thebourke

https://www.irishexaminer.com/news/arid-40269767.html

Henry Ford III

Wanderer78 wrote: »

pension funds are in trouble, this is clearly obvious, we need a rethink, and fast

Why are pension funds in trouble? Please explain.

thebiggestjim

Henry Ford III wrote: »

Nonsense.

Whilst charges will inevitably have an effect on growth they are not the most important consideration.

This is nonsense, costs hugely affect the growth of your pension funds and are one of the few things the investor can control. See what john Bogle, the founder of Vanguard has to say:

https://www.nytimes.com/2019/01/17/business/mutfund/john-bogle-vanguard-investment-advice.html

Costs are out of control in this country.

The J Stands for Jay

Wanderer78 wrote: »

all pension funds are in the same boat, we better start thinking what to do about it, and fast

Could you explain what the government paying pensions out of current tax/prsi receipts and not funding for future pension liabilities has to do with my Vanguard tracker funds?

sbs2010

Henry Ford III wrote: »

Nonsense.

Whilst charges will inevitably have an effect on growth they are not the most important consideration.

HH22 is dead right with this:

"That said for your pot to only grow by 2,000 last year despite contributing 11,000 seems crazy as stock markets generally rose last year "

This is a major concern. I hope op has made a mistake with his numbers because the only way it makes sense if all his funds are in hospitality and airline

OP, first thing you should do is get a statement showing input, charges and fund growth.

Find out where the 9k went and decide whether you need different funds, different charges or what.

jimmycrackcorm

Wanderer78 wrote: »

pension funds are in trouble, this is clearly obvious, we need a rethink, and fast

You are confusing pension funds with the government pension which is funded by current taxpayers and is essentially not a "fund".

garrettod

If this thread has done one thing, it has shown just how much confusion there is about pensions.

I'm not a pension expert, but I have passed a number of relevant exams, and work with people in the industry regularly...

Some of the people here haven't got a clue what they are taking about, and yet are making rediculous statements about how all funds should have performed over the last 12 months, what fees are correct etc. These people are true examples of where a little knowledge is a dangerous thing. I think they all need to go get some professional advice themselves, tbh.

Best advice is obtained from an independent Certified Financial Planner imho. They'll charge you a fee, and won't try to sell you any particular product, so they've no potential conflict of interest.

Henry Ford III

garrettod wrote: »

If this thread has done one thing, it has shown just how much confusion there is about pensions.

I'm not a pension expert, but I have passed a number of relevant exams, and work with people in the industry regularly...

Some of the people here haven't got a clue what they are taking about, and yet are making rediculous statements about how all funds should have performed over the last 12 months, what fees are correct etc. These people are true examples of where a little knowledge is a dangerous thing. I think they all need to go get some professional advice themselves, tbh.

Best advice is obtained from an independent Chartered Financial Planner imho. They'll charge you a fee, and won't try to sell you any particular product, so they've no potential conflict of interest.

I think you're largely correct above.

CFP aren't necessarily any better than a QFA btw.

Pensions should be taught in schools to all students. They aren't complex, but so many adults think that they are.

This leads to poor investing or even worse none at all. It definitely leads to poorly educated adults on the subject.

I personally know some people who pay the minimum of 1% at their company. The company matches that 1%. However, if they pay 5 the company will pay 10!

Rough maths showed them that paying 1000 a month into a pension will cost a them net about 370 a month!

You'll probably be in or around half a million pension pot after 25/30 years with that. Again rough maths from memory. I'm probably being conservative tbh, given the compounding aspect. Obviously this is a fund(s) that is allowed to grow, eg equities. Taper it down closer to retirement into cash or lower risk funds if required.

cruizer101

6 wrote: »

Pensions should be taught in schools to all students. They aren't complex, but so many adults think that they are.

They can be though if you get into the details of them, where to invest, what are best funds etc, and I think pension companies probably are no help there, by making it seem complicated it is easier for them to charge more.

But yeah the basics of pay money pre tax to get a big bonus and stick it in a fund are simple enough.

One simple thing that would massively increase uptake of pensions is to make it opt out. By default any employer should enroll you in a pension scheme for say 5% of gross. You are more than welcome to opt out, its your money, but the vast majority won't be arsed they will just go along with it and pay it.

garrettod

Henry Ford III wrote: »

.. CFP aren't necessarily any better than a QFA btw.

My reason for saying that I'd opt for the CFP, is because more work in independent roles... Most QFAs work in Banks, Insurance Companies, Brokerages etc that are often tied to specific pension companies, so are potentially conflicted (or at risk of being conflicted).

And I'm not a CFP, or studying to become one, btw

garrettod

6 wrote: »

Pensions should be taught in schools to all students...

I'd agree that they should cover pensions, at a preliminary level, in secondary school. That, how to manage your financial affairs etc. You could combine a few things, to make a good 4th year subject.

murphyebass

Henry Ford III wrote: »

I think you're largely correct above.

CFP aren't necessarily any better than a QFA btw.

Aren’t necessarily, but more than likely are more knowledgable as the CFP is a far more intense proposition than the QFA.

Having completed the QFA a number of years back and am going to be sitting my final grad dip exam in financial planning before Xmas this year before sitting the CFP exam in Feb 2022 I can tell you they are an absolute world apart.

QFA is 6 fairly simple exams. Multiple choice. NCQ level 7.

Grad dip in financial planning (which then leads to the CFP exam, if you want to sit it) is another 6 modules and NCQ level 9, all written exams.

Most people will have completed the QFA prior to sitting the grad dip in financial planning because it has been the industry standard for financial services for many years in Ireland.

The CFP is becoming the new norm or benchmark for financial advice here and is recognised as a world wide qualification as opposed to the QFA which is pretty much useless outside of Ireland.

All of that said there is without question some very bright QFA’s and Grandfathered advisers who are well capable of doing the CFP and advise just as well as one for the most part but just couldn’t be bothered putting the vast amount of time in to do get the qualification.

Ultimately if a family member asked me who to go to outside of talking to me I’d make sure the person they sought advice from was a CFP without question.

dunnerc

6 wrote: »

Pensions should be taught in schools to all students. They aren't complex, but so many adults think that they are.

This leads to poor investing or even worse none at all. It definitely leads to poorly educated adults on the subject.

I personally know some people who pay the minimum of 1% at their company. The company matches that 1%. However, if they pay 5 the company will pay 10!

Rough maths showed them that paying 1000 a month into a pension will cost a them net about 370 a month!

You'll probably be in or around half a million pension pot after 25/30 years with that. Again rough maths from memory. I'm probably being conservative tbh, given the compounding aspect. Obviously this is a fund(s) that is allowed to grow, eg equities. Taper it down closer to retirement into cash or lower risk funds if required.

A lot of people cant afford 370 a month into a pension , I also know people who only pay the minimum 1 % which there company matches , the reasons i have been told vary from its all they can afford right now due to mortgages creche fees etc , to they want to enjoy life now to the full , not when they are 65+ and to old to. Each to there own i say .

The J Stands for Jay

Henry Ford III wrote: »

I think you're largely correct above.

CFP aren't necessarily any better than a QFA btw.

CFP are better than QFA in that they have a better qualification. QFA is far too easy to get.

Henry Ford III

garrettod wrote: »

My reason for saying that I'd opt for the CFP, is because more work in independent roles... Most QFAs work in Banks, Insurance Companies, Brokerages etc that are often tied to specific pension companies, so are potentially conflicted (or at risk of being conflicted).

And I'm not a CFP, or studying to become one, btw

Nah.

The vast majority of QFAs are independent, and can charge on a fee basis with no commission and no conflict of interest.

I've plenty of direct experience in this area btw.

Henry Ford III

McGaggs wrote: »

CFP are better than QFA in that they have a better qualification. QFA is far too easy to get.

How do you compare the 2? I've contacts who have both and say there's nothing in it.

I can see it's rated Level 7 vs Level 9.

p.s. There's no guarantee at all that you'll get better advice from a CFP over a QFA or vice versa.

Jim2007

Wanderer78 wrote: »

pension funds are in trouble, this is clearly obvious, we need a rethink, and fast

A statement like this is completely pointless. Do you want to provide us with a factual reference that you based this on, or at least tell us which talking head you were listening to at the time.

Jim2007

batman1 wrote: »

I have a pension but not much knowledge of them. I understand the tax relief and how the pension is used in retirement etc.

Perhaps more of a general investment question but I was looking at a couple of statements today and was just curious after as to how it all actually works as I pay my monthly amount into it.
For example, last year it said it was worth 161k and I'd paid in 143k. This year it's 163k and i've paid in 154k. If that continued would that mean that next year I'd be paying in more than the value as I pay in just over 11k per year.

This might be a complete silly question....

It is prudent to make the effort to understand you pension fund, no doubt about it.



The problem is that you are not providing us with sufficient information for us to give you any valid comments. It's like asking us if a piece of string is long enough without telling us what the string is going to be used for....


Pension funds are not generic, they vary greatly in terms of investment and return. So perhaps you could start by telling us the types of investment that is in your fund......

Happyhouse22

garrettod wrote: »

If this thread has done one thing, it has shown just how much confusion there is about pensions.

I'm not a pension expert, but I have passed a number of relevant exams, and work with people in the industry regularly...

Some of the people here haven't got a clue what they are taking about, and yet are making rediculous statements about how all funds should have performed over the last 12 months, what fees are correct etc. These people are true examples of where a little knowledge is a dangerous thing. I think they all need to go get some professional advice themselves, tbh.

Best advice is obtained from an independent Chartered Financial Planner imho. They'll charge you a fee, and won't try to sell you any particular product, so they've no potential conflict of interest.

Fair enough- I was the person who posted my thoughts this morning and revived this thread. I tried to be very clear that I didn’t know much about pensions and am only learning - but I felt bad that the OP had not gotten many replies and none that really attempted to answer his question. I gave it my best shot and if nothing else it prompted some debate.

murphyebass

Henry Ford III wrote: »

How do you compare the 2? I've contacts who have both and say there's nothing in it.

I can see it's rated Level 7 vs Level 9.

p.s. There's no guarantee at all that you'll get better advice from a CFP over a QFA or vice versa.

There’s no guarantee of anything in life. A nurse could give better advice than a doctor in certain circumstances but you’re going to go for the highest qualified person and potentially a consultant if needing specialist advice.

A monkey could pass the QFA. It’s piss easy with literally on a few days of cramming required to pass if you’re any way bright.

The CFP is two levels above it for a reason. It’s an in-depth look into financial planning. A lot of calculations and a deep dive into someone’s finances, tax, pension planning etc..

garrettod

Henry Ford III wrote: »

Nah.

The vast majority of QFAs are independent, and can charge on a fee basis with no commission and no conflict of interest.

I've plenty of direct experience in this area btw.

Not trying to undermine you, but we're clearly keeping company in very different circles... and I happen to have some direct experience here too

We agree that you don't have to have a particular qualification, although I would agree with murphyebass regarding the QFA exams, compared with the CPA exams, and level of knowledge and expertise that I would associate with them etc.

We also agree that a QFA can just charge a fee for advice, they don't have to be commission driven...

But where we differ, is in the amount of QFAs that are genuinely independent. To use an example, I don't consider a QFA working in a multi-agency brokerage to be independent for example, do you? Thereafter, I'm not sure why we see this one so differently, unless you've access to a listing of where all QFAs work, for example?

Maybe, as I said above, we just move in very different circles (not that all of this really matters btw)

batman1

Jim2007 wrote: »

It is prudent to make the effort to understand you pension fund, no doubt about it.



The problem is that you are not providing us with sufficient information for us to give you any valid comments. It's like asking us if a piece of string is long enough without telling us what the string is going to be used for....


Pension funds are not generic, they vary greatly in terms of investment and return. So perhaps you could start by telling us the types of investment that is in your fund......

So it looks like the printed statement was incorrect. I finally got onto the online portal and it shows my contributions are 161k and the fund is 202k. As I'm in my early 40s, does this look reasonable for my age?
The pension is with Aviva L&G ARF

Henry Ford III

garrettod wrote: »

Not trying to undermine you, but we're clearly keeping company in very different circles... and I happen to have some direct experience here too

We agree that you don't have to have a particular qualification, although I would agree with murphyebass regarding the QFA exams, compared with the CPA exams, and level of knowledge and expertise that I would associate with them etc.

We also agree that a QFA can just charge a fee for advice, they don't have to be commission driven...

But where we differ, is in the amount of QFAs that are genuinely independent. To use an example, I don't consider a QFA working in a multi-agency brokerage to be independent for example, do you? Thereafter, I'm not sure why we see this one so differently, unless you've access to a listing of where all QFAs work, for example?

Maybe, as I said above, we just move in very different circles (not that all of this really matters btw)

Maybe and maybe not.

The mandatory Terms of Business letter will set out how they get paid, and all fees, charges, and commissions must be disclosed in any event.

Fee based assignments - be they fixed price, hourly rate, or a hybrid commission/fee with offset are becoming increasingly common.

The J Stands for Jay

murphyebass wrote: »

A monkey could pass the QFA. It’s piss easy with literally on a few days of cramming required to pass if you’re any way bright.

Speaking as a QFA, I'd say you could pass 4 of the 6 exams without any cramming.

garrettod

McGaggs wrote: »

Speaking as a QFA, I'd say you could pass 4 of the 6 exams without any cramming.

So, if you work in the pension industry, then your thinking that you need to cram for Loans and Financial Planning?

..... If you work in Banking, swap the Loans module for Pensions

The J Stands for Jay

garrettod wrote: »

So, if you work in the pension industry, then your thinking that you need to cram for Loans and Financial Planning?

..... If you work in Banking, swap the Loans module for Pensions

I was thinking you'd need to cram for regulation (the rules aren't all logical) and financial planning. For loans, having seen a few ads for mortgages would be enough studying.

Skill Magill

As someone who doesn't have a pension it seems the best advice from this thread is to go to an independant financial advisor, how do you go about that, not knowing any? Yellowpages or its online equivelant? Or do you get them through word of mouth?

sbs2010

If this thread has taught us anything, it is that most people just want to waffle on about their own issues.

The OPs first question was based on hugely incorrect information from a wonky statement but no one picked up on that and it descended in a squabble about qualifications.

OP has since clarified his figures and no one has ventured any opinion.

And the - get professional advice - advice is a cop out unless you add something extra. If everyone stuck to that this forum wouldn't exist.

I'm qualified in SFA by the way.

Henry Ford III

This has descended into nonsense. I'm closing it.