Originally appeared in
Getting started on your pension journey
Published in The Sunday Business Post on October 6, 2019.
The low rate of pension penetration in Ireland is a common topic when subjects such as auto enrolment and possible changes to pension tax relief are being discussed. That’s according to Eoghan Gavigan, a specialist investment adviser and certified financial planner at Highfield Financial Planning.
Gavigan said statistics can make it seem like there is a lack of urgency among consumers in relation to starting a pension, and this in turn can produce a herding effect where people follow what others are doing, or not doing, and put pensions on the long finger.
“Someone once said that deciding to start a pension is like deciding to have a baby. If you wait until you can afford it, you’ll probably never do it,” he said. “How early you start is critical, and far more important than how much you contribute at the start.”
“If a person starts contributing to a pension at a young age, most people find he relatively quickly adjusts to their capacity to increase their contribution as time goes on. The earlier you commence investing, the earlier you start to benefit from the effect of compounding of returns, which is a very powerful driver of investment returns.”
To explain his point, Gavigan uses the following statistic as a way of showing the pensions landscape.
“As of Q3 2018, only 16.3 per cent of workers between 20 and 24 years old had a pension, whereas in the 45-to-54 age group almost 71 per cent had a pension,” he said. “It is likely that the 29 per cent who haven’t funded one by age 45 are primarily low-paid workers.”
“When you factor in the fact that low-paid workers may not ever fund a pension due to affordability and because, in theory, they won’t need one as the state pension will provide them with over 50 per cent of their pre-retirement income, we can see that although the vast majority of younger people have pensions, it seems that for most those who can afford it do, starting earlier is key to some extent because the job so scarce, with an objection to starting a pension earlier, this argument holds the least weight when investing in property.”
“Investing, broadly speaking, takes one of two forms, lump-sum investing or instalment investing. For many, lump-sum investing carries the risk of mistiming the market while short-term market weakness during the term of your pension will actually enhance your eventual return as you will acquire more units when prices are low. This presumes that you don’t crystallise losses before the market recovers, which is why prudent management of the investment, especially in the later years, is important.”
“How early you start is critical, and far more important than how much you contribute at the start”
Another factor affecting risk and returns of the investment as an investor who has a longer investment timeframe can ride out dips in the market. However, an investor with a shorter investment horizon or a longer maturity date will, to a large extent, have to depend on efficiency, whatever happens in the market.
“When you read or see claims that instalment-type investing has outperformed lump-sum investing over a long period of time, that anomaly takes is a comparison of apples and oranges — it’s a marketing device, not a serious investor’s endeavour,” said Gavigan.
“We regularly see claims by funds of superior performance over a given period, but a measure of how well a fund performs as well at times, if you believe in the mean reversion — that deviations from the long-term average price will revert to the average — you would have to conclude that going with last year’s best performer is a flawed strategy. Investment advice isn’t about guessing which fund will outperform in any given year or timing the next correction in the market.”
Gavigan said an adviser cannot reasonably recommend an investment portfolio for a client without a financial plan. The plan determines the rate of return required to achieve the financial objective, and this, and assessing the investor’s profile, your capacity for risk and your risk tolerance, informs asset allocation.
“A key thing about this process is for the investment to achieve your financial objective, the additional satisfaction you may get from having a portfolio which has outperformed the market will be limited because your plan will facilitate you in selecting investments which should help you to grow your pension assets with only as much volatility as you can comfortably bear.”
“Advisers often talk of clients being upset because their fund value didn’t increase during a 12-month period or fell by, say, two per cent, but what this actually means is that the way that investments markets work wasn’t adequately explained to the client to begin with. Pensions are a long-term game and history shows that those who stay invested reap the rewards.”
Eoghan Gavigan is a certified financial planner and the owner of Highfield Financial Planning hfp.ie
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