Personal Finance Q & A

Your queries answered by DOMINIC COYLE

ARE EQUITY FUNDS RIGHT FOR THE YOUNG?

Q

If you are young and are saving into a defined contribution pension, is it advisable at the moment to be investing in equity funds? Or should one opt for safer albeit slower growth options like bonds, until the current equity volatility subdues?

– Ms NG, Dublin

A

With all the volatility in the markets at present, there is a great temptation to opt for a low-risk/no-risk approach to savings. having seen what happened to investors in the Irish banks, people are understandably nervous.

However, when you are young is precisely the time when people should be taking a higher risk approach to pension savings. There are two reasons for this. First, and most importantly, if there is a downturn in investment returns, you will have enough time to recover in a way that an older colleague close to retirement would not have. Time has a smoothing effect on investment returns.

Secondly, without risk, there is little chance of your pension savings achieving sufficient growth to deliver the sort of retirement income that you might expect.

Most people are not putting nearly enough into defined contribution schemes in the first place and adopting a low-risk/no-risk approach from the outset will only exacerbate that problem.

Having said all that, there is a difference between taking on risk and being reckless.

WHICH INSURANCE POLICY MATTERS MOST?

Q

What insurance policies do you consider to be the most important to budget for each month – ie health, home, car – in order of priority?

- Mr M T, EMAIL

A

In many ways, your choices on insurance are dictated to you. For instance, your mortgage provider will insist on you taking life insurance to cover your home loan. Any move by you to stop paying this would almost certainly put you outside the terms of the mortgage agreement and therefore put your home at risk.

The same is true for motor insurance. If you want to drive, you need to have your car insured or you risk prosecution; of course, in straitened times, you could opt to dispense with the car and avail of public transport – at least in the larger urban centres – which would remove the cost of insurance cover as well as the running costs involved with car ownership.

Insuring your home against the cost of rebuilding will also generally be required under the terms of your mortgage. Even if not, it would be foolhardy indeed to run the risk of not doing so. The home is generally the single largest investment a family will ever make and the prospect of paying for rebuilding in the event of disaster out of one’s own pocket is, for all but the most flush, not a viable option.

Paying for private health insurance is clearly a matter of personal choice, although one that is enormously popular in Ireland despite the cost. Alternatives include cheaper hospital payment plans or opting for the public health service.

In general it is certainly worth shopping around for the best deal on insurance, regardless of the type. Deals are available and premiums in the motor and home market are dropping.