Invest in Property vs Pay into pension

Chiorino

I'm getting to the stage now where I'd like to start seriously investing for retirement and am having a hard time convincing my partner (we also run a business together) that paying into a pension is far and away the best option, rather than buying an investment property.

We've been burned slightly in the past with property(as accidental landlords early in the crash) but she has also had a family member lose on pension investment many years ago which has turned her against the idea somewhat. She is also very much the type of person that needs something tangible like property to make her feel comfortable, despite the past experience.

In laymans terms, before we sit down with an advisor, what should I be saying to her to sell the benefits of the pension fund?

Henry Ford III

3 things I'd suggest.

1/. Equities will always tend to out perform other asset classes over time.

2/. Tax reliefs and incentives. Direct property has none.

3/. INVESTMENT DIVERSIFICATION and LIQUIDITY. This is absolutely critical.

There's room for property in anyone's investment portfolio if it's big enough, but taking on an investment property instead of investing in a pension (which can be designed, costed, switched, and risk adjusted to individual requirements) is highly questionable.

GazzaL

Tax relief is a big one!

daheff

Max out your pension first.

You can claim tax relief up to 40% on all investments to a pension.

Truthvader

Been round the houses on this. Had money in two pension funds for 15 years. Both made no money, one lost money. If you give money to any institution they will attach a milking machine to your money. You will never understand the fees costs and expenses involved. And above all they being no skill set to the party - neither do they care.

My advice is set up a PRSA, buy a commercial property. Rental income is tax free and you get a lump sum of up to €250K when cashing in (25% value). Plus with a commercial property you never get a phone call whining about the light bulb in the porch or the dishwasher they broke and if you choose the right one the tenant never changes. Plus if they dont pay rent you throw themout the next day without the two year PRTB torture while they wreck your flat. Money comes in and you know what where it goes from the off. There are charges etc but in my view far better than the Pension fund black hole

And as anyone will tell you even with "blue chip" investments all your money can be gone adn you will never know why. Enron, AIB, Lehman Bros Bnak of Ireland . Everything gone

Amirani

Truthvader wrote: »

Been round the houses on this. Had money in two pension funds for 15 years. Both made no money, one lost money. If you give money to any institution they will attach a milking machine to your money. You will never understand the fees costs and expenses involved. And above all they being no skill set to the party - neither do they care.

Firstly, you're using the wrong pension provider if they're drawing significant fees and expenses. You should be able to get passively managed funds with fees of 0.5% or so.

Secondly, if you had two pension funds that over 15 years made no money/lost money, then you had them invested in completely the wrong thing. There's been no 15 year period that I'm aware of in our lifetimes where equity markets haven't increased. Investing your pension in a handful of individual stocks is stupid, so is having it mostly in cash/bond type investments. Any broad-based passive World equity fund will have made money over this time period.

On both accounts here, the likely explanation is you made some terrible judgement in where you put your pension. Very expensive actively managed funds that didn't come close to matching the market. That's a problem with your investment decisions, not a problem with pension investments in equities.

coylemj

Amirani wrote: »

There's been no 15 year period that I'm aware of in our lifetimes where equity markets haven't increased.

+1 despite the fact that the past 15 years have incorporated two massive stock market crashes, the Zurich balanced fund (actively managed with 50-70% of the fund in equities) is showing an annualised growth rate of 6.8% p.a. over the period. That rate of return will double your money in 11 years.

Throw in the dot com crash in the early 2000s to make it three crashes, the same fund is showing an annualised growth rate of 4.9% over the past 20 years.

You really have to work hard or give your money to cowboys to lose money in an equities-based fund over 15 or more years.

Truthvader

Amirani wrote: »

Firstly, you're using the wrong pension provider if they're drawing significant fees and expenses. You should be able to get passively managed funds with fees of 0.5% or so.

Secondly, if you had two pension funds that over 15 years made no money/lost money, then you had them invested in completely the wrong thing. There's been no 15 year period that I'm aware of in our lifetimes where equity markets haven't increased. Investing your pension in a handful of individual stocks is stupid, so is having it mostly in cash/bond type investments. Any broad-based passive World equity fund will have made money over this time period.

On both accounts here, the likely explanation is you made some terrible judgement in where you put your pension. Very expensive actively managed funds that didn't come close to matching the market. That's a problem with your investment decisions, not a problem with pension investments in equities.

Zurich and New Ireland Assurance. New Ireland much much worse.

Just telling you what happened.

coylemj

Truthvader wrote: »

Zurich and New Ireland Assurance. New Ireland much much worse.

Which Zurich funds were you invested in? Did you leave the money in specific funds for a few years at a time, or did your advisor constantly recommend switching?

Henry Ford III

I need a p.c. to reply to this.

Pman1000

Do not invest all your money in equity - unless you have a huge appetite for risk.

Make sure to diversify your exposure while providing a partial hedge against falls in interest rates impacting the amount of Cashflow your investments will translate to in however many years you have until retirement (I hope a long time!). A long dated corporate bond fund may help here - providing you a spread over govies and duration.

If you do want to invest in property consider using a REIT or property fund - I’m London based so not sure what is available on the market in Dublin.

As you move through your investment journey, try to ignore the noise of mark-to-market valuation - easier said than done but it’s worth understanding that you’re being paid (in expectation) to surfer periods of market stress that other investors can’t stomach. Saying that, think about liquidity and endeavour to ensure that you don’t need to sell assets for liquidity during downturns which will crystallise loses.

Finally, as has been alluded to - do your homework and try to find the cheapest vehicle to give you exposure to which asset class you want. Also make sure the asset allocation you establish is one you have faith in working over the long term. Unless you’re an institutional-focused asset manager, turning over significant portions of your portfolio can cost and arm and a leg - more so during a panic.

And finally finally, you and your wife are a defined benefit pension plan of 1 (well 2). Think about what the best performing DB plans do and try to mimic that behaviour as much as you can.

Henry Ford III

I now have access to a p.c.

It's a really poor idea to invest all your funds in 1 local market, and even worse to invest in 1 asset class within that market. Worse still to invest in 1 property within that asset class, and within that local market.

You have absolutely no diversity, no liquidity, and no flexibility.

I've no idea how you managed to get such a dreadful result from "normal" pension funds. That took a special touch I'd say. I'm aware of many folk who have had exactly the opposite experience.

Cost wise property isn't cheap. Stamp Duty and legal fees are heavy. Gearing is dangerous (lack of diversity again) and I know some people who lost everything on a geared property investment.

Ongoing costs are high. Insurance, rates, accountancy fees, PRSA charges, and maintenance.

How would an ordinary investor buy a commercial property? How might they pay for the building?

The advice to get out of equity investments and invest in a single property isn't fundamentally sound. Not remotely sound in fact. It's lunacy.

Henry Ford III

Pman1000 wrote: »

Do not invest all your money in equity - unless you have a huge appetite for risk.

Make sure to diversify your exposure while providing a partial hedge against falls in interest rates impacting the amount of Cashflow your investments will translate to in however many years you have until retirement (I hope a long time!). A long dated corporate bond fund may help here - providing you a spread over govies and duration.

If you do want to invest in property consider using a REIT or property fund - I’m London based so not sure what is available on the market in Dublin.

As you move through your investment journey, try to ignore the noise of mark-to-market valuation - easier said than done but it’s worth understanding that you’re being paid (in expectation) to surfer periods of market stress that other investors can’t stomach. Saying that, think about liquidity and endeavour to ensure that you don’t need to sell assets for liquidity during downturns which will crystallise loses.

Finally, as has been alluded to - do your homework and try to find the cheapest vehicle to give you exposure to which asset class you want. Also make sure the asset allocation you establish is one you have faith in working over the long term. Unless you’re an institutional-focused asset manager, turning over significant portions of your portfolio can cost and arm and a leg - more so during a panic.

And finally finally, you and your wife are a defined benefit pension plan of 1 (well 2). Think about what the best performing DB plans do and try to mimic that behaviour as much as you can.

You were doing quite well, but the last para makes no sense at all.

Pman1000

Henry Ford III wrote: »

You were doing quite well, but the last para makes no sense at all.

Prey tell? You wouldn’t recommend an individual to consider how they will find the cash flows needed through retirement following the approaches of a well structured DB investment strategy?

dubrov

You can setup a pension fund and buy a property with it. This way you can get all the tax reliefs.

Take note of the comments about diversification above though

antimatterx

I'm interested in starting a pension, work doesn't offer one. Whats the max I can pay into a pension. I'm 24.

Truthvader

coylemj wrote: »

Which Zurich funds were you invested in? Did you leave the money in specific funds for a few years at a time, or did your advisor constantly recommend switching?

No idea what fund and never got a call from either about switching. Just an incomprehensible statement every year showing either a loss or a tiny profit. Did hear at one point that New Ireland used pension funds to prop up Bank of Ireland (who owned them) but no idea if it is true. Would explain the losses though. Got out after 15 years with what I put in between the two - I thing Zurich made something just when I got out which saved me. Will never know how much they ate up in fees for "fund management" and "advice"

Jim2007

Pman1000 wrote: »

Prey tell? You wouldn’t recommend an individual to consider how they will find the cash flows needed through retirement following the approaches of a well structured DB investment strategy?

How many DB funds do you know in detail? Most do no better that other funds and it is very unusually to find one that does not require the employer to bail it out every so often. Which is why they are on the way out and most are now DC

Jim2007

Truthvader wrote: »

No idea what fund and never got a call from either about switching. Just an incomprehensible statement every year showing either a loss or a tiny profit. Did hear at one point that New Ireland used pension funds to prop up Bank of Ireland (who owned them) but no idea if it is true. Would explain the losses though. Got out after 15 years with what I put in between the two - I thing Zurich made something just when I got out which saved me. Will never know how much they ate up in fees for "fund management" and "advice"

This is just nonsense and explains nothing.

Your posts seen to suggest that you don't have a handle at allow on what is going on with your pension and are just going on here say, rather that hard facts.

You should at a minimum be able say exactly which funds you were invested in for a start, all fund managers have funds that have done well and some that have not so broad statements about fund managers is meaningless.

crisco10

Even before considering the lack of diversity in property...

Do the tax incentives around a pension not make it a slam dunk to add to pension?

Heres Johnny

My pension costs me 60 euro to get 100 euro into it. That's actually a 67% return before charges etc.. And before the fund grows which it invariably does over history, and yes I know that doesn't guarantee the future returns but its good enough for me. It will take one hell of a sustained market fall the likes of which has never been seen to wipe out the fund to either

A-Lose my money
B- Not outperform other investments

Balanced fund, about 70% equities I'm invested in. Don't have the figures to hand but it's grown very nicely since 2009 when I started it, just missing the 2008 crash. Coronavirus took a lump out of it in March and April but its back positive for the year already.

antimatterx

Heres Johnny wrote: »

My pension costs me 60 euro to get 100 euro into it. That's actually a 67% return before charges etc.. And before the fund grows which it invariably does over history, and yes I know that doesn't guarantee the future returns but its good enough for me. It will take one hell of a sustained market fall the likes of which has never been seen to wipe out the fund to either

A-Lose my money
B- Not outperform other investments

Balanced fund, about 70% equities I'm invested in. Don't have the figures to hand but it's grown very nicely since 2009 when I started it, just missing the 2008 crash. Coronavirus took a lump out of it in March and April but its back positive for the year already.

You're basically guaranteed returns over your career. Even if it's down when you retire, the fund will grow eventually

Heres Johnny

antimatterx wrote: »

You're basically guaranteed returns over your career. Even if it's down when you retire, the fund will grow eventually

Yes, I was 29 when I started so it will be a 30+ year investment. Aim is to retire at 60 so we'll see what happens. Few other things working for me and a few other business plans but the pension is a no brainer as far as I'm concerned.

Truthvader

Jim2007 wrote: »

This is just nonsense and explains nothing.

Your posts seen to suggest that you don't have a handle at allow on what is going on with your pension and are just going on here say, rather that hard facts.

You should at a minimum be able say exactly which funds you were invested in for a start, all fund managers have funds that have done well and some that have not so broad statements about fund managers is meaningless.

Sorry Mr Angry. It was a while ago. No idea what funds then and certainly not now. Only telling my experience. Reality not hearsay. It is certainly true that I never had a handle on what they did. Clearly you fancy yourself as an expert and good luck to you. Will never give my money away to "expert fund managers" again. Maybe you are one which might explain the rage.

In property now. Asset cannot disappear - and is appreciating. Rent tax free plus tax break on further money going in each year to provide funds for next acquisition. Pus I understand 100% where everything is and where all money is going. People can make their own decisions I have made mine

Henry Ford III

Pman1000 wrote: »

Prey tell? You wouldn’t recommend an individual to consider how they will find the cash flows needed through retirement following the approaches of a well structured DB investment strategy?

Depends on a few things. Circumstances (personal and circumstantial) life expectancy, attitude to risk, legislative requirements etc.

Some people should buy an annuity, and others should invest in post retirement investments to produce income.

No two people are the same so a yellow pack solution isn't the answer.

Henry Ford III

Truthvader wrote: »

Sorry Mr Angry. It was a while ago. No idea what funds then and certainly not now. Only telling my experience. Reality not hearsay. It is certainly true that I never had a handle on what they did. Clearly you fancy yourself as an expert and good luck to you. Will never give my money away to "expert fund managers" again. Maybe you are one which might explain the rage.

In property now. Asset cannot disappear - and is appreciating. Rent tax free plus tax break on further money going in each year to provide funds for next acquisition. Pus I understand 100% where everything is and where all money is going. People can make their own decisions I have made mine

I still don't understand how you made no money in equity driven pension funds over 15 years. Strikes me everybody else did. New Ireland and Zurich are decent providers in terms of fund performance. Your comment on BOI is borderline actionable so I'd advise caution. I'll consider it further with my mod hat on.

What role did your Broker/Advisor have over the 15 year period?

Charges are a fact of life. They are the same as markup in every other business. Without markup nobody makes a profit.

I'm absolutely happy that no level of charges would have cancelled out equity driven fund performance over a 15 year period. A break even on gross premiums could mean a 40% return when tax reliefs are included incidentally.

I don't think you are being totally truthful here, or perhaps your memory is a bit selective?

Pman1000

Jim2007 wrote: »

How many DB funds do you know in detail? Most do no better that other funds and it is very unusually to find one that does not require the employer to bail it out every so often. Which is why they are on the way out and most are now DC

In the UK I know a great many DB schemes - which is precisely why I caution learning what the well managed schemes do. Some of these lessons are:

1) hedge interest rate risks (and inflation in UK)
2) account for contributions from sponsor in investment strategy (if you move job to an employer that gives you larger contributions, you can afford to take less risk)
3) review your investment strategy frequently. If your assets have performed better than expected (read higher funding level for a DB scheme) you can take less risk in your strategy or potentially address longevity risks and buy yourself an (expensive) deferred annuity (a DB scheme would call this a buy in)
4) think about the end game. What are you going to do with your investments on retirement. An annuity or holding on to the assets and funding cash flows via divestment or investing in amortising bond funds (read Cashflow Driven Investment for a DB).

Again learn from what the well run schemes did. Look for schemes that have completed buy outs. And learn from the mistakes of schemes that have folded or required bail outs.

The point about D.C. being better than DB is just nonsense. DB schemes are volatile liabilities on corporate balance sheets and can be expensive, so corporates shifted the risk onto the employee. I know which I’d rather have!

Pman1000

Henry Ford III wrote: »

Depends on a few things. Circumstances (personal and circumstantial) life expectancy, attitude to risk, legislative requirements etc.

Some people should buy an annuity, and others should invest in post retirement investments to produce income.

No two people are the same so a yellow pack solution isn't the answer.

Not all DB schemes do the same thing, but the ones who perform better do tend to have many things in common. Principle among them allocating a portion of their capital to Liability Driven Investment strategies.

Pman1000

Pman1000 wrote: »

In the UK I know a great many DB schemes - which is precisely why I caution learning what the well managed schemes do. Some of these lessons are:

1) hedge interest rate risks (and inflation in UK)
2) account for contributions from sponsor in investment strategy (if you move job to an employer that gives you larger contributions, you can afford to take less risk)
3) review your investment strategy frequently. If your assets have performed better than expected (read higher funding level for a DB scheme) you can take less risk in your strategy or potentially address longevity risks and buy yourself an (expensive) deferred annuity (a DB scheme would call this a buy in)
4) think about the end game. What are you going to do with your investments on retirement. An annuity or holding on to the assets and funding cash flows via divestment or investing in amortising bond funds (read Cashflow Driven Investment for a DB).

Again learn from what the well run schemes did. Look for schemes that have completed buy outs. And learn from the mistakes of schemes that have folded or required bail outs.

The point about D.C. being better than DB is just nonsense. DB schemes are volatile liabilities on corporate balance sheets and can be expensive, so corporates shifted the risk onto the employee. I know which I’d rather have!

To be fair on the D.C. point, of the sponsor has a very weak covenant then you will prefer a D.C. scheme (although depends on how much you’d get in the event of a bail out or (in the UK) going into the PPF) which depends on what sort of member you are (active/deferred/pensioner). I’d suggest finding a new employer if you end up being in such a position

coolshannagh28

Truthvader wrote: »

No idea what fund and never got a call from either about switching. Just an incomprehensible statement every year showing either a loss or a tiny profit. Did hear at one point that New Ireland used pension funds to prop up Bank of Ireland (who owned them) but no idea if it is true. Would explain the losses though. Got out after 15 years with what I put in between the two - I thing Zurich made something just when I got out which saved me. Will never know how much they ate up in fees for "fund management" and "advice"

I had the same experience with these funds , money invested fell by 70% after the crash and has made a recovery at the beginning of this year to 60 % of par , am going to look at the option of self management as I might as well gamble with it myself as let it be eaten up in fees and losses by someone else .

Truthvader

Henry Ford III wrote: »

I still don't understand how you made no money in equity driven pension funds over 15 years. Strikes me everybody else did. New Ireland and Zurich are decent providers in terms of fund performance. Your comment on BOI is borderline actionable so I'd advise caution. I'll consider it further with my mod hat on.

What role did your Broker/Advisor have over the 15 year period?

Charges are a fact of life. They are the same as markup in every other business. Without markup nobody makes a profit.

I'm absolutely happy that no level of charges would have cancelled out equity driven fund performance over a 15 year period. A break even on gross premiums could mean a 40% return when tax reliefs are included incidentally.

I don't think you are being totally truthful here, or perhaps your memory is a bit selective?

What is with all the rage here? I am only telling you what happened if you don't like it I don't know what to do for you. As explained in previous posts I never got a call in in 15 years and had no "broker or advisor". I bought two funds. Not impressed wit either but in fairness Zurich did much better and compensated for losses on New Ireland. Would not do it again. Everyone else is free to make their own decision - as you are .

Again why all the anger?