When it comes to pensions, tax relief gets all the headlines.
It makes sense. No other savings vehicle gets the star treatment from Revenue that pensions do. That is, tax relief on contributions, tax free investment growth and a tax free lump sum waiting for you on retirement.
But pensions are a long term savings vehicle, and the longer you save, the better. Over all that time it is your pension provider’s investment strategy that works diligently away in the background, doing its level best to make sure the value of your pension grows.
It’s the supporting actor without which there would be no performance.
“We talk about the need for pensions and the tax advantages and tax reliefs of doing it but, once you have a pension, how it performs over time is what will, ultimately, give you your pension pot,” says Ian Slattery, investment consultant at Zurich Life.
It can be hard to choose a pension provider, but if there’s a rule of thumb, look at their investment track record over time. While it is absolutely true that the value of investments can go down as well as up, and that past performance is no indicator of future returns, knowing a pension provider’s track record should play a part in informed decision making.
“It’s not something people tend to think about, but it’s about asking yourself, ‘Could my money be doing more for me?’,” Slattery explains.
Get your pension working for you
Pensions are designed to benefit from compounding. What that means is that, if you take a sample annual growth rate of 5 per cent, if you contributed €100 in 2020, it’s worth €105 at the end. That means you’re starting off with €105 next year and you’ve more money growing for you in your pension pot.
But the growth rate depends on what your pension is invested in. Insurance companies typically offer a variety of funds based on a different asset classes, such as equity or property. The vast majority of pensions are invested in multi-asset funds, comprised of different asset classes. The benefit of these is that diversification is built in. “You are, automatically, not putting all your eggs in one basket,” explains Slattery.
This matters because different asset classes perform better at different times, depending on what is going on in the world.
In recessionary times investors tend to move to safe haven assets such as cash or bonds, which tend not to give such great returns but are reckoned to offer better investor protection. In good times, equities are expected to give greater returns.
If assessing markets and making investment decisions accordingly is outside your comfort zone, looking for a pension provider for whom active management is a core competency can help.
Pension investments often span more than 30 years, so it’s reassuring to seek out a provider that has shown a consistent and robust investment framework through all sorts of economic ups and downs, over the long term.
While a passively managed investment strategy tracks market indices, aiming to match the performance of its asset category, an active one works to outperform market returns with investments that are hand-picked by professional investment managers.
“At Zurich Life we are active managers. People sometimes lose sight of good active management when everything is going well but the real value has been more evident throughout the pandemic,” says Slattery.
With Zurich Life, it's nice to know that there is someone actively looking after your money
“Being active managers meant that when Covid-19 came along we were able to react, make decisions and change what we were invested in. That’s very important. If things are going well you don’t need to worry but you really see the benefit of active management when there are bumps on the road.”
As an investor, you’d have to go back to the Great Depression in the 1930s or the global financial crash of the last decade, to find a precedent to the current crisis. Whilst previous global financial crises have been systemic, a global recession based upon a pandemic is largely unprecedented.
“What we have right now is, to all intents and purposes, a new reason for the economy to go bad,” Slattery says. “But every time there is a recession, for whatever reason, the same characteristics and investor behaviours are seen, every time.”
Strong track record
Maximising your income in retirement isn’t just about paying your pension contributions along the way, it’s about making sure, “you get the best possible bang for your buck in relation to what you are putting in,” he says.
A good investment manager, who can gain just that little extra every year, adds immensely to your pot over time
In the Independent Rubicon Managed Fund Survey Zurich is first over five, 10, 15 and 20 years, and has been Brokers Ireland’s number one for investment performance six years in a row*.
“In terms of pension returns, over the last 12 months we are 10 per cent above the average, which means you’re starting year two with a bigger pot than the next guy. A good investment manager, who can gain just that little extra every year, adds immensely to your pot over time. So whilst we have outperformed in recent times, it’s our long term track record matters most to customers*.”
Around 70 per cent of the value of your final pension pot is down to investment performance, he points out. “The earlier you start contributing the longer you’ll have that investment performance working for you.”
For a long term product like a pension, having a team of investment managers that can do well in a variety of economic scenarios can make all the difference.
Economic shocks capture public imagination, and tend to linger in people’s minds, he points out, but when you’re funding over the long term for a pension, they can be a red herring.
That’s because, in the end, it’s not the big events that matter most to retirement savings. It’s all the years in between, all the compounding that goes on in the meantime, and all the prudent investment decisions made along the way.
“With Zurich Life, it’s nice to know that there is someone actively looking after your money,” he says.
This article is intended to provide general guidance only. If you have not done so already, we suggest that you consider taking independent professional advice from your financial adviser and/or your tax adviser based on your own particular circumstances.
The tax and legislative information contained herein is based on Zurich Life’s understanding of current practice as at 31 August 2020 and may change in the future.
Zurich Life Assurance plc is regulated by the Central Bank of Ireland.