Investing, Portfolio

Why I took money out of my pension fund

I have a confession to make. I did something recently that many financial bloggers would strongly advise against: I took money out of one of my pension accounts.

Why would I do such a thing? Have I gone absolutely bonkers? Well… Read on to find out!

Earlier this year, I took stock of my financial situation and discovered that a relatively large share of my portfolio is currently invested in pension funds. While this is not necessarily bad, it surprised me. Therefore, I made it a goal to assess my pension fund situation and see whether it could be optimized.

One of the pension funds that was in my portfolio is a private, post-tax pension contract. When I started working full-time after college, I worked abroad, so my home country’s usual pension instruments were not available to me. Since I wanted to make sure that I do pay into a pension in my home country, I started a private pension contract.

The decision to start this private pension account was based on the following selling points, all eloquently laid out by my bank advisor at the time:

  • The money paid in would be guaranteed to be available in full when I turn 60, meaning, there is no way I would lose money (well, not accounting for inflation…)
  • I would be able to commit to a low monthly payment (100 EUR/month) but maintain the ability to “top up” contributions with up to 10,000 EUR extra per year
  • While I am young, the money would be invested in riskier assets to maximize returns, and as I got older, it would start to move towards less risky assets to minimize losses down the stretch
  • At age 60 or above, I could choose to take a lump sum payment or a monthly pension
  • Should I die before the age of 60 (knock-on-wood that I won’t), a named beneficiary would receive the funds instead

The whole setup made a lot of sense to me, so I signed the contract. Then, over the years, I regularly contributed 100 EUR per month, and on occasion topped up the contributions, adding an extra 23,500 EUR on top all in all. In 2020 when the markets were crashing due to the COVID crisis, I even invested the maximum possible top-up amount of 10,000 EUR, to make sure that my pension pot would benefit from the recovery that would inevitably come at some point.

You may imagine my surprise, when funds balance had only grown by roughly 5% between May 2020 and December 2020, despite the meteoric recovery of the global markets. For comparison, the S&P 500 gained +33% during the same time frame. Quite a big difference!

Chart by LadyFIRE – Made with MS Excel

I looked into the situation and discovered that actually, my pension fund was invested in very conservative assets, mostly in other pension funds. This did not mesh with my understanding of the product, so I called my bank. My advisor explained to me that due to the current low interest rate environment coupled with the capital guarantee in the product, the fund was not able to invest in riskier assets.

Wow. That definitely made me regret pouring 10,000 EUR into my pension fund instead of directly investing it into the stock market. Lesson learnt!

Resulting from my improved understanding of how this product actually works, I started looking at my options. I could either completely cancel the contract and receive the full invested capital minus some fees, take out parts of the capital, or keep everything as is. Luckily, the fund was worth slightly more overall than my total contributions to date, so all options were on the table.

Ultimately, I decided to take option number 2, and pull out my “on top” contributions but continue contributing 100 EUR/month into the fund. I’ve collected the reasons for both of these decisions below.

Why I decided to pull out my “on top” contributions:

  • Given that I’m in my early thirties, I would rather invest this money into riskier assets with higher upside
  • Since the contributions were made post tax and the fund was close in total value to the total contributions, the tax impact was minimal

Why I decided to keep the original contributions at 100 EUR / month:

  • I can easily afford the payments
  • Having some money parked in less risky assets is probably not a bad idea
  • Even though this is a private pension with post-tax contributions, there are some potential savings on capital gains tax when taking money out later in life
  • Should I ever really need to, I can still pull this money out at a later date, which is a plus compared to other pension contracts in my portfolio

So there you have it! I pulled money out of a pension account and actually feel good about it.

What will I do with the money? Most likely I will dollar-cost-average this into passively managed, global index funds.

Will I regret this decision when I’m 60+? Time will tell, but I think the chance of that happening is rather low. There is more than enough time for any potential short term losses to be recovered before I turn 60.

What do you think of my move? Have I gone bananas, or is this a solid decision? Have you ever tapped into your pension pot for something you consider a “good reason”? Let me know in the comments, I’d love to hear from you!

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