AVCs or fine art? That is the question

This is the time of year when those of us who do not have the luxury of a defined benefit pension scheme have to do some head-scratching.

October is the month when I and many others have to decide if we can afford a payment into our pension pot.

The technician tells me only a fool will ignore the opportunity to have the Revenue authorities hand me a cheque for a tax refund linked to an annual voluntary contribution (AVC).

The whimsical side of me wants to keep my hard-earned money in an easy-to-access account. The outright flippant part of me is eying up a holiday or even a new car with some borrowings.

This is where psychology comes into play. In an environment brimming with confidence about my career, earnings power, and the stability of the environment around me I’d go for a maximum AVC.

In such a set-up, my confidence would point to an ability to earn more next year to pay for the consumables while squirreling away savings for the long-term retirement plan.

In an environment marked by political uncertainty, economic risks, defined by Brexit and the US presidential election, it is more instinctive to keep money close to hand and not lock it up for years.

That logic extends to borrowing, too, whereby in a calm and safe climate the risk attached to leverage appear less fraught than during, for example, 2008-10 when economic crisis made leverage seem toxic.

There is a further complication. QE has inflated asset valuations across the board. Bonds, equities, and property are trading at earnings multiples not seen in many years.

Sales of safes with associated insurance policies are selling like hot cakes in Switzerland, where the costs are less than leaving cash in the bank, where you are charged for depositing money.

The financial world is upside down, so the challenges facing anyone managing money is tough.

A relative of mine enjoyed a windfall cash receipt recently. What should she do?

My conservative side told her to immediately retire debt as that creates an instant saving from interest costs which are probably higher than most financial product returns presently.

However, the advice instead was to use most of it to pay off loans and use the rest to buy some decent art.

The logic goes like this. Art tends to perform well as a financial asset, if picked carefully.

Well-regarded work, either contemporary of historic, can hold value and rise in price when inflation bouts occur.

It does go through periods of bubble-like pricing and that occurred in Ireland around the time of the Celtic Tiger.

Since then, though, prices have retraced, so there is an argument now that you are not buying it at the multi-decade elevated values that pertain in other asset classes.

Moreover, for those who like it, art provides a satisfying addition to any house and can cheer you up better than a bond certificate or a deposit account.

As with everything, moderation is the key word.

Art will not pay a regular dividend and its pricing can oscillate a lot around times of economic turmoil. It would certainly warrant no more than 5% of a well-diversified portfolio.

You cannot, however, buy art through a pension fund and that is why I would prioritise the AVC route at this time of year. There simply is no other mechanism that allows the Government, via Revenue, to send you a cheque for €40 when you write them a cheque for €100.

For a net €60 you have the use of €100 in your pension fund for as long as it exists.

If you are 30 years old that means for a minimum of another 30 years your €100 can go to work investing and all the dividends and capital gains attached to that activity are gathered tax-free within your pension pot.

Over the last few weeks I’ve read a lot of scare stories about how badly Irish people are organised around pensions.

As we approach the deadline for annual tax efficient contributions to your own savings, it is time to do a little bit to address that huge long-term challenge.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.