Converting PRSA to ARF

If you vest your PRSA before 30 June 2012 then you will not have to pay the levy next year
 
If you deal directly with an insurance company, they will usually deduct normal commission from the ARF. Although yours is a straight like-for-like transfer, in "sales" terms an ARF is a brand new product. You should be able to negotiate a better deal with a broker if you've already decided on your course of action.
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So can I get a better deal than with my Insurance company and with who. I would like to vest or arf with cheapest annual charges.
 
A broker has a certain amount of discretion with regard to charging structures on products. A lot would depend on the amounts involved and the amount of work the broker is required to do.

For example, we have an ARF product with 100% investment, no bid/offer spread, no policy fee and fund charges from 0.75% per annum.
 
I cannot ask a direct question so indirect.
How can one know that the fee broker is not getting a % commission + his fee for the same transaction? - so doubling up.

And second, given that ILife want to send out a rep who is on a salary - is it just as € efficient to use a commission based broker for an ILife ARF?

Thirdly, would it be more € efficient to use an independent fee based advisor?
 
monagt said:
How can one know that the fee broker is not getting a % commission + his fee for the same transaction? - so doubling up.
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If you've agreed a "fee and no commission" arrangement with the broker, you can ask for a an illustration prior to point of sale - commission disclosure should be on any illustration and should therefore be zero in all years. You'll also get a similar illustration directly from the ARF QFM along with a copy of your policy document after the event.

monagt said:
And second, given that ILife want to send out a rep who is on a salary - is it just as € efficient to use a commission based broker for an ILife ARF?
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I don't know what sort of charging structures Irish Life's direct sales staff offer. Ask the rep for a breakdown in writing of what charges will apply to the ARF - allocation rate, annual management fee etc. Then compare.

monagt said:
Thirdly, would it be more € efficient to use an independent fee based advisor?
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Depends on the advisor. While all financial advisors in the country are closely regulated, the regulator does not dictate what level of fees one can charge. So some commission-based advisors may be offering more competitive charges than some fee-based advisors and vice versa.

All other things being equal, paying an advisor via commission for setting up an ARF is more efficient than paying a fee directly, for two reasons. (1) If your advisor gets paid by commission, the commission is ultimately deducted from your pension fund. You've already received tax relief on the contributions that made up that fund. If you pay the advisor a fee, the fee is coming out of your after-tax income. (2) Some fee-based advisors are registered for VAT. If your fee-based advisor is registered for VAT, then you'll have to pay the fee plus VAT. If you agree that the exact same fee can be deducted by commission from your ARF, commission is not VATable.
 
Liam, You continue to be very generous with your time and advice, Thanks again, M:)
 
Currently I have an AMRF taken out before budgetary changes for specifified minimum amount c 65K. I am now interested to activate my main PRSA(2nd PRSA) and how a couple of questions relating to ARF versues leaving it as a preserved PRSA.

If I opt for a preserved PRSA assuming I have to withdraw 5% annually is there any downside in relation to not going the ARF route.

The reason I ask is that with my AMRF I have a penalty of 4% of fund if I encash within 3 years? I also had quite a few percent charge for going from PRSA to AMRF. Given that I stayed with same Company and stayed in same fund I did'nt think this was fair. Any idea if I went the same route for my main PRSA what charges I could expect for a preserved PRSA versus ARF route.
 
What's the amount in question? Depending on the amount, it may be possible to arrange an ARF with 100% investment, no early exit penalties and an annual charge of <1%. This would compare with leaving it in the vested PRSA where you'd still have 100% invested, no early exit penalties but the annual charge is presumably 1%.
 
The sum involved couple hundred k. I have an arf quoted that will give me 100% value for transfer into a 5 year deposit bond/fund providing 5.4% aer less 1% management fee giving annual return nett to me of 4.4% guaranteed for the 5 years. So looks like I am losing .6 of the fund annually which is the same the Government takes without anything in return. probably go with this.
 
Sounds like an Aviva ARF with an EBS deposit - 5.45% AER? Are you dealing directly with Aviva? If so, push them for better than 100% - it can be done.

So looks like I am losing .6 of the fund annually which is the same the Government takes without anything in return. probably go with this.
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I don't undertand this point. How are you working out .6 of the fund?
 
5.4% less 1% annual fee less 5% imputed distributions less say an average of 3%pa inflation.

How long do you think you might live?

Over 25 years you would lose about 60% of the real value of your fund in today's terms from this strategy if inflation averaged 3%. Higher inflation would be even worse.

Of course this assumes that you can continue to obtain cash deposits paying 4 half percent above base for the next 25 years which isn't a very realistic assumption.

which is the greater risk? The absolute certainty of loss of purchasing power or some short term volatility from having some risk assets like equities?

A better strategy would be a more balanced portfolio with some fixed interest some equities global real estate etc.
 
The investment is only for 5 yrs after which I will still be able to avail of 100% transfer to any fund I want. I loose 0.6% value of fund which compounded over 5 yrs equals 3.3% approx of the fund. I will have obtained income of approx 23% of funf as income. Inflation maybe an issue but not significant over 5 yrs. If you look in todays Businerss Post at the Balanced Funds Managed Funds and Managed Dynamic Funds about 100 plus funds. None have returned a + over 5 years most have between -4 t0 -5% return annualised over the last 5 years. They have done not bad this year but overall poor performance but maybe that will change.
 
Ok so a few questions for you

Firstly how much of your investment is protected and by who if the bank goes bust? If you are buying a cash deposit through an insurance company you are no longer a retail investor. Professional investors such as insurance companies do not have the same protection as retail investors.

By investing through an insurance company your investment will be held on the balance sheet of the insurance company and if they go bust you would be a creditor of the insurance company. How financially sound is the proposed insurance company?

If you are holding cash in your ARF why are you using an insurance company at all? Why not use an independent QFM and get the ARF for 0.25%pa instead and keep the extra 0.75%pa?

Have you had a look at a range of risk rated index portfolios rather than the insurance company managed funds reported in the SBP? These index strategies have been positive over the last 5 years.
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Or over the longer term

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This is a relevant study I conducted on real returns for cash vs balanced strategies for ARF investors that you may find interesting

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or this article

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This video makes the same point

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Finally, the latest data for inflation in Ireland can be found here
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Marc said:
If you are holding cash in your ARF why are you using an insurance company at all? Why not use an independent QFM and get the ARF for 0.25%pa instead and keep the extra 0.75%pa?
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Hi Marc,

Would there be an additional fee for establishing the ARF on these terms and if so, what would it be for, say €200,000?

I agree that risk assets will be more likely to outperform cash over the long-term and that cash will probably underperform inflation over the long term. But if a client tells you that they simply cannot stomach the volatility associated with risk assets, even for short periods, and want a fund that will not drop in absolute value at any time, what would you suggest?
 
Dave,

There is an establishment fee for an ARF of €1000.

For a €200,000 ARF, this would equate to 0.5% of the initial amount or just 0.1%pa expressed over 5 years. If the ARF remains in place for the whole of an investor's retirement then the set up cost clearly becomes relatively insignificant.

Your second question is a common one that we see every day. If a client cannot face volatility risk they should actually first consider if an Annuity might be a better solution for them - at least for some of their fund.

All retirees face longevity risk that is to say the risk that they live "too" long and they run the risk of outliving their money. This is a very significant risk for an ARF investor who remains in cash for the whole of their retirement.

An annuity is a perfect hedge against longevity risk since the capital cannot run out. An annuity pays out for the whole of your retirement however long that is.

By definition half of us will live for longer than our average life expectancy. The real question that nobody can answer for certain is which half?

Retirement planning isn't a simple problem that can be distilled into a one size fits all solution and far too many people look at this too simplistically. If I earn 3% on my money pay 1% in charges but take out 5%pa then I am only losing 3%pa.

This fails to consider the loss of purchasing power on the pension fund and the ultimate impact that this will have on the standard of living of some retirees.

My recommendation is that ANYONE contemplating taking out an ARF and EVERYONE already in an ARF should obtain competent financial planning advice preferably from an independent and fee-only financial planner who operates as the clients fiduciary adviser. This is too complicated to arrange on a DIY basis.

I'm happy to offer a second opinion to anyone with an ARF or considering taking out an ARF and I have produced a detailed guide which I am happy to provide on request.

Marc Westlake CFP, TEP, APFS, Grad Dip, QFA
Chartered and Certified Financial Planner and Registered Trust and Estate Practitioner.
 
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