My husband is due to retire this month and has a defined benefit pension plus an AVC fund of about €60,000. He is not able to avail of any of the fund-tax free, so he is going to put this money into an ARF. Can you advise as to what fund he should put it into? The market seems to be very high at the moment and bonds may be risky because of inflation.
– YS, Kildare
Your husband is in a position of strength here, which enables him to make some smart moves with his additional voluntary contribution (AVC) fund as he approaches retirement. Here are three to consider.
First, the defined benefit pension. These pensions are now rarely on offer for those in the private sector, because they are so beneficial for the employee, and so expensive for the employer. They provide certainty over your income in retirement. Typically, a defined benefit pension pays out based on a percentage of your final salary when working.
That’s great in itself, and it changes the context of the €60,000 pot. It means you have less need to draw down the AVC money rapidly. And because you have a high degree of certainty over most of your income, you can afford to take more investment risk than you might expect, in search of greater financial returns.
There’s a second reason not to shy away from investment risk. Yes, there is short-term uncertainty in the markets – isn’t there always? – but your investment timescale is probably longer than you think. You could be spending some of this this money in 2050 or later.
How to go about choosing an Approved Retirement Fund (ARF) in practice? To start, bear in mind that there’s no need to use the employer’s existing adviser, or to stick with funds from the existing pension provider. You make get more responsive and more knowledgeable advice elsewhere.
At Moneycube, we judge funds using three pillars: diversification, growth alpha, and wealth preservation. Because of your defined benefit pension, it’s likely the first two pillars are most important in your situation.
Your fund choice needs to be diverse: across geographies, industries, and types of asset. A well-managed multi-asset fund could fit the bill here, and you could also invest in four or five different funds within the ARF.
Where is growth to be found? Certainly not in cash or cash-like assets. For the long-term investor, a spread of equities, inflation-linked bonds, and income-producing infrastructure assets is to be embraced, not feared.
A final thought on how there is money to be won and lost by acting smart: can your husband cram any more into the AVC pot before he retires? If he is a top-rate taxpayer, a last-minute contribution of, say, €10,000 could generate a €4,000 tax refund.
Effectively, he would be growing his €6,000 after-tax contribution by 67% overnight, giving you even more scope to finance your retirement comfortably.
This article is adapted from a Moneycube article which appeared in the Sunday Times on 23 May 2021.