We are living in extraordinary times. COVID-19 has changed our way of life, economies across the world (including Ireland) have fallen off a cliff, and investment markets have been extremely volatile. This understandably leaves workers worrying about the impact on their pensions.
It’s important to remember though that all the usual significant tax advantages still apply to pensions.
• You still get full tax relief on your contributions at your marginal rate of income tax.
• Any growth in your fund is not liable to tax.
• You will still get a portion of your fund tax-free at retirement.
However, investors are naturally anxious as they follow the performance of investment markets. Here are a few things to consider and some practical tips as we continue through these unprecedented times.
Time is your friend
Firstly it is important to remember that pensions are a long-term investment. This can be very hard to remember as we see our fund values fall, as markets fall. But what matters most is the value of your fund when you retire. Those still far from retirement can continue to invest through the volatility. Every market slump has been followed by a period of strong growth – the difficult bit of course is knowing when the slump has finished and the growth is starting again.
Changing long-term investment choices in response to short-term market events is generally not advisable, and research has shown that trying to time markets is just not possible. More often than not, investors end up selling when prices are low and then investing when prices are high, leading to significant losses. Ignore the short-term noise and focus on your long-term plan.
Keep investing – there’s a sale on!
Some investors wonder does it make sense to keep investing in uncertain times, it most definitely does. Asset prices have dropped and your contributions buy more than ever when markets have fallen. It’s like going shopping in the sales! So keep investing in volatile markets.
For members closer to retirement, there may not be sufficient time for their savings to recover before they retire. However, most Irish defined contribution plans offer a lifestyle strategy, investing for growth when a member is far from retirement, and reducing risk gradually and automatically as retirement approaches. Also, if members are planning to go the Approved Retirement Fund (ARF) route at retirement, then this will extend the time period to recover any losses made.
Anyone approaching retirement, or anyone who is finding the current volatility hard to live with, should consider taking financial advice on the options available to them to ensure their investments match their risk profile and retirement preferences.
In these volatile times, compound interest remains your friend. Compound interest – which is essentially interest earned on interest over time, will continue to apply to your fund and given the benefit of time, it adds significantly to your fund.
As we have learnt over the past few months, it is important to ensure that your pension provider has your correct contact details. If you have not already done so send them your email address and register for access to their online portal – it’s recommended though that you don’t look in every day to see the fluctuating fund values! However, it is useful to ensure your contributions are up to date and to check the value every once in a while.
Employers continuing to pay monthly contributions by cheque, should switch to sending them directly to their pension provider’s bank account, to ensure that contributions continue to be received within 21 days and allocated to members’ accounts in a timely manner.
For pensioners, we would recommend that you consider sending your bank details to your pension payroll contact so that your pension can be paid directly to your bank account. Unfortunately, some pensioners who received their monthly pension payments by cheque found it very stressful as some were unable to leave their homes to cash them.
These truly are extraordinary times and we at CPAS will continue to provide the best possible service for members and employers.
For more information please contact our team in CPAS at email@example.com who will be happy to help.
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