High Yield Bonds

British fund managers have recently launched a number of high-yield bonds, which they describe as a halfway house between bonds and equities. Are there any equivalent Irish bonds available for investors here in the Republic?

Ms K.G., Dublin

There are two things to remember about such bonds. The first is that they are corporate, rather than government, issues; the second is that, in order to achieve the forecast return, they include an element of high-risk or junk bonds.

There has never been a culture of corporate bonds in the Republic, although some do exist. These include issues by the ESB - as close to government bonds as you can get, given that they come with a state guarantee - and Irish Permanent.

As the name suggests, corporate bonds are issued by individual companies. Like their government counterparts, they are essentially loans advanced by investors to the company with a promise to pay a set amount of interest over the term of the loan and the lump sum advanced at the end of the term.

Where they differ from government-issued bonds or stocks is that they do not have the added security of a state guarantee - hence the name gilts applied to government issues. If the company in which you invest collapses, your investment goes with it.

High-yield bonds, as the name implies, are corporate bonds, which promise to pay a higher rate of interest than their cohort. However, as with any investment, there is no simple way to do so without taking on a greater degree of risk. Regardless of what hype people seeking to sell such products may include in the sales pitch, the only way to offer the sort of returns these bonds do in the current low interest rate environment is to include junk bonds. These are loans to companies, whose future is so uncertain, they might have trouble finding alternative methods of funding at equivalent rates.

While such bonds are not on offer here, I cannot see why an Irish investor could not put money into such products in Britain, providing a Revenue return was made in relation to any income earned. Before any such move, one must fully understand the risk involved - with the benefit of professional advice - rather than the assurances sometimes given by salespeople.

Pensions

Can you please let me know if there is a recommended percentage proportion of one's salary that one should pay into a contributory pension fund as a general rule of thumb? For example, is it recommended that a person pay 5 per cent, 10 per cent or 15 per cent of their salary to their pension? I want to ensure that I am making sufficient monthly contributions to my pension. I am currently paying approximately 13 per cent between normal and AVC payments. My employer contributes an additional 5 per cent.

Mr B.G., e-mail

It would be lovely to be able to turn around and say, simply, that you need to pay x per cent into your pension fund, but I am afraid it is impossible. There are too many bits of information I do not have and, in any case, what you really need is a proper assessment from a professional financial adviser. What I can do is point out some of the factors which need to be taken into account.

First, what flexibility do you have on payments? Within the main contributory scheme, I assume you have very little. The scheme's rules will determine that the employer contributes an amount - 5 per cent in this case - and the employee also a set amount. If you had a personal pension, there would obviously be more flexibility but you would clearly miss the substantial input from the employer's side. In your case, the flexibility lies within the Additional Voluntary Contributions (AVCs) which you are already making.

You also need to examine what type of scheme your main pension fund is in - defined benefit or defined contribution. The former states that you will receive a proportion of your income on retirement determined by the number of years served, regardless of the performance of your investment; the amount you receive under the latter arrangement depends entirely on the performance of the investments bought with the funds you and your employer put into the pension.

Older schemes are almost certain to be defined benefit. Increasingly, newer schemes are going down the defined contribution route. Furthermore, in the case of defined benefit schemes, is any benefit paid net of social welfare entitlements?

Next you need to look at the pension options you may wish to acquire, if they are not already included in the scheme. You are, by law, entitled to a maximum pension of two-thirds of final salary - which itself can be calculated in a number of different ways - plus social welfare entitlements. In addition, you can make provision for a spouse in the event of your death, for death in service benefits, for coverage of benefits such as a company car which are not included in salary, for inflation and for early retirement.

Of course, each of these options adds to the cost of funding the pension, so you need to decide what you want and what you can afford.

A crucial bit of information, which you do not provide, is your age at present. To give an example, if you were to start paying into a pension at age 30, with a view to providing only the full two-thirds pension on retirement, it is estimated it would cost you close to 13 per cent of income - including contributions from your employer. That would not inflation-proof the pension, provide funds for a spouse in the event of your demise after retirement or any other "extra" elements mentioned above. If you were to delay paying into such a pension until you were 40, it would cost you more than 19 per cent of salary; by 45, the cost would rise to almost 25 per cent. As you can see, the age you begin funding a retirement plan is vital in determining the level of funding you need to consider.

Another factor to consider is tax planning. For people, like yourself in occupational schemes, tax relief extends to pension contributions up to 15 per cent of salary. For private pension holders, in the current financial year, you are allowed tax relief on all pension contributions up to 15 per cent of net relevant earnings. If you are over 55, this rises to 20 per cent. From April 6th, 1999, the relief becomes more generous.

Up to 30 years of age, you will still be allowed claim tax relief on contributions up to 15 per cent of net relevant earnings but in your thirties, you will now be able to claim relief on up to 20 per cent of net earnings, rising to 25 per cent in your forties and 30 per cent for anyone over 50.

As you can see, with so much at stake, it makes sense to take advice from a professional, preferably someone who is not tied to a particular range of products.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, Fleet Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.