Time to bring this post back to life and update with some developments in the market for Self Administered Pensions.
By way of disclosure I can confirm that I personally have a Small Self-Administed Pension Scheme (SSAS).
In terms of eligibility, I am eligible to hold a SSAS as I am an employee (PAYE taxpayer) I am not a company director (although a company director is eligible, the self-employed are not). If you are an employee, it should be noted that it is necessary to obtain the consent of one's employer to sponsor the pension scheme.
Flexibility
The SSAS allows me to have a considerably more flexible pension than either a PRSA or a personal pension from an Insurance Company.
One of the reasons for this is the access to an un-fettered range of investment options. By this I mean that I am able to invest in any asset class permitted by the Revenue without any restrictions being imposed by an Insurance Company.
For example, it is a little known fact that although the Revenue will allow investment into commodities within Irish pension funds, it may not be possible to hold these within all forms of pension. The problem arises from the way in which insurance companies are supervised and regulated, specifically, the European Communities (Life Assurance) Framework Regulations 1994. These regulations specifically prohibit an Insurance Company from investing in commodities.
Where a pension is structured as a trust (such as in a SSAS), this restriction does not apply thereby offering greater investment choice.
Costs
There are certain fixed costs associated with operating a SSAS and having a pension trustee. I pay a little over €1000pa. This would be equivalent to a 1% annual charge on a €100,000 pension fund.
It is therefore reasonable to conclude that the charges for a SSAS are probably uneconomical for a pension fund of less than €100,000 compared to an insured pension product.
Stockbrokers
Like many AAM readers, I had a look at all the established Irish Stockbrokers, laughed heartily and proceeded to apply the wonderful power for good that is global competition.
The recent
Markets in Financial Instruments Directive (
MiFID) now allows stockbrokers to "passport" their services across the EU from one country to another.
The key here is to not only find a low cost broker internationally, but also one who can operate within a pension trust.
I have therefore opened an account with a major online broker offering trading in multiple currencies and on multiple exchanges for a fixed-fee per trade rather than the more normal percentage per transaction.
Investment advice
There is a misconception that a self-administered pension means there is no role for an adviser. Recent experience has shown that this is simply not the case and the need for competent financial advice is possibly greater than ever.
In my experience an accountant will have typically done a very good job of selling the tax benefits of setting up a SSAS. However, most of the schemes that I review are sat with large cash deposits and the member simply has no idea how to invest this cash.
In the past, where cash has been invested, the "traditional" route seems to have been to either seek out the services of a stockbroker or to make an investment into property. Clearly recent events have shown that both of these options are not without their risks.
With the Irish Stockmarket now making up just 0.22% of the World (source: MSCI World Index end Sept 2008) the folly of buying a small basket of Irish Companies as a safe, blue chip or in any sense diversified portfolio has now been exposed for the madness that it always was.
Furthermore, the credibility of the advisers who sold such highly concentrated positions in such a small range of stocks and mislabled this as a "portfolio"" has clearly been heavily damaged.
Equally, the frenzy of property speculation has left many with ill-conceived investments which may be highly leveraged, concentrated and illiquid.
The key to good financial advice in my opinion is simply the absence of the need to make a forecast about the future.
If I see "advice" which contains words such as "I feel, I believe or I think" I know that there is a hope of a result - I would consider anything along these lines to tend to be speculation about the future.
By contrast, investment advice is based upon an expectation of a result. E.g I expect an investment in the stockmarket to be more risky than an investment in government bonds. I therefore expect a higher return over time as compensation for the higher risk.
The foundation of Modern Portfolio Theory was a 1952 paper, "Portfolio Selection" by Dr Harry Markowitz in which he established a theory explaining the best way for an investor to choose a portfolio. Modern Portfolio Theory is of such fundamental importance in investing that the economists that formulated the theory received the Nobel Prize in Economic Science in 1990.
Modern Portfolio Theory has four basic premises:
- Investors are inherently risk averse. Investors are more concerned with risk than they are with reward. This sets them apart from speculators.
- Securities markets are efficient. Most studies support this idea.
- The focus of attention should be shifted away from individual securities analysis to consideration of a portfolio as a whole, predicated on the explicit risk/reward parameters and on the total portfolio objectives. The efficient allocation of capital in a portfolio to specific asset classes is far more important than selecting the individual investments.
- For every risk level, there is an optimal combination of asset classes that will maximise returns. Portfolio diversification is not so much a function of how many individual stocks or bonds are involved, as it is of the relationship of each asset to each other asset.
Competent Asset allocation within a pension therefore involves dividing the investment portfolio among different asset categories such as equities, fixed interest, cash and property and the process of establishing which mix of assets to use, is largely determined by investment objectives, time horizon and tolerance to risk.
The rationale for asset class investing is simple: capital markets work and diversification between asset classes increases return and reduces risk. Over the long run, markets reward investors with positive returns for taking risks and providing capital. If they did not, the capitalist system would have collapsed long ago. Market prices reflect the knowledge and expectations of all investors. Nearly forty years of academic research has shown that traditional fund managers are unable to outperform the markets by anything more that we would expect by chance.
"The idea that any single individual without extra information or extra market power can beat the market is extraordinarily unlikely. Yet the market is full of people who think they can do it and full of other people who believe them….Why do people believe they can do the impossible? And why do other people believe them?
Daniel H Kahnemann, 2002 Nobel Laureate in Economics.