# ARF advice - which one?



## java31 (5 Jul 2007)

Hi all,

Am posting on behalf on my mum, need advice on setting up an ARF for her. She has 100k - 130k lump sum to put into an ARF which she wants to draw money down from each month. 

What would be the best policy for her? She is 67.

Many thanks!


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## Conan (5 Jul 2007)

Rather than "which ARF" I would start at "whether an ARF" (or an annuity).
The factors to be considered are:

Does she have other income (Social welfare pension, other pensions, rental etc)?
What is her state of health?
What level of income will she need/like in retirement?
The ARFhas the attraction of flexibility:

She can drawdown whatever income is required (subject to drawing down at least 3% p.a. and paying the tax)
On her death, any capital remaining can pass to a spouse/children
The downside is:

Depending on the rate of drawdown, the rate of investment return and her longevity, she could live longer than the fund
The Annuity has the attraction of

A guaranteed income for life (no ifs or buts)
But the downside is

Once invested in the annuity, the capital is lost
If she dies shortly after buying the annuity, little or no capital is available for the estate (depending on the type of annuity).
In simple terms, I would say:

If she is in excellent health (longevity is a family trait) then consider an annuity
If she wants certainty, then consider an annuity
If she has other income, and wants flexibility then invest in an ARF
If she is in poor health (longevity not a family trait) then invest in an ARF
If she is prepared to invest the funds on a sensible basis(!), taking some level of risk so as to generate a reasonable return (as opposed to investing in Cash), then an ARF may be suited.
Whether an ARF or an Annuity, you then needs to ask the major providers (the main Life Assurance Co's) what they can offer (or get professional advice).

Hope this helps.


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## South (5 Jul 2007)

How much would she be planning to draw down each month?

If there is another source of income (eg a husband's pension or she has another pension herself) then I would definitely go for the ARF - she can draw down in such a way as to always remain in the lower tax bracket or even tax exempt.

All the major insurance companies provide ARFs.

The right company and the right fund - would all depend on your mum's circumstance, if has other guaranteed income then she can take a longer-term investment approach, if no other income then she cannot take investment risk and probably should not even go for an ARF...


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## java31 (5 Jul 2007)

Hi everyone,

Thanks for your replies. I honestly cannot predict how long she will need to draw down money from the fund for at this point.

There is other income coming in from other investments, she just wants a regular sum that can be drawn down to supplement the other income that she has. Am thinking that an ARF would be best....

She wouldn't like the risk associated with an annuity that the money would be lost if something did happen to her. 

Can anyone recommend a good provider? The lower risk the better I think...

thanks again!


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## LDFerguson (5 Jul 2007)

The choice may not be hers.  She can only invest in an ARF if


the €100K - €130K is currently in a pension arrangement of some sort and
she has *guaranteed for life* annual income of at least €12,697 per year elsewhere.  This can include the State Pension if it is paid to her
Does she qualify on the above?

Liam D. Ferguson
www.ferga.com


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## java31 (7 Jul 2007)

Hi LDFerguson,

The lump sum was in my father's ARF and he passed away a few months ago, she does have a guaranteed for life income that meets the minimum requirement.


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## LDFerguson (7 Jul 2007)

Hi java, 

Sorry to hear of your loss.  

There are almost as many funds to choose from in ARF products as there are funds to choose from in the pre-retirement arena of Personal Pensions, PRSAs and company pension schemes.  

In the same way as there's no answer to the question "Where's the best place to invest €100,000?", there's no ARF that's unquestionably better than the others.  The best ARF will be the one with the best performing fund in the future.  And we can't predict that.  

All we can do is narrow down the list to find one that's suitable for her particular needs and preferences.  

Here's some pertinent questions: - 


What are the charges?  (Hint - at €100,000 she should be expecting *at least *101% allocation and an annual management charge no higher than 1.5% with no bid/offer spread.)
What does the fund invest in?  Equities? Property? Bonds? Cash?  Look at the proposed ARF investment in the context of all her other investments, with a view to keeping her diversified, i.e. if she already has most of her other investments tied up in equity investments, it might be wise to look at other asset classes for diversification unless she really wants equity investment.
Does she require a guarantee?  If so, exactly what are the terms of the guarantee offered - do they only apply on a fixed date?
If her pension adviser is recommending a particular ARF, how does it compare with the alternatives?
How much is the pension adviser getting paid out of your Mum's fund?
Hope this helps.


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## South (8 Jul 2007)

LDFerguson said:


> Here's some pertinent questions: -
> 
> What are the charges? (Hint - at €100,000 she should be expecting *at least *101% allocation and an annual management charge no higher than 1.5% with no bid/offer spread.)
> What does the fund invest in? Equities? Property? Bonds? Cash? Look at the proposed ARF investment in the context of all her other investments, with a view to keeping her diversified, i.e. if she already has most of her other investments tied up in equity investments, it might be wise to look at other asset classes for diversification unless she really wants equity investment.
> ...


You should not pay more than a 1% fund management charge.
The allocation should be min 100% with no spread.
At your mum's age, a significant fixed interest/cash % would be appropriate.


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## LDFerguson (8 Jul 2007)

> The allocation should be min 100% with no spread.


 
Wouldn't 101% or higher be better as per my post above?



> At your mum's age, a significant fixed interest/cash % would be appropriate.


 
I don't agree with generalised advice such as this.  It assumes that all people of a certain age think the same way about investments.  

While java does say "the lower risk the better I think..." it would need to be established whether he means low risk of a fall in the absolute value of the ARF or low risk of losing value to inflation before offering fund advice.  

A significant fixed interest/cash % is relatively low-risk in absolute terms, but runs a high risk of losing value to inflation.


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## South (8 Jul 2007)

The only way to get > 100% with no spread for an ARF holder at that age and fund size would be if there was a crazy fund management charge like 1.5% as you mentioned or an early exit penalty or probably both!!


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## Nermal (10 Jul 2007)

Could I throw another question about ARFs in here?

Let's say I have a DB pension, equivalent to 2/3rds salary.

But I've also maxed my AVCs, so I have a large fund there. 

Obviously, one's pension is limited to 2/3rds salary, so I can't use my AVCs - but can I just buy an ARF with them? Or do they just 'disappear'?


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## South (10 Jul 2007)

You would pay tax on any amount over which your total pension fund exceeds the revenue maximum.

If your DB Pension is already 2/3 of final salary, you can still increase this pension (perhaps) by using your AVC to provide a 100% spouse pension (if there is not a 100% spouse pension) or indexation in line with CPI (if not already there) or even a 10 year guarantee period.


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## Nermal (10 Jul 2007)

South said:


> You would pay tax on any amount over which your total pension fund exceeds the revenue maximum.
> 
> If your DB Pension is already 2/3 of final salary, you can still increase this pension (perhaps) by using your AVC to provide a 100% spouse pension (if there is not a 100% spouse pension) or indexation in line with CPI (if not already there) or even a 10 year guarantee period.


 
So the 'limit' of 2/3rds of final salary is actually just the amount that is tax-free, and it could be increased beyond this, it's just taxed?


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## South (10 Jul 2007)

Yes - they stopped the executions in the early 80s 

By the way - a pension is not tax-free either!


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## Nermal (10 Jul 2007)

Thanks South... Nice to know the AVC isn't going into a black hole if I'm still pottering about here when I'm 65...


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## South (10 Jul 2007)

No prob Nermel - does your DB pension have a ten year guarantee and increase in line with CPI and provide a 100% spouse pension?


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## Nermal (10 Jul 2007)

South said:


> No prob Nermel - does your DB pension have a ten year guarantee and increase in line with CPI and provide a 100% spouse pension?


 
No guarantee, no spouse pension, so they would be the obvious place to put the AVC towards first, right?

Scheme documents say that it will 'increase with CPI or 4%, whichever is lower, but at the discretion of the trustees', i.e., it's not guaranteed.


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## South (10 Jul 2007)

Hi Nermel - yes you can certainly use up some/all of your AVC on a Spouse Pension and a Guarantee before you have to worry about incurring the wrath of the Revenue!!


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## LDFerguson (12 Jul 2007)

South said:


> The only way to get > 100% with no spread for an ARF holder at that age and fund size would be if there was a crazy fund management charge like 1.5% as you mentioned or an early exit penalty or probably both!!


 
Not so.  Assuming that the broker is not taking maximum commission, you can get >101% allocation from several providers, 1% annual management charge and no early encashment penalties on regular income.  There would be encashment penalties in the first five years for full or partial surrenders but that shouldn´t be an issue for someone taking out an ARF for the long term.


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## South (12 Jul 2007)

LDFerguson said:


> Not so. Assuming that the broker is not taking maximum commission, you can get >101% allocation from several providers, 1% annual management charge and no early encashment penalties on regular income. There would be encashment penalties in the first five years for full or partial surrenders but that shouldn´t be an issue for someone taking out an ARF for the long term.


 
Brilliant 105% allocation and a 5% bid-offer spread...lovely stuff


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## LDFerguson (17 Jul 2007)

> Brilliant 105% allocation and a 5% bid-offer spread...lovely stuff


 
Heavens no - *NO* bid/offer spread of course.


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## monagt (13 Feb 2012)

Is this still available - 105%, 1% AM Fee, no bid/offer spread?

Someone mention AXA at <1% but I cannot find it, anyone see it?

Any others at < 1% AMF?


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## Marc (13 Feb 2012)

I think every single post on this thread assumes that the ARF is being provided by an Insurance Company.

Not a single reference to the possibility of using a Qualifying Fund Manager, separate custodian and separate fund managers. 

For many ARFs this is actually the best way to go but this option does not get much air time as the dominant distribution model in Ireland is the packaged insurance scheme.u

The real benefits of this approach are most significant for bigger schemes 

Typically you would be looking at fees like this 

Initial set up fee of around €1000

Annual fees as follows:
QFM 0.25%pa or €900pa minimum
Independent Custodian 0.05%pa
Fund management charges typically range from 0.15% to 0.5%pa depending on fund choice.
If you need the services of a professional adviser these should be paid for separately and not bundled together by an insurance company so that you end up having no idea what you are really paying.

No early surrender penalties, no smoke and mirrors.

If you are wondering why you need a QFM and an independent custodian ask anyone who had their money with Bernie Madoff or Custom House Capital.


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## Dave Vanian (14 Feb 2012)

Hi Marc, 

Do the above charges represent *everything* a client will pay to access such a product?


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## monagt (14 Feb 2012)

> €900pa minimum


 omg


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## Dave Vanian (14 Feb 2012)

I wouldn't be overly worried about the €900 minimum annual fee as it's explicitly stated.  But I have found that some QFMs quote charges and then there's an additional fee on top before you get access to the product.  In fairness  Marc does say that there's no smoke and mirrors with this one, so I'm hoping not in this instance.  Marc - if I was to send someone to you can you confirm that the charges you quote are all that they'll pay?


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## monagt (14 Feb 2012)

I like the .25% not the minimum


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