Don’t be frightened off by pension scare stories

Financial advice for farmers from chartered tax adviser Kieran Coughlan, Belgooly, Co Cork

Don’t be frightened off by pension scare stories

Those working in the agriculture, fishing and forestry sectors have relatively low private pension coverage compared to other sectors of the economy, at just 28.1%.

On the ground, it’s clear that a host of factors result in such low coverage, ranging from general scepticism of pensions, and low disposable income, to higher priority for on-farm capital investments.

Low pension coverage can unfortunately lead to difficult decisions. manifesting in a future where would-be retirees cannot afford to retire.

A 2014 study on land mobility and succession, by Macra na Feirme, found that 50% of farmers thought they possibly would need an income from the farm, after they were no longer able to work on the farm.

This was delaying the transfer of the family farm, due to the inability of the farm to generate enough income for two generations.

Pensions received relatively bad press during the financial downturn about a decade ago, with scare stories of people’s entire pension pots evaporating making headlines.

Any investment, whether it’s wrapped into a pension product or not, is only as good as the underlying asset base, income base and risk base.

During the financial crisis, plenty of investors (outside of pension investments) lost heaps of money, investing in physical property including development land, hotels, commercial parks, and shares.

In that context, it is easy to whitewash off-farm investments as being a waste of money.

However, the majority of those that invested in property in the depths of the recession will have been well rewarded.

CSO figures show that Dublin residential property prices have risen 93.4% from their February 2012 low.

Those who invested in a fund tracking the Dow Jones share index in the depths of the financial recession, at March 2009, would have been rewarded well, with a near 370% gross return on their investment over the intervening decade.

The point here is that, for every negative news story pointing to huge losses on investments for a cohort of investors, as a result of a financial crash, there are positive stories showing how some investors have made a killing, as markets recovered.

Investing via a pension has three main advantages over a more traditional model of direct personal ownership, regardless of whether the underlying investment is made in property, shares, bonds or interest returning investments.

Firstly, contributions to a pension fund qualify for a tax relief, subject to relevant limits.

This means a taxpayer who is liable to income tax, who makes a pension contribution, can claim a rebate of income tax or, in the case of employees, have their pension contribution factored into their pay packet, getting tax relief during the year.

Secondly, growth within the pension fund, either via income, rental income, dividends, capital gains, or interest, can be earned tax-free by a pension fund.

Thirdly, pensioners can usually receive a portion of their pension fund tax-free on retirement.

Typically, companies offering pension products allow investors to make relatively small investments, and can allow an investor to switch between different funds with relative ease, whereas trying to emulate such an investment personally may be impractical, and may incur prohibitively expensive transaction charges.

For instance, an investor looking to invest €1,000 and trying to buy a selection of 20 diverse shares, across a variety of stock markets, would lose a relatively high amount of their investment pot in purchase commissions, whereas joining a managed fund would likely incur much lower commission.

Of course, pensions have some downsides too, such as additional charges on investment, and annual or periodic management fees.

Your pension fund may also be inaccessible until you reach retirement.

The benefits payable out from the pension fund on retirement, apart from the tax-free portion, can constitute taxable income for the recipient.

Persons who may wish to consider making a pension contribution should obtain relevant professional financial advice; the above information should not be construed as investment advice.

Apart from considering whether you should invest in a pension or not, farmers should consider whether on-farm investments will deliver a better return for their investment.

Financial advice for farmers from chartered tax adviser Kieran Coughlan, Belgooly, Co Cork

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