ARF Expenses & Charges

Slim

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I have recently set up an ARF via a broker. Terms are 100% allocation, annual management charge 1.25%. So far, so good. However, the documents provided show projected expenses and charges in year 1 of approx. 6.2%. It seems to be a one off charge but increases slightly, in monetary terms, as the ARF grows. I was not surprised but this was not flagged at the meeting with the broker.

Is this standard and is this avoidable by using an execution only broker? Thanks.
 
We've seen some very poor charges disclosure recently



From an earlier AAM post on the same subject

Please remember that an “increased allocation“ isn’t really the benefit it seems.

it is sold like this “I’m getting 3% commission, but the life company is paying 2% of that by the increased allocation”

it actually works like this

you give the company say €100,000 they purchase units with 102% allocation so €102,000 - so far so good

then they apply their annual management charge to the €102,000

A typical life company contract costs over 2%pa when properly disclosed.

So each year you are paying a couple of grand in fees and if you try to break the contract the additional fees are recouped by way of an early surrender penalty.

For example and this is a very rough illustration

Amount€ 100,000
Allocation102%
Invested€ 102,000
Illustrative Annual fee2.41%using Irish Life MAPS 4 Investment Bond product as a proxy because fee disclosure for ARF is opaque
Commission3.00%
Commission Paid€ 3,000.005% GrowthCharge
Year1€ 107,100€ 2,581.11
Year2€ 109,744.83€ 2,644.85
Year3€ 112,454.98€ 2,710.17
Year4€ 115,232.06€ 2,777.09
Year5€ 118,077.71€ 2,845.67
Cummulative Charges€ 13,558.89
It looks like the commission is "only 1%" when you focus on allocation rates
For illustrative purposes only
 
It would appear that your ARF is subject to early surrender penalties. Did you advisor discuss early surrender or encashment penalties with you? If so these are taken account of in your disclosure document. Typically these penalties apply in each of the first 5 years. The purpose of the disclosure document is to show you what your position would be if you drew down the fund in full at each time period shown i.e. if you drew down full at end of year one the total charges would be 5% early encashment penalty & 1.25% in AMC = 6.2% is the charge in year one BUT this only happens if you full encash your ARF.

These disclosure documents are my least favourite part of all regulatory / complicance documents in Irish financial services. In my opinion they are of little to no help to consumers, full of jargon and lead to confusion such as this. These are drafted to comply with the Life Assurance (provision of information) Regulations 2001 which really could do with a major refresh to make this information more appropriate and more importantly to be presented in a way that understandable and consumer friendly.
 
Thank you both for your responses. Marc's figures make sense but my figures don't reflect that example. While early encashment charges might have been mentioned, I fully expect and accept them. The puzzle for me is that, if as Smoneen says, year 1 value takes this into account, I would expect the expenses and charges figure in year 5 to be considerably less, but it is higher at 6.78%. What else might these 'expenses & charges' represent. The company is Zurich, if that is of use. Thanks.
 
This is exactly the reason the legislation around disclosure needs to be looked at!

Looking at year 5 the disclosure calculation assumes you haven’t full draw down your fund until exactly that point in time. Therefore as you’ve held onto the policy for 5 years you will have had 5 years of 1.25 % deducted. Therefore the total expenses and charges to date are 5 years worth of AMC deductions and the penalty applying at that date.
Ideally if you could see the projected values for year 6,7,8 and 9 it would help clarify the impact of the early surrender penalties on the projected deductions. Can you see why I say these are not fit for purpose?

If it helps your broker could request the missing years for you from the life company. By missing years i mean 6-9 as the table you’ll have been given will most certainly jump from year 5 to 10. They have only provided the default tables based on your investment amount & fund choice that they are required to provide but they could provide the calculations for the first 10 years if you request it from your broker. I sometimes find that those figures help people understand these documents a little better.

The way I like to think about these disclosure tables is each year in isolation so if I reach X year what are the total / cumulative charges, values etc at that point in time. However I find for most people the figures for the previous year tend to skew their thinking in terms of the values been illustrated. Of course to make things worse, these are simply projections with smoothed growth and amc deductions, which in practice simply does not happen.
 
Is this standard and is this avoidable by using an execution only broker? Thanks.

The average AMC across Savings/Investments/Pensions through the normal advisor channel is close to the 1.25% you quote. You are also more likely to have early exit/transfer charges in the first 5 years of this contract.

You can, readily, get 100% allocation with an AMC of 0.75% and no early exit/transfer charges on an ARF through the 'execution only' route.


Gerard

www.prsa.ie
 
This is exactly the reason the legislation around disclosure needs to be looked at!

Looking at year 5 the disclosure calculation assumes you haven’t full draw down your fund until exactly that point in time. Therefore as you’ve held onto the policy for 5 years you will have had 5 years of 1.25 % deducted. Therefore the total expenses and charges to date are 5 years worth of AMC deductions and the penalty applying at that date.
This makes sense and the numbers stack up approximately. Thank you for taking the time to explain it to me.
 
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