Clever Investing

Let’s say you have a lump sum sitting in your bank account that you would like to invest, with the hopes of making a profit…what should a first-time investor consider when deciding on if and where to invest it?

How much risk are you comfortable with?

If you are ready to invest, consider how much risk you’re willing to accept. With all types of investments there will be some degree of risk, but some have more than others.

• Would you be more likely to choose high risk for potential high return investments, or an investment with the lowest potential loss?

•   Are you cautious or carefree when it comes to making financial decisions?

•   Are you quick to react to media or market changes?

Some tips to help with your investment decisions;

¬  Invest with a regulated company: A company regulated by the Central Bank of Ireland must always act in the best interests of consumers and comply with strict rules that help protect consumers. Your financial advisor will also be able to guide you in choosing a company and with assessing your needs.

¬  Diversification: Spread your risk across several types of asset classes and sectors to avoid putting all of your eggs in one basket.

¬  Consider volatility: Certain assets are more volatile than others. If you only invest in a single asset type (such as individual shares) you are more exposed to changes in market value for that asset type. This can demand a lot of your time to monitor the market and use your judgement as to when to sell.

¬  Choose a managed fund: You’ll have an expert investment manager at the lead who is knowledgeable about what assets across which sectors to mix, and who is actively monitoring performance and responding to market movements and opportunities.

What does return on investment mean?

A return on your investment is the potential amount you could gain or lose. A return can be positive where you gain money over the amount you have invested. Or a return can be negative where you lose money you invested. It’s important to know that unless there is a capital protection guaranteed, most investments are not protected, and you could lose some or all of the money you invested. No one can predict what is going to happen with the market. However, it is a good idea to leave the money you’ve invested alone for a while and a recommended duration of at least 5 years can give your investment a suitable time to perform.

Monthly Income in the Event of Death

This month I am highlighting a type of life cover which will provide a monthly income on death. Most life protection policies pay out one lump sum, so this policy type is designed to replace some or all, of an income coming into a household.

What are the benefits of this type of policy?

Mortgage Protection will cover any outstanding mortgage amount, which is most likely the largest monthly expenditure in most households. Although mortgage repayments are only a portion of the overall monthly outgoings a family may have, utility bills, groceries, clothing, education costs and possible outstanding loans are among the many other expenses. A regular monthly income might be easier to manage than a lump sum and would help keep the household on track.

How does it work?

In the event of a death during the chosen term of the policy, an income will be provided from the date of the claim until the end of the policy term. Income will be paid for a minimum term of two years once a claim is made even if the claim occurs within two years of the end of the term.

How much does it cost and how much cover is needed?

Let’s imagine you have mortgage protection which will clear your mortgage. You have calculated that you would require a monthly income of approximately €3,000 to compensate for the loss of earnings into the household. You want to cover this amount until your children are financially independent, so determine that you require this income cover for a term of 20 years.

Life Cover (Monthly Income) Premium (Monthly) Term

€1,500 €24.35 20 Years

€3,000 €45.66 20 Years

Sample quotations above are based on a non-smoker male / female, aged 40. Source: Zurich

 Some of the additional benefits that may be included with this cover without additional cost, can be Accidental Death Benefit, Guaranteed Insurability Option and Terminal Illness Benefit.

Paid Up Pensions…what to do with them?

A paid-up pension is a pension that you may have had with a previous employer and upon leaving employment and ceasing payments, you may not have enquired about or moved to your own name.

How do I get information about my old Pension?

In most cases you should be receiving annual benefit statements with general details (including the value) of your pension. Though if you have moved to a new address, you may not be receiving this information annually or at all. If you are unsure where to look, the company’s human resource department (or Employee Pension department if there is one) is a good place to start.

Can I bring my pension with me when I move employment?

In most cases, when you leave employment, you have several options. You are entitled to request “leaving service options” which sets out what choices are available to you. This can intimidate and confuse people but if it’s explained correctly, I find people are more confident making the decision to move their pension into their own name.

Will I lose out if I move out of the old Pension arrangement?

The only way of knowing is by enquiring about the benefits currently included on the pension plan, but in many cases, you can gain from moving your pension funds into your own name.

One of the main advantages is that you get direct access and information sent to you personally about your pension. Many people like to have complete control over their pension without having to contact a Trustee (or past employer) anytime they want information regarding their policy.

What can a Financial Adviser do for you?

Part of our job is to help people arrange their pensions together into an efficient / transparent portfolio. In simple terms this means you know exactly what you have, where you have it and when you can access the funds. In certain cases, individuals are surprised to learn they may have access to part of their pension once they reach age 50.

Do I have enough Life Assurance cover?

It is understood that if you plan to purchase a property in Ireland, you will be required to have a Mortgage Protection policy in place. This policy is to pay back the loan amount in the event of death.

Is this enough life cover? Depending on your age and whether you have a family or dependents, then no, Mortgage Protection alone is regularly not enough.

Why would I need more Life Assurance cover? A salary coming into a household is used for bills, loans, savings, and other big life events. If this salary ceases in the event of death, a replacement will be needed to cover the shortfall. If you have a young family, you will need more cover as you will need any benefits to last for a longer time.

How much is enough? We tend to avoid thinking about losing our loved ones, let alone the financial consequences. There is more than one way to work out how much life cover one might need. A basic starting point is to multiply your gross salary or your household annual expenses by a factor of eight.

The following quotations are an example of the cost of Life Assurance for a couple who are non-smokers and with the option of conversion (this allows you to convert your policy before the term ends to a new policy without the need to provide medical evidence). The term is for 10 years, and the cover is €250,000.

Age 30 € 23.19 per month

Age 40 € 40.41 per month

Age 50 € 87.52 per month

You may not need extra Life Assurance or less cover in the case where; your dependents are financially independent, you have death-in-service benefit through your job, you have substantial savings, or you have investments or a property which could provide an income or be sold.

Income Protection…is it necessary?

If you were unable to return to work long-term due to an illness or from the after-effects of an illness, would it be possible for you to sustain your current standard of living? How long will your employer pay your salary if you are unable to work for an extended period?

What is Income / Salary Protection?  Income Protection is different to serious illness cover and is designed to provide people with income replacement in the event of serious illness or if they are unable to work for a prolonged period of time. It can also be called Permanent Health Insurance (PHI).

Who is it for?  It is particularly important for those who are self-employed or people who are not entitled to a salary while off work due to a medium to long term illness or disability.

Why would I need it?  If you had an ATM in your house which held more than €500,000 in cash that you could access monthly for your day-to-day expenses, would you insure it?

We do not always think about income and future earnings as an asset. It funds our lifestyle, mortgage/rent bills, children’s education, life in retirement etc. In turn we also do not realise that as one of our biggest assets, this needs to be protected or insured. We don’t hesitate to insure our cars, houses, pets but we rarely think to insure the one thing that pays for these items…our income.

Pros: It can cover up to 75% of your income, tax relief is available on premiums paid subject to specified limits.

Cons: Depending on age, occupation and medical history, the premium can be costly, but the tax relief can bring the cost down.

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Executive Income Protection can be set up by an employer who wants to provide income security for key employees or directors. The cost of pension contributions can also be covered under this plan. One benefit for employers or business owners is that the premiums qualify as allowable business expenses so they can be offset against corporation tax.

Personal Income Protection is similar to Executive Income Protection and can be set up by individuals who pay the premium themselves and claim the appropriate tax relief personally.

Wage Protector is more budget-friendly and most suitable for more manual occupations or for workers in riskier jobs which may be more expensive to insure.

Cashflow Planning

The heading makes the task sound a bit boring, and slightly business-like… but the actuality of this term is something we all do in everyday life! Each month, most of us will have bills to pay, maybe a mortgage/rent, household utilities, insurance…followed by food/clothing bills, savings and hopefully some funds to put aside for a social life or something nice to enjoy as a reward for our hard work. This short-term planning is an important and smart habit to have and can help us be prepared for any unexpected bills or events that may occur along the way.

A secure online financial planning system we use for creating financial reviews can help with the long-term cashflow planning. It allows safe access to a portal where you input your expenditure/liabilities, savings/income and most importantly, your objectives now and further into the future. The more information you can input, the clearer the picture can be for your financial adviser and the more accurate the recommendation. It helps to highlight any areas where you may need to perhaps direct funds towards protecting yourself and your family or maybe towards saving for big life events such as starting a family, college fees, buying a property or preparing for life in retirement, to give some examples. Or maybe you have a dream of cruising around the world and want to figure out how you can make it happen!

Although this system helps identify the areas you need to focus on and it is planning for the long-term, nothing is ever set in stone and life can change in a heartbeat. The results and graphs can show you various scenarios throughout your life and the impact they may have on your finances.

Once we provide the results and recommendation, it is up to you to decide on the next step. As life can be ever-changing and unpredictable at times, we feel it is important to review your cashflow status every one to two years or should your circumstances change. So, as you have your monthly planning habits, an annual check-in on your cashflow plan will help give you peace of mind knowing you are using your money wisely and as best you can to achieve your goals.

Apart from mapping out a financial plan for the future, it is also a good opportunity to review any existing life policies or pensions you may have. Once you give signed instruction to a provider, your adviser can contact the life and pension companies on your behalf for further policy details. If you would like to see more information on cashflow planning, just visit www.drumgoolebrokerage.ie/planning.

Saved Smart… what’s next?

Potential options for a €200,000 Pension

Last month we looked at how you can potentially turn €120,000 of savings into a pot of €200,000. Our sample subject took the advice provided and placed €40,000 of their salary into a pension for 5 years, between the ages of 60-65, to build up a pension of €200,000. They received tax-relief of 40% on these pension contributions. So, what can they now do with their pension savings?

There are different potential retirement options available in what is called an Occupational Pension plan. For the purposes of keeping this simple, I will discuss the retirement options that are available in most pension arrangements. The options for our sample retiree will be as follows:

Value at 65:    €200,000

Tax-Free Lump Sum: 25% of the fund = €50,000

Balance of Funds: €150,000 - can be used to provide a level of income for life in one of the following two ways:

1.    Annuity

You place your €150,000 with a pension company and they pay you a guaranteed income for the rest of your life. At the moment, a 65-year-old may get an income of roughly €5,325 per year (subject to income tax)

The biggest pro of this option is that you are not reliant on fund performance. The biggest drawback is that once you have purchased the pension, you cannot make any changes and once you pass away it ceases.

2.    ARF/AMRF (Approved Retirement Fund / Approved Minimum Retirement Fund)

This is where you reinvest your €150,000 and draw an income out of the proceeds. The biggest benefit is the flexibility (you can take different amounts when you want) and this will pass onto your estate/partner upon your death.

The biggest downside is that you can theoretically draw it all down and/or the fund value does not perform as well to make back what you take out of it.

“I pay income tax on my pension when I retire?!”. This is something I hear from time to time, but remember, you will have had tax relief when you put money into your pension, you gained tax-free growth on your savings, and you received 25% of the fund tax-free at retirement.

Not just that, at retirement you are earning less income, with a sole pension of €150,000 and only the state pension. A lot of individuals (and couples) will pay little to no income tax on their €150,000.