'Recovering' the value of your pension in these times of risk
Q. Like many people who have Pensions, I have seen the value of my Pension eroded over the past few years. As I am Self Employed I need to ensure that my Pension Fund is sufficiently large enough to enable me to have a comfortable standard of living in retirement. I am unsure as to what action I need to take in order to at least bring my Pension Fund back to the value of the contributions I paid into it. Can you please help?
A. Whilst it may be no particular comfort to you, you are not alone. We have seen too many examples over the past few years of Pension Funds plummeting in value, over sometimes relatively short periods of time.
For many people approaching retirement their principle concern at present is to, at the very least, ensure their Pension is worth at the very least the value of the contributions they have paid into it. Some investors have been badly affected by Pensions in the past, and whilst they appreciate the valuable tax relief they, and possibly their company receives on contributions, their financial goalposts have altered in recent years.
Many self employed people now take the view that they need to reduce risk and consolidate their Pensions given the increased financial risk they are taking in their day to day business life.
In order to start planning for the 'Recovery of your Pension', you will first need to establish the scale of the task involved and the level of return you need to achieve in order to recover the value of the contributions paid into the Pension. Take for example the following scenario: Female, Aged 52, Term to Retirement: 13 Years Total Investment to the Pension Fund to Date €485,000; Current Value: €310,000.The total loss is: 36.08%; Recovery Needed to reach €485,000: 56.45% Target Annualised Growth Rate Net of Charges is: 3.50%
Based on the above example we can see that in order to recover the value of the Pension a return of 3.50% per annum, net of all charges, needs to be achieved. Identifying the target level of growth that needs to be achieved is crucial as this will give you a guide as to the level of risk you need to take with your pension fund investments in order to achieve your desired retirement fund on retirement.
Based on the example above, an annualised growth rate of 3.5% net of charges is achievable as many Pension funds now offer deposit rates for your monies of 3-4% net of charges. We can see that although the client's pension has fallen by 36%, there is no need to take substantial risk in order to chase the recovery of the Pension Fund.
Using this calculation as a base figure we can then also factor in other considerations, such as inflation, in order to amend our target annualised growth rate. It is possible to recover the value of your pension without necessarily taking a significant amount of investment risk. With careful consideration and planning you can recover the lost years of your Pension. Jim Doyle ACMA QFA is a partner in RDA Accountants offering full accountancy, business advisory, tax advisory and financial services. RDA Accountants | 5 Upper George Street, Wexford | Louisville House, Waterford Road, Kilkenny | 053 91 70507 | www.rda.ie RDA Wealth Ltd trading as RDA Accountants is regulated by the Central Bank of Ireland
