Conor Martin: Overcoming your own biases when it comes to pensions
My soon-to-be 13 year old son came home last week and exclaimed: “Dad, I love Spanish and my teacher is really good. We are learning so much every week!”
I reminded him that only a month ago before he started 1st year that he was moaning when their teachers were announced for each subject, and that his buddies in 2nd year had told him he’d be in trouble if you get that Spanish teacher.
So far, Spanish is one of his favourite subjects and he thinks the teacher is great. I asked him what he’d learned from a month ago when he already had his mind made up that he wasn’t going to enjoy Spanish because his older pals had told him what to expect from this teacher.
He came to the conclusion himself of what I was going to say and he agreed that he shouldn’t always accept the opinions of others and make up his own mind about people. What’s good for the goose might not always be good for the gander.
A little over five years ago in early 2014, a husband & wife who owned their own business came to me and asked me to help them plan financially for the future. They were generating significant revenue in their company and had no debt.
Their industry was beginning to pick up nicely after the financial crisis and they were expecting good years ahead. They were both in their late forties and the husband had a small enough pension while his wife had no pension at all. We sat down and looked at their current & projected profits, the cash they had accumulated in their company bank account and we discussed when they would like to retire. They hadn’t really thought about that but one thing was they were both very sceptical about was pensions.
They explained how they were both very risk averse and had heard many stories about how people had lost all of their money in pensions. I listened and asked some more questions about what they wanted retirement to look like and what plans they had in place to become financially independent one day. The recurring themes in our discussion was that they expected to generate lots of cash in their company, they did not like the idea of using pensions and they did not know how to take the money out of the company without paying the highest tax rate plus PRSI, plus USC and giving the Revenue more than half of it.
I’m delighted to say that in the last few weeks this couple exited the company with excellent pension pots and have now become financially independent in their mid-fifties, where otherwise the Revenue would have received loads more income tax, PRSI and USC and they would not have had any retirement fund which can pay them a steady income until they die.
Since, mid-2014, they regularly contributed as much as possible in their pensions and I invested both of their pots in low-to-medium risk funds for the last 5 years which ensured they had no sleepless nights when equity markets got volatile.
They have availed of lots of tax savings in the process and I will continue to invest in low-to-medium risk funds for their post-retirement funds so that their children will even benefit when they pass away. They’ve now sent some of their friends to us to also convince them that pensions exist purely to allow us avoid tax during our working life and, then provide a predictable income in retirement. They now know that the pensions themselves do not lose money, it’s the contents of the pension that loses money if invested unwisely.