As a result of interest rate hikes from the ECB, banks have increased their interest rates on lending across the board this year. While interest rates have increased on the lending side, they are still offering nothing to the saver who has money on deposit.
With most banks setting savings rates as close to 0% as they can, money that is left on deposit is not growing and is being diminished by the high inflation environment that we currently have.
Inflation in Ireland is currently running at over 8% for the year and this has a major affect on individuals and companies’ savings. If an individual had €100,000 on deposit with the bank in January and still holds that money today, they have effectively lost €8,000 in real terms, as their purchasing power has diminished. By leaving money on deposit at these rates of interest and inflation, we are guaranteeing a loss on our money.
So, what are the alternatives?
At Honan FS we have started an investors club which will allow regular savers and those who have built up a lump sum, to contribute monthly to a savings plan which has an excellent track record of growth. We have identified two funds, the Zurich dynamic fund and top tech 100 fund which we recommend to clients. The dynamic fund was launched on 01/11/1989 and has returned on average a very impressive 10.6% per annum. The top tech 100 fund was established on 16/08/2001 and has returned an average of 9.4% per annum.
While these funds can be volatile and unpredictable in the short term, they are good investment options for someone who is targeting long term growth and is fed up of receiving no return from the banks.
You can start your investment journey with contributions as low as €100 per month. There are no huge barriers to entry and you don’t have to be a millionaire contributing massive money to qualify. This fund is for anyone who is able to save on a regular basis and is happy to leave the money untouched for 5 years or more. We charge a small set up fee of €100 and advise on the policy on an ongoing basis. Contributions are flexible and you can increase, decrease or pause your contributions entirely if your circumstances change.
However, the best outcomes will come to the investor who contributes consistently despite short term market conditions. Bad news is amplified, especially in finance but if you can tune out the noise in the short term and stay focused on your long-term goal you will be rewarded. Currently the news cycle is extremely negative, and we hear all the time about the poor performance of markets. However, if you invested in the Zurich dynamic fund and held your investment to this day, you would have seen 39.99% growth on your fund. This is despite a global pandemic and war in Europe during that time.
*These figures are accurate as at 18/10/2022
Passing on assets to your children while minimizing tax implications
Currently in Ireland, we can inherit up to €335,000 from our parents without any tax implication. Once this threshold is exceeded, we begin to pay tax at 33% of the excess. This can lead to large tax bills on inheritance if there is a large estate to pass on. However, there are some under-used tax-efficient ways of passing on assets to your children while minimizing the tax liability. The most effective way of doing this is to utilise the gift tax exemption.
Everyone is allowed to gift €3,000 annually to anyone, without any tax liability on the gift. Therefore, a couple can gift €6,000 each year to each of their kids and grandkids tax free. This can even be paid into an investment account for your kids which allows them to grow the funds you have gifted to them over many years. This has the potential to save hundreds of thousands in inheritance tax for families who are passing on large estates.
Take for example a couple, Joe and Mary, who have a family home worth €335,000 and €234,000 in savings with the bank. They have one child and two grandchildren. If they die there will be an inheritance tax bill of €77,220. The value they have passed on net of tax is then €491,780.
A more tax efficient way would be to pay €6,000 per annum into a Zurich savings plan in their child and each of their grandchild’s name. This would allow them to pass on €18,000 in total each year tax free. After 13 years they would have passed on €234,000 with no inheritance tax implications. They could even invest in the dynamic fund through this plan which has averaged an annual return of 10.6%. If they had done this the funds passed on would have grown to €429,859 . After exit tax is paid there would be a fund of €349,556. Added to the house value of €335,000, by utilising the gift tax exemption, Joe and Mary have managed to pass on an estate net of tax to the value of €684,556 versus €491,780.
What to Do with an old employer pension
Our workforce is far more mobile now than 30 years ago. Previously, it was the norm to start work with a company in your early 20s and continue to retirement age before drawing down your company pension. In more recent years, the trend has been to switch jobs more regularly; be that for better pay, better work conditions or a better work life balance. However, a too often overlooked element of leaving your job is what to do about retained pension benefits with your former employer.
There are a number of options available to you, let’s weigh up your choices.
Do nothing
This can be the most common approach, but it is usually not the best.
There are a couple of things to consider:
Firstly, how much control will you have over your pension? Will you be able to make investment choices, usually as a deferred member this is difficult? There are cases where deferred members benefits are moved out of investment and sit in cash once they leave. Once you account for fees and inflation these such cases are certain to lose money on their pension.
Your former can also move the pension to a new provider without consulting with you. As a deferred member you will have no input into how it is invested at this point. It is commonplace for employees to receive financial advice on their pensions when they are employed but once they leave, they will usually lose this benefit.
Now is a great time to review the quality of the pension in the job you’re leaving. Has it performed well? Are the charges reasonable? Is the provider responsive, informative, and transparent?
If the answer to any of those questions is no, it may be time to take your pension funds with you.
Move the pension to your current scheme
This is not always an option as some schemes will not allow it but moving pensions from previous employment to your current scheme has the advantage of keeping everything together and ease of administration.
This can be a good option for someone who has built up a small pension fund with a previous employer. You have less pension pots to keep track of and you have full visibility of exactly what your pension is worth, helping you calculate what it will be worth at retirement.
The cons are that you are missing an opportunity to move the pension into your own name. The same arguments around control, charges and investment choices persist. You are bound by scheme rules around access which are usually more stringent than a pension which is owned exclusively by you.
Move your fund to a pension in your own name
This is usually done using a personal retirement bond (PRB) but there is also the option of a personal retirement savings account (these are usually more expensive).
This option allows you to cut the chord with your previous employment and have the pension in your own name. You have full autonomy over where your fund is invested (with the help of your financial advisor) and you can choose from a vast range of different PRB providers to ensure you get the most suitable product. Company pension schemes are often limited in their fund selection options, however, through a PRB you will have a vast range of possibilities to choose from.
The biggest advantage to moving the pension to an account in your own name is around access. When part of a company pension scheme you are bound by scheme rules which in most cases will not allow you to access your pension until age 65.
When you invest in a PRB you can access your 25% tax free lump sum from age 50. This flexibility of access is a huge draw to using a PRB. By keeping it separate from your current pension this also means that you could decide to cash in a smaller portion of your pension without having to crack open your entire pension portfolio.
The PRB is a great option for many who have left a pension with a previous employer, however, each person’s circumstances will differ and the most important thing to do is get good financial advice around your options. A good financial advisor will point you in the right direction and develop a plan specific to your needs.
