Q I will be retiring later this year and have built up a substantial fund in my workplace pension scheme. I was planning to use the pension fund to buy a property to rent out to provide income, but I heard that a recent change of the rules has meant that I can no longer buy property with my pension. Is there anything I can do?
ony, Co Meath
A Quick answer – the recent changes don’t affect you at all and you can still buy a property with your pension fund in accordance with your original plan. Last April, an EU directive known as IORP II was transposed into Irish law. It doesn’t prohibit a pension fund from buying property, but it does stipulate that, for any new investment selections, no more than 50pc can be invested in property.
In my opinion, this is prudent. Diversification, or not putting all your eggs in one basket, is very important. Those of us old enough to remember 2007 and 2008 will remember that many Irish people got into trouble by being too heavily invested in property, often with significant borrowing attached. So limiting the portion of a pension fund that can be invested in property will protect people.
That said, it’s important to note that the IORP II regulations only apply to occupational or company pension schemes. The new rules don’t apply at all to any other type of pension plan. So PRSAs are unaffected, as are buy-out bonds, personal pensions and – of most relevance to you – Approved Retirement Funds (ARFs) for those who have retired.
Any of these types of pension products can invest in property exactly as before. If you want to buy a property with your pension fund when you retire, nothing has changed and you still can. Property has long been a popular investment to hold within a pension fund, as the fund doesn’t pay income tax on rental income, nor does it pay capital gains tax on profit when the property is eventually sold.
It’s also possible to buy a property and lease it to a local authority on a long-term lease, giving you what is effectively a State-guaranteed income.
That said, just because you can, it doesn’t always follow that you should. Just as the packaging on health food tells you that it can be beneficial as part of a balanced diet, property should be considered as an asset as part of a balanced portfolio.
Q Over the years, my husband and I have accumulated a small collection of life assurance policies. We have a mortgage protection policy, two life assurance policies, one of which also has serious illness cover and he has an income protection policy. My job provides income protection as part of the pension scheme. We’re paying out several hundred euro a month on all these policies and I’m wondering if we should cancel some of them or consolidate some of them to save money.
Geoff, Co Kildare
A Without knowing full details of your financial circumstances, income and outgoings, assets and debts, number of financial dependents (eg, children, elderly parents) I can’t tell you if you have too much cover, too little cover or just enough but I can tell you how to establish this for yourself.
First, make a list of all the policies you have. Find out what exactly each one covers you for and how much you’re paying for it. If you’re not sure, just go down through your bank statements, pick out the life assurance company names from the direct debits and ring each of them to find out.
Then work out what financial position you’d be in if one of the insured events actually happened. For example, let’s say your take-home pay is €3,000 per month and you’re 10 years away from retirement. The mortgage repayment is €600 per month. If you died, your household income would be down by your €3,000 per month salary. The mortgage protection policy would presumably clear off the mortgage, so that would free up €600 per month. The State Widowers’ Pension would pay your husband around €900 per month.
In effect, your household income would be down by €1,500 per month for 10 years. That’s a loss of around €180,000. You should have that level of additional life cover at a minimum.
You can do a similar exercise regarding the other covers: the serious illness cover and the income protection. That’s a very basic way of doing what’s known in the industry as a needs analysis.
Alternatively, a good financial broker will be able to carry out a more detailed needs analysis for you, taking into account other relevant factors such as the value of your pension funds, savings, how long your dependents will be financially dependent on you and so on.
Q I recently received my annual statement from my workplace pension scheme. Due to Covid-19 there were no salary increases since 2019 and so there has been no change in my pension contributions since then. But the projected pensions on the statement are lower on this year’s annual statement when I compare them to last year’s statement. Why would this be?
Fionnuala, Co Dublin
A Pension planning is by its nature a long-term process. There is no way of knowing in advance what the returns will be on your pension funds, as these are reliant on future investment conditions.
So, when preparing pension projections, the pension scheme administrators use assumptions. One of the assumptions is the annual rate of growth of your pension funds. Pension providers rely on guidelines issued by the Society of Actuaries in Ireland for the rates of growth they assume in projections.
It’s important that the assumed future growth of funds is not over-optimistic as that could give you an unrealistic expectation. For example, if a pension scheme administrator gave you projections as to what your pension would be in 20 years’ time and assumed that the fund would grow at 20pc per year, the projected pension would look very rosy indeed and you might start making plans to buy a yacht and moor it in Monte Carlo once you retired.
But such projections would almost certainly be unrealistic and the actual pension you receive at retirement would be significantly lower. This is why the Society of Actuaries in Ireland attempts to use future growth rate assumptions that are likely to be realistic.
In March of this year, the Society revised such assumed growth rates downwards. For equity funds, the future growth rate assumption was reduced from 5pc to 4.5pc. For bond funds it was reduced from 2.5pc to 1pc. For cash funds it was reduced from 1pc to zero.
In summary, on your annual statement, the current value of your pension fund should have gone up but the projected future values would have gone down because the assumptions used to calculate these values are more cautious than they were last year.