Money under the bed in a shoebox or contribute to a pension: Limerick financial planner debates

I came across an individual some months ago who is incredibly skeptical about putting money into a pension plan. He’s so distrustful of them that he hasn’t joined his companies pension scheme and he’s been with them for the last seven years.
And the reason why he’s like this is down to what happened to his father.
He told me his dad had been contributing to a pension plan all of his working life and when it came to retirement time he was told by his employer that there was no money to pay his or anyone’s pension for that matter because the company went bust and so did the pension scheme.
And understandably what happened, which was a long time ago, left a terrible impact on him and his family and their distrust of pensions filtered down to each and every family member, young and old.
And because of what happened many many years ago the person I met who is now 40 years old, has never put money into a pension plan and as I said already he hasn’t joined his current employers plan even though he has been asked multiple times to join.

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And despite knowing the company would contribute 12% of his salary to a pension for him, he still wasn’t for turning.
He said and I quote, if my father all that time ago put his money into a shoe box and put it under his bed at least he’d have that money now. And incredibly that’s exactly what he had been doing himself because that way he thought it would be safe and what happened to his dad wouldn’t happen to him.
I had to ask him again about putting money under the bed into a shoebox, just to be sure that I hadn’t misheard him, but he confirmed that’s exactly what he had been doing.
I told him how important it was that he saved for retirement in the right way and what happened to his father was terrible, but it was extremely unlikely that it would ever happen to him. And just to say, I don’t know the particular reasons or background behind why his dad’s company went bust and why they reneged on paying pensions to their employees. They obviously didn’t have the same protections that are in place nowadays.
Anyway I wanted to try and change his mindset if he allowed me to try and he said okay but he didn’t think he’d change what he was doing, but I was up for the challenge.
And my starting point was to put in front of him some factual, indisputable numbers that he couldn’t argue against.
So, on a whiteboard I started to write down some numbers and on one side I was going to put down figures based on choosing the traditional retirement route where he and his employer would save a % of his salary into a managed pension fund.
And on the other side of the board we’d put his shoebox numbers.
I wanted them side by side so we could stand back and look at them alongside each other and see what the difference between them was.
And the output I was going to deliver in each instance was based on the following parameters.
His gross annual income is €65,000
Monthly savings of €379
He had 25 years to retirement
My first heading was:
Fund at retirement
Shoebox €113,700
Traditional Pension €529,127
Difference €415,427
My next was and there were seven more headings that followed this one which you’ll see what each are as you read on.

Fund adjusted for inflation
Shoebox €94,863
Traditional Pension €428,127
Difference €333,264

Annual growth
Shoebox 0%

Traditional Pension 4%
Employer Contribution
Shoebox €0
Traditional Pension €195,000

Tax relief from Gov
Shoebox €0
Traditional Pension €45,500

Personal cost
Shoebox €155,700
Traditional Pension €68,220

Why the shoebox’s strategy's personal cost to him is €155,700 is because he is saving money from after tax income.
His effective tax rate is 27% so for him to save €379 each month, it’s actually costing him €519 because he has to pay income tax and usc and prsi on that €519 in order to net down to €379.

Monetary Loss/Gain
Shoebox -€60,837
Traditional Pension +€359,907

% Loss/Gain
Shoebox -39%
Traditional Pension +527%
I also spoke to him about the volatility of the stock market just in case he was concerned about it, so I wanted to nip that in the bud just in case it was something he didn’t want to ask about or use as an excuse.
And you must invest in some asset classes that carry some risk and there is just no escaping that but having a well-diversified portfolio will help in this regard so that when some asset classes fall, others will rise. And no one knows what investment returns will be next year, but the past leaves clues and we should pay attention to what they are.
But the tax relief that is available on personal contributions provides a huge buffer against stock market drops.
Let me explain.
If someone invests €100 each month and they are on the higher tax bracket, it's actually only costing them €60.
So, €100 is going into their fund but their salary is only reduced by €60.
If the stock market dropped in value by say 10% in one month, you might be excused into thinking you lost 10%, but in fact you still made a gain of 50%.
You invested €100, it cost you €60, it drops in value by 10% and is now valued at €90 but remember it cost you €60.
Which means you still made a gain of 50% because your €60 is now valued at €90.
So, despite the market dropping by 10%, you’ve still made a gain of 50% and a 10% drop is huge by the way. But let’s make it even bigger, what if it dropped by 20%?
Well now your €100 is worth €80 but it cost you €60 so you’re still up +34%.
These are factual indisputable numbers.
Let’s include an employer contribution and see what happens.
Lets’ say your employer matches your €100 which means there is now €200 going into your fund every month but remember the personal cost to you is just €60.
If markets dropped by say 40% in one day (the biggest single day drop by the way was Black Monday on October 19, 1987, at -20.47%) that would mean the €200 invested for you is now worth €120.
But your personal contribution was €60 which means you’ve still doubled your money even with a market drop of 40%.
There is no comparison, none whatsoever when it comes to saving for your retirement, the evidence is indisputable and that is saving into a pension all day long and don’t let anyone else tell you otherwise because the numbers don’t lie.
And there are other advantages to choosing the pension fund route.
The first is your savings grow tax free within the fund and are not subject to DIRT or CGT or Exit tax like they would be if you saved into a savings or equity-based account and secondly, you will be able to take up to 25% of your fund tax free at retirement as well, something you won’t be able to do from your savings account.
The moral of the story is to try and not be influenced with what has happened to others or what you’ve heard has happened to others, if you can that is.

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Seek out the facts if you’re unsure from someone who knows who might confirm or dispel what you’ve heard or are thinking. Because a belief formed in the past can influence what people do in the present which can have a knock-on effect of what happens in the future and I think the best financial advice should focus on the past, present and future.
And there needs to be more education taught in schools about this. Some things are too important to be left to chance, and I believe financial education is one.
We are failing our young people if we do not invest in their future. When they leave school they will have to make complex financial decisions that will have long-term consequences like this type of thinking that I have been telling you about.
And I believe that the best place to start is at school and as soon as possible. There we have a captive audience and what's more, its’ an audience that is very interested in money and recognizes its relevance.
I’m beginning to rant, so apologies and this is a conversation for another day but relevant nonetheless to what I’ve been talking about.
So, how did we end our meeting?
Did I convince him to start a pension and stop putting money under the bed?
I think so.
What he agreed to do was start a pension with his employer. Get a contribution from them and he was going to make one as well, but he was going to start slowly with a small amount until he got more confident that this was the right route for him.
So, rather than going for zero to a hundred metaphorically speaking, he was going to start off slowly and gradually build it up as he became more confident with what he was doing and seeing.
And the ultimate goal was that in one or two or even three years, he’d take that money from out under his bed and lodge it to his pension fund as a big AVC contribution. And then keep that shoebox he had under the bed for shoes and nothing else.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie