Approved retirement fund investment...

I invested a large sum of money in a retirement fund with the view that I would be making money.

I recently got an annual benefit statement for the above fund. There are two figures on the statement. One is a closing unit value and the second is policy value. I take it the policy value is the monetary value of the policy. What is the difference between the two values?

Also, apart from recieved a dividends a couple of months ago, I am down a couple of thousand. My understanding of the policy was that it was like putting the money in to a deposit with the bank and if I left the money in I was'nt paying the DIRT on it.

Can someone help explain how I have lost money?

Thank you.

Charges and the 0.6% levy?

You could call them?

Firstly I would assume that the difference between the policy value and closing unit value may be that a penalty would be applied if you move your fund within the first 5 years.

Did ytou invest in a deposit account? If so the couple of thousand you are down may be because a set amount has been held within a cash or liquidity fund to be offset against charges and gowt. levy.

As Brendan said you can always ring them or go back to where you purchased from and ask them to clarify any issues you may have

One of the biggest problems we face when advising new clients is the issue of dealing with early surrender penalties on their existing contracts.

In order to pay high upfront sales commissions, product producers design complex charging structures typically including early surrender penalties. Naturally, no one purchases a product with the intention of changing it immediately and so in our experience many clients don’t pay close enough attention to the lock in clauses on the products they buy.

Unfortunately, it is not unusual to see penalties of 5% being charged for surrender in the first two years, falling to 1% in the sixth year. The investor is often given an upfront incentive of say 102% allocation and this is sometimes presented as “free money”. Of course, the contracts are designed to be profitable and providers are simply exploiting the well documented bias amongst investors to seek to avoid up-front costs and to tend to ignore the overall cost of the contract.

When reminded of these contractual penalties, many investors decide to stay put rather than pay to get out. Of course, the product producer has designed the contract to ensure that they make a profit whatever you choose to do and so the client who remains will end up typically paying at least 1%pa* more in total expenses compared to a comparable low-cost index fund. Over 5 or 6 years these additional annual charges could easily add up to more than the cost of getting out of the contract early and paying the surrender penalties. However, in our experience investors rarely choose to pay a known cost now for an uncertain future benefit and so many retain their existing contracts.

It’s therefore a case of you are damned if you stay and damned if you move and this situation was set in stone the moment the application form was signed and the broker received their upfront sales commission.

You should check through the original disclosure documentation you received which will set out the contractual terms of your contract.

*based on a low cost retirement structure invested in index funds.

I think we need to clarify exactly what sort of structure you invested in.

If you invested into a post retirement Approved Retirement Fund -ARF - then it is not subject to the 0.6% levy. However you do have to draw down n income of 6% of the fund value each year. So that might account for your reduced value. Investment performance also impacts the value, whether that is positive or negative. When investing the money you would have had choice of Funds, ranging from Cash to Equities etc. Cash funds will deliver very low returns and when the 6% drawdown is taken into account it would result in your fund value reducing over the year.

If your contribution was invested into a Pension Fund per-retirement, then there is a 0.6% levy cost and if the Fund was a Cash fund then the net return (after fund management charges) could be slightly negative.

Please clarify if you are in an ARF and what investment strategy you opted for.

Thanks for all your replies.

The investment is an Approved Retirement Fund.

TBH, I am annoyed at how much I am down after 6 mths. I have arranged a meeting with the finicial adviser to explain things to me. I will keep you posted....

I just get really fed up in this country at the moment where a day does'nt go by that someone is'nt carrying my money.

My queries were explained as follows;

1. The policy value is the money I would get if I exited the policy.
2. The unit value is the value of my policy.
3. The reason my money is less than when I started is that a 6% had been drawndown as an income & tax deducted from this at the high rate. If however I come into the low tax bracket I get refunded the difference between the high & low rate of tax.

Whiskey1,
Ok, so it is an ARF. Lets assume you invested €100 in a Cash fund. Over the last 12 months, it might have earned 1% gross. If you take off a typical annual management charge of 0.75%, the net value has only increased to €100.25. At the end of the year you are obliged to drawdown an income of 5% ( or 6% if the value exceeds €2m). Tax at your marginal rate will probably be deducted at source. Therefore your original €100 is now valued at circa €95.
The reality is that if you continue to invest in a Cash fund, the net growth will never cover the income drawdown. Therefore your net value will decrease every year.
You could invest in a Fund that might generate a higher return (to cover the drawdown) but that involves taking some investment risk.

Just to complicate things, you may have got a bonus allocation on entry (say 102%) so your notional value then was €102. But if so, you will be hit with an early exit charge (circa 1% to 5%) if you seek to transfer the funds during the first 5 years.

Since an ARF may ideally have to last 20 years plus in retirement, you do need to consider the investment strategy, whether you can live with some investment risk so as to try to generate a decent growth rate. If not, then your overall value will gradually decrease over time.