5 Top Questions About – Pensions


    It’s that time of year again. A lot of people are thinking about pensions to gain the benefit from the upcoming tax deadlines. But there’s been a lot of questions about pensions this year. From market volatility to auto-enrolment, it can seem like a bit of a minefield. Here, Anne O’Doherty, our Head of Life & Pensions answers the most commonly asked questions we have received and shares our view on how best to manage your pension.

    I haven’t started a pension yet, when is the right time to do this?

    Saving for retirement is extremely important. People are living longer and leading more active lives in retirement. As a result, it is more important than ever for you to think about where your income will come from when you retire. Starting a pension is one of the smartest decisions you can make. The earlier you start the better. But it is also never too late to start planning for the financial future you want. Have a look at this Pension and Retirement Calculator on our website. It can give you help with your retirement planning and to see you how much you need to put away for later in life.

    I’ve read a lot of headlines about auto-enrolment recently – what is it?

    Quite simply auto-enrolment is a new scheme announced by Government earlier this year. The aim of it is to try to encourage people to make adequate provision for their income at retirement. It will work by having employers automatically enrol their employees into a workplace pension scheme. It is aimed at those people who currently are not in a company pension scheme. The Government has estimated this number to be around 750k between the ages of 23 and 60 (earning more than €20,000). Our recent blog covered all aspects of auto-enrolment, and you can read it here.

    Is my pension safe given the current market volatility?

    We are being asked this a lot by our clients given the rocky year markets have endured. The first and most important thing to remember is that a pension is a long-term investment. By their nature markets have ups and downs but over the course of an investment these tend to level out. There are many factors that can affect the markets. Volatility is usually caused by political and economic factors, industry or sector changes or even individual company news. While it can be difficult to witness any declines in your portfolio, it is important to apply logic and not act out of emotion. The most important thing for an investor to do is hold their course. History has shown that those who have stayed invested during previous periods of market volatility have achieved their original investment objectives.

    I’m getting nearer retirement, should I make any changes to my pension arrangements?

    As a general rule you need to be between 60 and 75 years of age to take your pension benefits. If you are are about 10 years from your retirement age, then there are a few things you need to start considering. There are lots of things that you have had to think about to date – building your career, paying the mortgage, educating your children and maybe even saving for a rainy day. These are important. But as you start approaching retirement it’s now important to take advantage of the last 10 years of your working life to make sure you maximise your financial position when you do retire. This can mean increasing regular contributions, making additional lump sum contributions or switching funds to lower risk options. Depending on your own personal circumstances, we can talk you through what the best approach is now.

    What is the tax situation for my pension contributions?

    It is safe to say that a pension is one of the most tax-efficient ways of saving money. Tax relief is the greatest benefit of saving into a pension. If you’re paying tax at 20%, then you’re entitled to 20% back on pension contributions. If you’re paying tax on your salary at the highest rate, then you’re entitled to get 40% back on any pension contribution that you make. So, it doesn’t cost as much as you may have thought to save for retirement. You can also benefit from higher limits for tax relief as you get older as these are age-related.

    Creating Opportunities in a Negative Space

    Like many of our peers we’ve highlighted the impact of negative interest rates on client returns. We recently looked at some solutions to the problems faced by investors. It’s interesting to see that there have been opportunities that have been created in this negative space. But how can we best engage with you in an understanding and taking advantage of these? This question prompted us to look at the factors driving an individual’s decision-making process. specially at the current time as well as how financial decisions are made.

    The decision-making process

    Decision-making process, customer journey, sales funnels, these are all variations on the same theme. The decision-making process is a psychological one. We assume from a behaviour or action taken that a decision has been made. It shows a commitment to an action. What is often referred to as the customer buying process, is itself a decision-making process. This is where we see the journey a customer goes through before purchasing a product. The easiest way to look at it is using the AIDA structure.

    • Awareness: Recognition of a need or problem
    • Interest: Seeking information on the various options available to solve the problem
    • Desire: Evaluation of options and a preference develops
    • Action: Reaching of a decision and the purchase is completed

    We are all consumers and are more informed than ever before. That is why our job as financial advisers is not to sell a product to you. It is to understand the process you go through to reach a decision. It is also to recognise the need you are trying to fulfil, whether this is protecting your family or planning for your retirement. We must work with you through this process to assist you in defining the need and to provide the best advice on the solutions available.

    The role of behavioural finance

    So, what does behavioural finance have to do with anything? We should recognise that not everyone is approaching a financial purchase from the same starting point. Traditional theories were very functional. They assume financial decisions were made against a rational background – both for internal and external factors.

    Behavioural finance goes against this by asserting that financial decisions are often based on emotional responses. For example, you purchase protection on your own life to protect your loved ones. This holds true also for investments where investors may hold losing positions rather than feel the pain of taking a loss or the emotional instinct to move with the herd may explain why investors buy in bull markets and sell in bear markets.

    Understanding how this impacts financial decisions around things like investments, risk, protection, and personal debt is critical to being able to provide a better service to our clients. Human emotion plays an incredibly influential role in these decisions. We have come through a time of crisis and while there is still much uncertainty there are opportunities.

    What is the opportunity?

    It is a time of negative interest rates. The Covid-19 pandemic shocked the world and is continuing to do so. We will be dealing with the fall-out for many years to come. Following our lives being put on hold, there is a huge amount of money on deposit earning no return but there are opportunities for those to make their money work harder. This is true too for those who wish to continue the savings habit they have now started. By combining an understanding of buying processes with the concept that financial decisions are emotionally based allows us to work with our clients in helping them make more rational decision in their financial matters. This is particularly relevant at the current time.

    With negative interest rates, investors are faced with a choice. This choice is between a sure loss or exposure to a possible greater loss by choosing stocks. What is the best course of action? By following a well- thought-out strategy for gradually drip feeding into the markets to benefit from potentially greater returns can be an excellent route to follow. This type of unit cost averaging may dampen volatility and is applicable regardless of overall risk attitude.

    If you’re not sure what direction to follow with your financial decisions, we’re here to help. Just get in touch for an initial chat.  

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