Many savers wonder whether continuing to contribute to their retirement fund makes sense, writes CAROLINE MADDEN

GLOBAL STOCK market losses have proved particularly galling for Irish pension investors. After saving diligently and regularly for their retirement years, many now find that a shocking amount has been wiped off the value of their pension.

Despite the protestations by some investment experts that now is the perfect time to buy into equities, some pension savers will be wondering whether they’re simply throwing good money after bad by continuing to contribute to their retirement fund.

Already this year, Irish pension funds have lost an average of 7.5 per cent and the long-term performance isn’t more compelling. In the past three years, the average Irish managed fund has weakened by 14 per cent each year. In fact, the average fund has failed to beat inflation over the past 10 years.

Employees in defined contribution schemes have become increasingly disillusioned as significant chunks of their pension have vaporised each month. And some, especially those closer to retirement, now wonder whether future contributions will also prove to be more money down the drain.

“It would be,” says Ian Mitchell, managing director of Deloitte Pensions and Investments, “unless they put it in a cash fund”. Even though the level of return offered by cash funds is low, if a person is entitled to tax relief at the higher rate on their pension contributions, this return alone will make it an attractive proposition.

Fiona Daly of Rubicon Investment Consulting points out that, if an individual is a member of an occupational pension scheme, their employer will probably contribute to their retirement fund as well. So if, for example, an employee’s monthly contributions of €100 are matched by their employer, a total of €200 goes into their pension pot each month.

After tax relief is factored in, this only costs the individual €53. “So even if the €200 has fallen 50 per cent, they still have €100, €53,” she says.

While tax relief makes for a very compelling argument, pension savers must remember that, to a large extent they are simply deferring, rather than saving, tax. When they eventually draw down their pension, it will be taxed in the same way as any other income.

If a person’s pension fund is already invested in stock markets, Mitchell says they shouldn’t necessarily move it into a cash fund now if they still have several years to go before retirement.

Although the bottom has yet to be called on the stock market freefall, at some point in the next 10 years equities may be higher than they are now.

Daly agrees that people should be wary of moving any money already in a pension fund into cash. “If it’s already in equities, moving it into cash will crystallise the loss,” she explains.

She says that it could be argued that now is a good time to buy equities as they are very cheap. Of course that assumes the companies survive. In the Irish market where bank nationalisation is a real issue, investing in equities continues to look high risk.

If people are uncomfortable with putting their money into equities now, they should be able to redirect future contributions for the next year or so into a cash fund, she says. Most company pension schemes allow members to make this type of switch at least once a year.

They will “lose on the upturn when it happens”, she points out, but it will protect them from some of the stock market volatility. Many people now find that their financial circumstances are becoming considerably tighter as the recession deepens. If they’ve taken a pay cut or their spouse has lost their job, monthly pension contributions that were affordable in the past may now represent a considerable burden.

Is it possible to reduce these contributions until their situation improves, or even take a pension holiday?

It all depends on the rules of their company pension scheme. “If they’re in a defined contribution scheme where the rules state that they have to make certain contributions, then they may have no choice,” says Daly.

However, Mitchell encountered a client who told her employer she could no longer pay her pension contributions, and her employer was “quite generous” and not only allowed her to take a break, but also said that they would continue making the employer contributions to her pension.

“It involved a rewrite of the scheme rules,” he says. His client had to be moved into a special category of members that were not required to make pension contributions. It’s not that easy, but it can be done, he says, although if an employer is looking for a reason not to contribute to the pension fund, depending on the scheme rules they may well be within their rights to stop contributing.

Reducing or taking a break from AVCs is more straightforward, as contribution amounts can be changed, stopped or restarted at any time. However, if the AVCs were set up on a high commission basis, it’s possible that the individual may face a penalty. A lot of AVCs are set up on a nil commission basis, so this shouldn’t be an issue.

What if an individual’s financial circumstances have deteriorated to the point where they are considering raiding their retirement fund? Is this even a possibility?

Daly explains that it is only possible to withdraw your pension contributions from an occupational pension scheme if you leave within two years of joining. She warns that in this situation, the individual will not only pay tax on the amount that they get back, but they will only receive the current value of their contributions, as opposed to the full amount that they originally paid in.

She says that it’s “pretty much impossible” to withdraw AVCs in advance of retirement as Revenue does not allow it. The only possibility is if the person manages to “swing early retirement”, she says, and if they can afford to leave the workforce early, then raiding their pension probably isn’t a priority.