Are You Planning a Lump Sum Pension Contribution This Year?

Whether you are a business owner or an employee on a PAYE basis, you might be contemplating the idea of making a substantial one-off payment into your pension plan before the year comes to an end. Given the recent market volatility, increased interest rates, and stubbornly high inflation, you may feel less confident than usual about how to proceed. As investment advisors in Ireland,  we strongly advise that you dedicate some time to reviewing the nature of your pension investments before deciding on the best approach and destination for your pension contribution, in order to optimize the efficiency of your money management.

If you already have an existing investment plan, it could be an opportune moment to make certain adjustments. Conversely, if you currently lack an investment plan, it is crucial that you establish one that aligns with your financial objectives and risk tolerance before committing any of your hard-earned money.

Outlined below are four key factors our retirement planning advisors  feel you should consider before making a lump sum contribution to your pension plan.

1. Consider your overall financial plan and investments.

Take a moment to evaluate your comprehensive financial strategy and investments. It might be beneficial to reassess if your portfolio aligns with your true risk tolerance and profile, and if the current unpredictable market conditions pose a threat to your financial and retirement objectives. The years 2022 and 2023 have experienced significant volatility in investment markets, resulting in mostly negative returns across various asset classes, causing understandable apprehension among investors. Nevertheless, if your investment plan is resilient and you have a long-term perspective, volatility can be regarded as a chance to enhance the value of your portfolio.

2. Pension tax relief – use it before you lose it.

If you are self-employed, it is important to be mindful of the time constraints associated with pension contributions and tax relief. By making a contribution before the 31st of October this year (or the 15th of November if you file your return of income and make the necessary payment through ROS), you can claim relief against your 2022 income. Failure to meet these deadlines means forfeiting the opportunity to avail of tax relief this year, a benefit that you don’t want to miss out on and in turn support tax efficient investing.

Pension contributions remain one of the few opportunities that still qualify for tax relief at the marginal rate of tax. Furthermore, the funds invested in pensions grow tax-free, unlike other investments that are subject to Exit Tax or Capital Gains Tax. This means that any money you can allocate towards pension contributions can yield an immediate positive return of up to 40%, thanks to the immediate tax relief. Additionally, any investment gains within the pension will also enjoy the advantages of tax-free growth. In Ireland, there is no other investment structure that offers investors an instant 40% from the outset.

3. Always clarify the charges.

This is a particular area that our Thomond Asset Management team goes to great lengths to highlight and discuss. What can seem like small charges now can have a significant impact over time. Certain product providers tend to fudge the information and do not offer full clarity, even if you ask. If you are a business owner and in control of putting your own pension plan in place, you should focus on value for money, just as you would do with any area of your business. A pension is a product, and like any other products, they vary in cost. 

You need to examine all the costs – product costs, investment costs and adviser charges. Don’t be afraid to ask for an itemised breakdown of all the charges. These can add up and have a significant impact on your returns over the long term, particularly in times of negative returns.

4. Having an investing strategy is key

One of the fears of lump sum investing in volatile market conditions is the fear of markets falling immediately after you invest. There are several strategies that can be employed to minimize the impact of negative market drawdown while also allowing an investor to exploit an opportunity to gain better value in the longer-term.

Euro-cost averaging is the strategy of spreading out the investment of your money periodically, buying at regular intervals and in roughly equal amounts. When executed in a structured and disciplined way, it can have significant benefits for your investment portfolio as you are buying at various price points and so smoothing out your entry price into the markets. Some of these strategies can feel uncomfortable in the moment but can add significant value over time.

It is our experience that having a plan in place provides a degree of comfort, but it certainly doesn’t eliminate the fears associated with making investments at any time, and especially during highly volatile times like the present. Potential investors need to remember that while investments should ideally be carefully considered and planned, they are rarely risk-free, and the future is never certain.

Conclusion

While tax reliefs may be a primary incentive for making a pension contribution at this time of year, it is crucial to understand the nature of your investments and whether they align with your retirement plans and goals. Often, there are opportunities to significantly reduce the cost of pensions and investments for new clients which can lead to better long-term outcomes for you giving you a greater opportunity to reach retirement financially strong.

Important

This article is based on current pension rules, which are subject to change. Pension plans should be reviewed regularly. Independent advice should always be sought on pension planning. To claim income tax relief, you can apply to the Revenue to adjust your tax credits. Contributions deducted from salary will receive immediate tax relief. If you are self-employed, you must include your pension contributions in your self-assessment tax returns to obtain income tax relief.

Always seek the advice and support of your investment adviser before making any significant changes to your investment positions. 

This outlook and commentary do not constitute an offer and should not be taken as a recommendation from the author or Thomond Asset Management. Advice should always be sought from an appropriately qualified professional.

Warning

1. The income you get from an investment may go down as well as up.
2. The value of your investment may go down as well as up
3. Benefits may be affected by changes in currency exchange rates
4. past performance is not a reliable guide for future performance

Regulatory Status

Thomond Asset Management is regulated by the Central Bank of Ireland as an Investment Business Firm under Section 10 of the Investment Intermediaries Act, 1995 (as amended) and registered as an insurance, reinsurance or ancillary insurance intermediary under the European Union (Insurance Distributions, 2018).