Hello everybody,
A long time lurker and a first time poster here, so just another usual suspect, this time from Slovenia (hi rekreativc, hi Zarya – at last we can play some Tarok, we have reached the minimum of three players).
Not quite able to figure this one out on my own, so I thought I could use some of the wisdom being gracefully shared in this community.
As a rather late starter I am trying to build up stash as quickly as possible. One of the options and topic of this post is transforming my tax deferred investments into index fund. The question is whether this is sensible/optimal.
I have around 17.000 EUR invested in a tax deferred (not yet tax sheltered) account. Generally it is called PDPZ, is considered as private pension savings and is the only tax advantaged option here. Some details on past performance and inflation are provided in the attached document, hopefully it is self explanatory.
*Note: VWRL
https://www.euronext.com/en/products/etfs/IE00B3RBWM25-XAMShttps://www.vanguard.co.uk/uk/portal/detail/etf/overview?portId=9505&assetCode=EQUITY##overviewThese options are available:
1) Cash in, pay tax, index invest
CONS:
This was fully employer contribution (up to the point it ceased contributing), so full tax applies:
- pay 1 % back load (exit) fee
- pay 25% tax immediately, i.e. at cash in
- pay 16% tax (difference to full rate) mid 2017
Net output is ~ 10.000 EUR
PROS:
Line of reasoning:
- I have 20+ years to official retirement
- Currently (barring some considerable twist) it seems infeasible for me to retire earlier solely based on my investments in taxable account
- secure the funds, i.e. avoid any funny future legislation, which essentially confiscates the private pension savings (actually happened in some EU countries recently, google it for Hungary, Poland, Ireland, etc.)
- higher potential return:
- assuming 7% nominal annual return (global stock index VWRL*) vs. ~3,5% current fund return (see attachment), the break even point is in year 16, from there on I should be better off. This is a simplified calculation, accounting for taxed dividends, which must be reinvested manually (all of this is included in 7% nominal).
- can use the investments whenever and however I want
- I completely control the actual selection of stocks/bonds in my account
2) Leave it in the current guaranteed fund
PROS:
- avoid the 42% tax setback/loss
- the fund has a guaranteed return, which is legally prescribed, so this could be used as the “bond” part of my portfolio
- can cash in lump sum anytime I want, this of course incurs the 42% tax+fee cost
- tax is deferred until the retirement, i.e. drawing the pension/annuity, when my tax bracket may be lower (25% or 16%)
- there are some ideas for new legislation to reduce/halve or even eliminate the tax altogether for pensions based on this fund (but not for lump sum cash in)
CONS:
- run the risk of new legislation confiscating the private pension savings
- lower return, the fund return is guaranteed and prescribed:
- the minimum annual return is prescribed as: 40% of the average of returns of all 1y+ Slovene government bonds, so the fund return is below bond return. The high return in recent years (see attachment) is because Slovenia was considered risky recently (the infamous PIGS/PIIGSS club), therefore higher recent bond return => higher guaranteed fund return.
- if the fund fails to reach this return, the fund provider has to cover the difference himself
- for this reason guaranteed fund managers invest very conservatively (e.g. 10/90 stock/bond), despite being allowed to use a portfolio with more risk and higher return potential
- I have no influence whatsoever on actual selection of stocks/bonds in my account
3) Move the money into a different lifecycle fund – new legislation
PROS:
- potentially higher return – actual figures not known, this is new stuff. Two new funds are available with the same fund manager:
- “moderate fund” with around 50/50 stock/bond ratio
- “dynamic fund” with around 90/10 ratio
- switching funds with the same manager can be done for free once a year
CONS:
- run the risk of new legislation confiscating the private pension savings
- the return is not guaranteed
- once moved from guaranteed fund to lifecycle fund, it cannot ever be cashed in as lump sum, even if moved back to guaranteed fund – a result of legislation change
- pension/annuity can only be drawn after official retirement, i.e. in 20+ years
- as an exception, pension/annuity can (partly) be drawn in 9+ years if unemployed (not sure of the exact conditions, though)
- I have no influence whatsoever on actual selection of stocks/bonds in my account
Based on the above it seems to me that the choice is between options 1 and 2. Despite a huge tax setback, I am leaning towards option 1 mostly for psychological reasons, i.e fear of confiscation, can use money anyway and anytime I want, can select actual stock/bond indices(!), etc.
Note that I plan to invest only in stock index (VWRL) for the next ~5 years, then slowly increase the percentage of bonds. IMO this is in line with my risk aversion, I had the benefit of checking it up close and personal in the aftermath of the last recession, albeit with a different and smaller portfolio.
Opinions, comments, criticism, and votes on recommended option warmly welcome.
Most notably, are my assumptions sensible: is 7% nominal realistic for global stocks index, is 3,5% a “bond index grade” return, etc.
Many thanks for bearing with me in this rather lengthy post. I just wanted to be as precise as possible.
Poll
