Key Post: Self Administered Pension Schemes

I am a self employed co. director and currently have a co. pension with Irish Life and Permanent. As I would like more control over my pension investments I am considering opening a share a/c type pension with stockbrokers/life assurance co. Who offers the best value with these type of pensions? Will I be able to invest in US Mutual Funds, particularly inverse index funds?

Self-controlled pension fund

Can't answer the "best value" question, but I think there are only a couple of firms offering this service, so it shouldn't be too difficult to make the comparison yourself.

As to the US mutual funds, in general a non-"US person" cannot, for US legal reasons, invest in a US mutual fund. You can, however, invest in exchange-traded funds, which are similar though not identical. I have no idea what an "inverse index fund" is, so I can't tell you if there's an exchange-traded alternative in which you could invest.

Re: Self-controlled pension fund

You can set up a small self-administered scheme, appointing your own pensioneer trustee and paying for your own actuarial services as required. That's the most expensive option, but it gives you complete freedom, within the regulatory framework, to invest where you like, use whatever stockbroker you like etc.

An alternative is the "quasi-self-administered" arrangement available from some life assurance companies and brokers. The one I'm familiar with is New Ireland / Davy's.

Fee to establish at the discretion of the broker. (5% is the standard charge, but you should be able to negotiate this.)
1% charge to New Ireland for setting it up. (Waived if the fund is over €127,000)
Normal Davy's dealing charges.
Ongoing administration charge of 0.5% per annum to New Ireland and 0.5% to Davy's.

Of course, this arrangement ties you to Davy's services.

Liam D Ferguson
www.ferga.com

Re: Self-controlled pension fund

CHICHI, one suggestion would be to weigh up the additional cost associated with the extra control you are looking for.

My experience is that most clients want the control in order to achieve a higher return. If this is the case with you think long and hard before you act.

There is no relationship between control and higher returns, if anything you could be effectively taking higher risk, increasing your costs and ending up with a smaller pension fund.

A rule of thumb is that you would need to be contributing about 25k - 30k EUR each year to justify the extra cost of a small self administered pension scheme (SSAPS). Liam has already covered the kind of cost associated with the quasi-SSAPS.

These days you can have your existing pension and future contributions converted to a nil commission structure and have no entry costs (depending on the regular contribution), a low monthly policy fee of 3-4 EUR and 0.75% management charge. You would not have as much control as a SSAPS but you can choose from over 20 different funds. The fee for such a move is about 200 EUR.

I hope this helps.

Regards Michael

Authorised Advisor
www.myadviser.ie

Self-controlled pensions

"Inverse Index Fund" is a fund which moves in the opposite direction to the market, effectively another way of shorting the market.
I have heard recently of E.T.F.'s but am not sure if they can be used to gain from a falling market.

Your comments would be appreciated.

bcp

Do a share dealing pension. farily simple and not too dear. 5% of your cash going in and 1% per year after that. You buy and sell to the cows come home. You can short sell too if you fib a bit and buy within the couple of weeks they give you to cough up.

Self-controlled pensions

As a Pensioneer Trustee (and current chairman of the Association of Pensioneer Trustees) it might be useful to dispel some myths about self-controlled schemes.

Firstly, there is a choice of almost 50 different service providers to choose from.

Secondly, the manner in which the different providers charge and the services provided do vary. It is possible to find a service and price to suit most people's needs.

Thirdly, the question of costs is frequently a red herring. My own company has compared Total Costs on a contribution level of £10,000 per annum over 10 years with all the major players in the Insurance Market. The Total Costs associated with the self-controlled scheme came in at less than the Total Costs of the cheapest insured product.

In practice I believe every company director should have a Self Controlled Sheme to ensure value for money, transparency and choice.

Re: Self-controlled pensions

Hi Aidan,
would you mind telling us which of the
self controlled schemes offered good value?
What levels of entry charges and
management charges could you expect to
pay? Or are the charging structures
generally more complex?

Thanks.

Self-controlled pensions

Hi darag

I'm not Aidan, but I can point out that the answer to your question is not necessarily straightforward.

The whole point of a self-controlled pension scheme is that you can invest in anything you want, and the costs you pay will depend on what you invest in. Your fee to the scheme trustee/administrator may be unchanging, but if you invest in (say) equities you will also pay commission at whatever rates are imposed by the stockbroker used, if you invest in mutual funds you will pay the entry and annual charges embedded in the mutual funds, if you invest in property you will pay the costs associated with that, and so forth.

Re: Self-controlled pensions

Hi US,

Yes that makes sense.

But I'm not too worried about the unavoidable
costs that you mention - stockbrokers' fees,
mutual fund management charges, etc. If I
were investing "normally" (i.e. not saving for a
pension), I would have to pay these charges
anyway. Also there are ways to minimise them
by keeping down the number of transactions if
buying shares for example.

I guess I'm interested in how much is charged
(and is pocketed) by the trustee. It seems like
such a minimal service that it should be relatively
cheap. I'm thinking that you could get a pretty
good value pension by purchasing blocks of ETFs
or similar every couple of months through one of
these vehicles.

Thanks.

Self-controlled scheme

Hi darag

I think in today's regulatory climate it's very far from being a "minimal service", but no doubt Aidan will be along before too long to speak on this with the benefit of more experience than I have. Much of the trustee's time is taken up with ensuring that the Revenue Commissioners are kept happy, which costs money even though it doesn't necessarily translate into value for the client in terms of a higher pension fund.

If you are sure that you want to confine your scheme to the purchase of publicly-traded securities (like ETFs) many of the Revenue's more outlandish concerns would disappear, and the trustee's burden might be lightened. On that basis you might be able to get better terms, but it would be for negotiation.

Re: Self-controlled scheme

Aidan, would it be possible to see the assumptions made that underpin -

"The Total Costs associated with the self-controlled scheme came in at less than the Total Costs of the cheapest insured product."

I am happy to re-direct clients to such schemes for those who want the extra investment control and such a cost advantage would open them up to a wider audience. So far the checks that I have made would lead me to believe that you need to be a significant investor (approx 30k EUR per annum) to make them in any way cost effective and that would be compared to a 5%-6% flat commission structure.

I sell discounted insured based pensions and here are two examples of the typical costs for a 10k EUR lump sum;

Hibernian Life
Entry Cost = 0.5%, Set Up = 44.44 Eur fixed, and annual management charge of 0.75%.

Scottish Provident
Entry Bonus = 0.23%, Set Up = 0.00 Eur fixed, and annual management charge of 1.00%.

Both providers have a very wide range of funds and the MyAdviser once off fee on top of the above costs amounts to 100 EUR for Transaction Only and 400 EUR if you need full advice.


Regards

Michael

Authorised Advisor & Discount Broker
www.myadviser.ie

self controlled pensions

Hi Darag,

Apologies for not responding sooner.

I would prefer not to advocate the services of one Pensioneer Trustee over another.

What I would say on the question of costs is that the charging structure generally includes:
1. a set-up fee and
2. an annual management fee

Some Pensioneer Trustees are linked to specific investment options or providers and therefore their costs may be an amalgamation of administration costs and investment costs.

Because of the variety of different ways in which Pensioneer Trustees operate the set-up fee can range from€2,000 to €6,000. These fees are, for example, influenced by the range of ancillary services provided and the types of investment effected, their scale and complexity.

Annual administration fees tend to be expressed as a proportion of the fund and would average 0.5%. With some providers additional administration costs may be incurred in respect of actuarial fees, auditors fees etc. With others these will be included in the fee quoted.

As US has pointed out, additional costs can be incurred in respect of investments. However, as you have pointed out such costs are inherent in the making of any investment. (I will reply separately to Michael on the issue of costs). However, a key element to a self controlled scheme is the issue of costs. Because costs are transparent and self controlled you can add value to your fund immediately. For example, dealing costs can vary significantly between stockbrokers. Depending on the stocks invested in and the volume of investment activity significant savings can be achieved.

Similarly, with property investment, the legal fees and other costs can be factored into the investment decision (and controlled with a bit of haggling!)

I hope this is of help to you.

Aidan

Self Controlled Pension Schemes

Hi Michael,

In relation to the question of costs of insured versus self controlled pensions it is useful to outline some general background points.

The assets of unit-linked funds form part of the overall assets of the insurance company. As a consequence the costs of an individual fund are not separately audited. Therefore arriving at the true costs require a certain amount of detective work.

In much of the rest of Europe (and the US) pooled investments are effected through unit trusts, Open ended investment companies or mutual fund. A key distinction with these structures are that the individual funds are audited. From the audited accounts it is possible to discern a figure known internationally as the Total Expense Ratio (TER).

International studies of thousands of investment funds suggest that most funds have a TER of the order of 2.5% to 3.5% per annum. It would appear that funds with the lowest declared management fees do not necessarily have the lowest TERs.

It is worth noting that even the TER does not include dealing costs as these are generally netted of against profits before inclusion in the accounts. Thus actively traded funds could have significantly higher dealing costs.

There is nothing about the structure or practices of the Irish unit-linked funds to suggest they would be cheaper. Indeed in one infamous example of a unit-trust launched by an Irish Institution (which mirrored a range of unit-linked funds) the TER came to 12%.

Clearly, it is possible for unit-linked managers to charge a whole range of costs to the fund in addition to their management fee. However it is also possible for such managers to indirectly increase the cost of entry and exit through the movement of the bid/offer spread. Take for example a €10,000 investment in fund A which wishes to switch to fund bid. The fund manager allows bid to bid switching at a cost of €10. We will assume the "true" bid price of each fun is €1 therefore you would assume that the new fund value will be €9,990 after the switch. If the actuary moves the bid-price of the departing fund downward and the receiving fund upward s/he can achieve a "margin" of 5% or more on the transaction. This can result in a true switching cost of the order of €60 or more - a 600% increase on the declared costs.

Some appreciation of the true charges of insurers can be gleaned from the insurance industry "blue book". The total expenses of the various insurers can be measured as a proportion of total premium income. Note that this doesn't include dealing costs or the insurers profit margin.

In summary, in comparing unit-linked funds with other more transparent vehicles care needs to be taken in just using the declared fees approach.

I trust this is of some assistance.

Aidan

Re: Self Controlled Pension Schemes

Aidan, thank you for that and I want to think about what you have raised and come back later. In the meantime you mentioned a cost assessment that you did which showed that for a 10,000 EUR contribution level SSAPS come in very cost competitive. Do you have the specifics of that study?

My feeling is the costs of 2,000 EUR - 6,000 EUR set up and 0.5% on going cost (before any fund or dealing costs) look like it would take a lot of funny business (moving bid prices against a customer who switches or some how just adding in extra cost before the fund growth is set and the actual declared management charges is deducted) to make up for these costs. But maybe I am wrong.

Regards Michael

Authorised Advisor & Discount Broker
www.myadviser.ie

SSAP

Aidan,
An insured scheme using a stockbroker account overcomes this transparency issue. The account is valued by the stockbroker on a quarterly basis. This value is calculated as stock value less stockbroker fee less a defined fund management fee (usually 0.5%), ie full transparency.

In my experience many SSAPS have a significant investment in unitised funds therefore exposing them to the same fund management issues you have highlighted.

So the issue of unitised fund management costs is not in itself a reason for deciding between an SSAP or a self directed insured scheme.

self controlled pensions

Michael,

I have the underlying figures on a spreadsheet. If you e-mail me at aidan@independent-trustee.com I will forward the figures to you.

Aidan

self controlled pensions

Hi monet,

Your comment on a pension wrapper invested with a stockbroker is correct. The structure is more transparent that ordinary insured pensions and that is one of their attractions.

Similar benefits are available from pension wrappers which provide specific property investments. As the performance charachteristics of the underlying investment are known there is less potential for hidden charges.

In relation to the comment on unitised investments I would suggest that such structures are not getting the full benefit of being self controlled. However it is still logical to use unitised investments in a self controlled fund as, for example, a tool for diversification or whilst accumulating a fund for property investment.

The advantages to a self controlled pension scheme are not driven solely by costs. I dealt with the issue of costs because it was suggested that this might be a reason for someone not doing a scheme; I was simply ensuring that all costs were brought into the decision process.

Equally in assessing a pension wrapped around a stockbroker versus a self controlled fund it is useful to consider the costs of the stockbroker as well. In addition to having funds invested through all the Irish stockbrokers we also have funds that are utilising UK and US brokers. This is based on our clients own research on issues such as cost. With some stockbrokers dealing overseas I believe you may have to incur their own costs and those of a broker based in the overseas market.

A further advantage of the self controlled pension fund is the ability to use a variety of different investment media including 1 or more stockbrokers, unitised investments and direct property investment. Where someone has elected for self control it seems inappropriate to utilise a structure which places artificial limits on the exercise of their control. The investment term can be lengthy and the structure should facilitate the widest possible choice for current and future planning.

Regards,

Aidan

Self Controlled / Self Directed Pensions

"A further advantage of the self controlled pension fund is the ability to use a variety of different investment media including 1 or more stockbrokers, unitised investments and direct property investment. "

There is no doubt that a small number of professional investor will look for the degree of investment sophistication you outline, ie. the ability to use low cost online US investment brokerages etc. But surely this is rarefied territory and most self controlled investors will use stockbrokers well known to them who they can put a face on. I'm not sure what the reference to different investment media refers to. Most Irish stockbrokers offer a very broad range of sophisticated investment instruments.

I also have some reservations with the basic principal of investing in a specific property through a self controlled pension fund. My concern would be that the key attraction of investing in property, gearing, is lost. It seems a preferable approach would be a pension backed property investment mortgage. You gain personal ownership of the property, effectively tax free rental income to cover interest payments and the full benefits of geared investment returns.

Regards

Monet

self controlled pensions

Hi Monet,

The significance of using discount stockbrokers is it allows the client to control costs all the way down the line. In an era of reduced stockmarket returns this can be significant.

Not all clients in self controlled funds would seekto use discount stockbrokers or indeed any stockbrokers. The advantage of having an independent trust is to have the right to access ant provider you want - when you do decide to invest.

Clearly many people are interested in property investment when they set up self controlled funds - approximately half the funds I am involved with have property in them. It is an area where ordinary investors feel they can compete or a good footing.

The issue of gearing is not prohibitive as you suggest. Self controlled schemes can access a range of opportunities which will permit property investment with gearing.

This does not exclude your pension mortgage suggestion. It could be used in conjunction with the self controlled trust.

Aidan