Pension Vs Investment Property

magpie

OK, here's the deal.

I recently took out a Pension fund that will pay out €600k in 34 years time, which is costing me approx €500 per month, including life insurance.

I've been thinking about this, and €500 per month would pay a mortgage of €120K, so if you factor in rent etc I should in theory be able to get an apartment for around €350k as an investment with the same money.

So which is a better bet? Will property continue to accrue value? Obviously it will be paid off sooner than the pension. Your thoughts please.

MG

Remember the pension contributions are not included in taxable income so the €500 you are putting in is effectively costing you €280 (if my maths are correct and dependant on your earnings & marginal tax rate). I was wondering the same thing about pensions v property but is there any value left in property in Ireland? My instinct is no. There may be value abroad but that brings its own problems.

Also, "They" never tire of telling us too that over time stocks outperform all other investments.

magpie

Yes, the 42% tax break is pretty good alright.

I just wander about the fact that property also brings in a rental return once the mortgage is paid off, as well as being a lump-sum asset.

MG

It's all a gamble really i suppose. Personnally, I feel that property is, how should I put it, "not undervalued" in Ireland. If interest rates rise, and they will, then any investment in property would be hit on three sides, the capital value would fall, the mortgage repayments would rise and rents would fall.

Just to illustrate, imagine if the interest rate went up and this happened (figures made up to illustrate);
Pre- int rate rise: Mthly Mortgage 1500 Rent 1000 Net mortgage 500 Capital value 300,000

Now after: Mortgage 1700 Rent 800 Net Mortgage 900 Capital Value 250,000

I'm not advising one way or the other BTW, I just feel that about 5 years ago people were mad about shares, setting up share clubs etc and that bubble burst. Now there seems to be property fever and I wonder will it end up a happy story?

magpie

Where did I leave that Crystal Ball?

madramor

the pension is a no brainer with the breaks tax+prsi+health

if you have 34 years togo property is a good idea over that period
but i would wait a few years to get into property, as it is definitely
over valued and it would cost you a bundle to get started/keep running

investment mortage higher interst rate also loan/value bigger so further higher
rate.
apartment maintenance charges these usually double in the first 3 years
if you buy a new property as builders suplement them.
tough rental market for owners
possible governement intervention new tax

i'm assuming you already have a property/mortgage your home.

magpie

i'm assuming you already have a property/mortgage your home

Correct

MG

madramor wrote:

i'm assuming you already have a property/mortgage your home.

Effectively you already invest a lot of your income in property through your mortgage so a pension is spreading your risk as your pension is probably 70-80% in shares.

Nuttzz

magpie wrote:

OK, here's the deal.

I recently took out a Pension fund that will pay out €600k in 34 years time, which is costing me approx €500 per month, including life insurance.

if you think that it WILL pay out 600k you are mistaken, the broker/pension company hopes that it will pay out 600k based on current market trends, but its not definite

RainyDay

You're comparing apples and oranges here. It's not a straight A or B comparison.

Your point about 'the apartment would be paid off earlier' doesn't stand up. If you invested in a bicycle (instead of an apartment or a pension), it would be paid off much earlier - does that make it a better investment? I'm not clear how you made the jump from a €120k mortgage to a €350k apartment?

Don't get blinded by greed at the prospect of 'brings in a rental return once the mortgage is paid off'. Any substantial asset will bring in an income. If you have a substantial pension or share portfolio, this will bring in a dividend income. If you have a pile of cash in the bank, this will bring an interest income. Many assets will bring in an income - the real question is will you get a good return on your money.

As I understand it, rental property yields are not great at present (2% - 3%). By contrast, dividend income yields from AIB/BOI are around 3.5% - 4%. Of course, no-one knows what these markets will be returning in 20 years time, but history does show that a long-term investment in the stock market will beat property time & time again.

As MG points out, you also need to consider diversification, or 'spreading your bets'. Your biggest asset is probably your residence. If you put all your remaining investments into the residential property market, then your future financial wellbeing is hugely dependant on this market only. A UK-1980's style property collapse would have a major impact on your life. [I'm not saying I think this is very likely, but it certainly is possible]. On the other hand, if you put your remaining investments in the stock market, you will reduce the impact of any such collapse.

You also need to consider the tax impacts. There are big tax benefits available for pension contributions, within the approved limits. There are also big tax benefits available for property investors (uncapped mortgage interest relief, for example), but there is a greater chance that the property benefits will be restricted or removed at some time in the future by a Govt that isn't in the pocket of property developers.

Think about the time/hassle factor too. Your pension fund manager won't be ringing you at 10 pm on Christmas eve to get you to fix the broken heating. Your tenant will. Your pension fund manager won't ring you to complain about the other guy in the office who keeps leaving his jockies in the loo. Your tenant will. Your pension fund manager won't leave your asset empty for 2 months of the year. Your tenant will.

You've probably gathered that I'm not a great fan of the Irish penchant for residential property investment. But you need to run the numbers for your own scenario carefully to see what is best for you. What rent are you expecting? How many months of the year will the property be vacant? What will it cost you to maintain the property etc.

If you do go down the pension road, check very carefully to see what fees and charges apply, or you may find that you are funding the salesman's pension instead of your pension. Look for bid/offer spread, allocation rate, annual management fees. The proposal from your broker should show the fees & commissions clearly. Post details back here if you want to compare options.

Have a good read of the Askaboutmoney.com Guide to Savings & Investments to understand your options a bit better.

lomb

RainyDay wrote:

You're comparing apples and oranges here. It's not a straight A or B comparison.

Your point about 'the apartment would be paid off earlier' doesn't stand up. If you invested in a bicycle (instead of an apartment or a pension), it would be paid off much earlier - does that make it a better investment? I'm not clear how you made the jump from a €120k mortgage to a €350k apartment?

Don't get blinded by greed at the prospect of 'brings in a rental return once the mortgage is paid off'. Any substantial asset will bring in an income. If you have a substantial pension or share portfolio, this will bring in a dividend income. If you have a pile of cash in the bank, this will bring an interest income. Many assets will bring in an income - the real question is will you get a good return on your money.

As I understand it, rental property yields are not great at present (2% - 3%). By contrast, dividend income yields from AIB/BOI are around 3.5% - 4%. Of course, no-one knows what these markets will be returning in 20 years time, but history does show that a long-term investment in the stock market will beat property time & time again.

As MG points out, you also need to consider diversification, or 'spreading your bets'. Your biggest asset is probably your residence. If you put all your remaining investments into the residential property market, then your future financial wellbeing is hugely dependant on this market only. A UK-1980's style property collapse would have a major impact on your life. [I'm not saying I think this is very likely, but it certainly is possible]. On the other hand, if you put your remaining investments in the stock market, you will reduce the impact of any such collapse.

You also need to consider the tax impacts. There are big tax benefits available for pension contributions, within the approved limits. There are also big tax benefits available for property investors (uncapped mortgage interest relief, for example), but there is a greater chance that the property benefits will be restricted or removed at some time in the future by a Govt that isn't in the pocket of property developers.

Think about the time/hassle factor too. Your pension fund manager won't be ringing you at 10 pm on Christmas eve to get you to fix the broken heating. Your tenant will. Your pension fund manager won't ring you to complain about the other guy in the office who keeps leaving his jockies in the loo. Your tenant will. Your pension fund manager won't leave your asset empty for 2 months of the year. Your tenant will.

You've probably gathered that I'm not a great fan of the Irish penchant for residential property investment. But you need to run the numbers for your own scenario carefully to see what is best for you. What rent are you expecting? How many months of the year will the property be vacant? What will it cost you to maintain the property etc.

If you do go down the pension road, check very carefully to see what fees and charges apply, or you may find that you are funding the salesman's pension instead of your pension. Look for bid/offer spread, allocation rate, annual management fees. The proposal from your broker should show the fees & commissions clearly. Post details back here if you want to compare options.

Have a good read of the Askaboutmoney.com Guide to Savings & Investments to understand your options a bit better.

property is the only realistic asset that tags inflation, shares are only a reflection on a mix of things like property, business ideas goodwill with a bit of dodgy CEOs and dodgy accountants in the mix.

pension funds offer tax relief. i would use all ur tax relief to buy a pension that invests in property primarily and if there is any left then buy a property with it.

bandraoi

Don't forget to factor in the maintenance and upkeep of a property.
In twenty to thirty years its likely that a major overhaul would be needed.
There's also down time between tenants and your generaly minor overhauls on a yearly basis that need considering - repainting, new furniture etc.

antoinolachtnai

Well, it is possible to make a geared investment in UK or Irish property using your pension contributions too. Tricky to set up, and probably only for the higher earner, but definitely possible.

RainyDay

lomb wrote:

property is the only realistic asset that tags inflation

And your source for this little nugget of financial wisdom is?

lomb wrote:

shares are only a reflection on a mix of things like property, business ideas goodwill with a bit of dodgy CEOs and dodgy accountants in the mix.

This is just rubbish. There are many advantages in investing in shares over property. The price of a share of a publically quoted company is watched every day by professional analysts all over the world, based on the very strictly regulated environment controlling what information has to be published. The market corrects any over- or under-pricing promptly. By contrast, the price of a residential property is subject to huge emotion, no regulation about what information needs to be published.

If you invest in a unit-linked fund, you can spread your investment of a range of different companies in a range of industries right across the world. You therefore 'hedge your bets' and limit your exposure to risks (like the dot com bubble). By contrast, if you invest in a single property, ALL your eggs are in that one basket and you a very vunerable a property price crash (which will hit both your investment property and your residential property).

If you prefer property over shares, that's fine - but please have a good reason for doing so.

lomb

RainyDay wrote:

And your source for this little nugget of financial wisdom is?


This is just rubbish. There are many advantages in investing in shares over property. The price of a share of a publically quoted company is watched every day by professional analysts all over the world, based on the very strictly regulated environment controlling what information has to be published. The market corrects any over- or under-pricing promptly. By contrast, the price of a residential property is subject to huge emotion, no regulation about what information needs to be published.

If you invest in a unit-linked fund, you can spread your investment of a range of different companies in a range of industries right across the world. You therefore 'hedge your bets' and limit your exposure to risks (like the dot com bubble). By contrast, if you invest in a single property, ALL your eggs are in that one basket and you a very vunerable a property price crash (which will hit both your investment property and your residential property).

If you prefer property over shares, that's fine - but please have a good reason for doing so.

and shares arent affected by emotion? hahahahaha of course they are.
the people who run most companies are asset strippers, or are incompetent. how is it waterford wedgewoods share price has declined to zero virtually while still having a good product. probably because the management will lead a management buy out 'to salvage some value', slash the overheads, and then exit after 2-3 years as per all venture capital deals.

if u have ever had any involvement with the financial industry, you will believe that the square mile in londons city has more crooks in it than belmarsh.

RainyDay

lomb wrote:

pension funds offer tax relief. i would use all ur tax relief to buy a pension that invests in property primarily and if there is any left then buy a property with it.

Can you advise the OP specifically what pension funds invest entirely in property, or specially how he/she can go about creating their own fund to invest in property? What kind of fees/charges will be eaten up going down this road?

lomb wrote:

and shares arent affected by emotion? hahahahaha of course they are.
the people who run most companies are asset strippers, or are incompetent. how is it waterford wedgewoods share price has declined to zero virtually while still having a good product. probably because the management will lead a management buy out 'to salvage some value', slash the overheads, and then exit after 2-3 years as per all venture capital deals.

These broad generalisations have no place in any serious discussion of investment strategy. For every headline Enron/Worldcom/Elan/Waterford Wedgewood, there are hundreds (or thousands) of companies which work away quietly in the background building value for their shareholders. The Irish market (ISEQ index) returned 26% in 2004 and is up 9.7% in just 2 months of 2005. Like your WW example, I can show unrepresentative selective examples which prove the other side of the arguement. Look at Anglo Irish Bank, up ten-fold over 5 years. Are their management incompetent asset strippers too? Look at Bank of Ireland which has doubled in price over 5 years - Are their management incompetent asset strippers too?

Of course, there will always be company failures. But if you are in a unit-linked fund, the Enrons/Elans/WWs of this world will make up 1% or 2% of your portfolio and the impact to you will be negligable. If you own your own house and you purchase another for investment, a 15% drop in property prices in your area could have a substantial impact on your financial future.

I can show unrepresentative, selective examples of property price falls too, but that doesn't make property is always a bad investment.

You need to look at the fundamentals of the market. The market in publically quoted companies is one of the most highly regulated and managed markets in existance. The guys operating in the market know very well that the kind of shenanigans that they might have got away with 10 or 20 years ago will result in serious punishments today. They will lose their careers completely, and few are willing to take that gamble.

By contrast, the property market is almost entirely unregulated. ANyone can become an estate agent - no experience or qualification is needed - just a €12k bond and approval at the district court. There are few compulsory disclosures required when selling a house - the buyer won't hear about the nightmare neighbours, or the past murder in the house (and yes, this happened recently in Dublin). The property market is fuelled by emotion, with first-time buyers willing to forget common sense in order to get their foot on the property ladder.

lomb wrote:

if u have ever had any involvement with the financial industry, you will believe that the square mile in londons city has more crooks in it than belmarsh.

My original point stands, i.e. these broad generalisations have no place in any serious discussion of investment strategy. But if you really want to go down that road, then by comparison to the crooks that operate in the property industry, the financial industry guys are angels. Just drop into the tribunals in Dublin Castle for a few hours if you don't believe me.

ck1

Why don't you combine your pension with your property by fund sufficient to repay the capital at the end of the term. What you have to remember here is that what you get back from your pension at the end of the day largely depends on of course the amont that your pay and also the actual fund the money is invested into. If you took out an interst only mortgage for 20 years and invested the capital into a pension, based on Finance Act 1999/2000 you can withdraw all in cash, and this pays the mortgage. Based on aproximatley 6% growth of a fund, what you actually save is aproximately net 24% of the costs. Of course if the fund actually grew at a higher rate your savings would be much higher. Effectivley you are paying the capital of your loan with Gross Income rather than net income which is what you repay a standard mortgage with. I know all this sounds complicated which is why if you are doing this you should get professional advice and make sure that the person giving the advice has the proper qualification. For this I would suggest that at least the person is a QFA (Qualified Financial Advisor) and if you want one better the person could be QFA LIAP or QFA FLIA.

One another point, you mentioned that your pension would pay out €600k in 34 years, is this after tax or is this just the actual fund value based on the standard quotable growth rates which are generally 6% & 8%. Always remember there is no guarantee that your pension will accumulate to his, it is dependant on the fund that you are invested into.

shoegirl

magpie wrote:

OK, here's the deal.

I recently took out a Pension fund that will pay out €600k in 34 years time, which is costing me approx €500 per month, including life insurance.

I've been thinking about this, and €500 per month would pay a mortgage of €120K, so if you factor in rent etc I should in theory be able to get an apartment for around €350k as an investment with the same money.

So which is a better bet? Will property continue to accrue value? Obviously it will be paid off sooner than the pension. Your thoughts please.

Ok while it might seem very attractive to invest in property you need to factor in maitenance and vacany. Also bad tenants - and there are thousands of them out there. The legal situation for tenancies has also changed dramatically in recent years, and tenant expectations are rising.

Secondly 34 years is a long time and while you might get the results from rental property there is a fair amount of work - but more worryingly if Ireland follows the demographic trends of the rest of the Western world, the property world will be a disaster in 25+ years time as there will not be a younger population to place demand on the housing market. This is inevitable, even if households get smaller - a falling population quite simply will need less housing, so within 20-30 years property appreciation has to fall.

Sdconly you are liable for tax on earnings from rental so in order to get €500 euros a month you'd need to charge a rental of 900 a month (from the figures you're giving you are obviously in the upper tax braket). In much of Ireland this may not be a feasible rent and there are a lot of landlords settling for rents that don't pay off the morgage and costs. Lastly, the gains you make from selling the property in 34 years are liable for Capital Gains Tax and there are 34 years of potential changes - and increases - to this tax to contend with.

I'd go for the pension. The advantage of the pension is that you get tax relief on it and once you're with a reputable pension management company there is no extra work to do. A certain degree of risk but over 34 years you'll probably make steady gains. Consider the property option but only if you are willing to take a long term risk and put the work into it.

Japer

RainyDay wrote: »

Look at Anglo Irish Bank, up ten-fold over 5 years. Are their management incompetent asset strippers too? Look at Bank of Ireland which has doubled in price over 5 years - Are their management incompetent asset strippers too?

Of course, there will always be company failures. But if you are in a unit-linked fund, the Enrons/Elans/WWs of this world will make up 1% or 2% of your portfolio and the impact to you will be negligable.

Just came across this thread from some years ago, and its funny how so much has changed since then. Few people now would look on Anglo or B of I as the sounder part of their pension. I know one "unit-linked fund" which has certainly failed alarmingly to keep up with inflation over the past 25 years. No doubt those who work in the well known pension-provider have done ok for themselves though.

DubTony

Love the bump. So timely given todays market values on banks.
This is funny

RainyDay wrote:

Look at Anglo Irish Bank, up ten-fold over 5 years. Are their management incompetent asset strippers too? Look at Bank of Ireland which has doubled in price over 5 years - Are their management incompetent asset strippers too?

Look at Bank of Ireland which has fallen in price by ... oh ... gazillions.
This day in 2005 it closed at €12.47
Todays price €1.31

Having said that; the price is double what it was a year ago.

MOH

I though the first few posters were complete lunatics before I realised the thread was 5 years old