Owner/Director Pension Fund

[galwegian44]

As a recent Owner/Director I'm looking to add to my Occupational Pension by starting a self-employed pension. I've talked to a few advisors, some tied, some not and I seem to be more confused with many questions left unanswered. I'm hoping the AAM fraternity may be able to help.

I've been advised that as an Owner/Director I can open one of 3 types of pensions:

1) Self Administered Pension
2) Self Directed Pension
3) Directly w/ Life Company

My intention is to maximise my contributions every year for the next 8 - 10 years until retirement. I cannot say that my understanding of the pros and cons of the above is complete but my feeling at this point is that I should open a SSAP for its flexibility. I'm told that its the same as a Self Directed pension except that you can invest in property.

Having identified the type of pension I moved on to my risk profile and find myself in the Low to Medium bracket primarily because my financial outlook for the next 5 years is one of decreasing equities, bonds with low interest rates (I'm far from being an expert so welcome thoughts that disagree with this outlook).

The next stage for me as I see it is to choose the fund(s) to invest in. Is there a straightforward way to retrieve fund information for funds across the major providers that fall into this category, say a 3 - 4 on the Risk Profile or would I have to check them out individually on each Life companies website?

With my lower risk profile and the current low interest economic environment charges are extremely important in a low yield environment so is it possible to compare all charges across these funds including Entry Charge, Exit Charge, Management Fee, Allocation Rates etc. Is there an equivalent rate to the APR for savings which shows the comparable cost across funds?

Also, is it possible to retrieve information on say, the top ten Irish fund managers who actively outperform everyone else. I'm thinking that maybe it's better to research and invest in the person(s) managing the fund rather than the fund itself.

Lastly, is there a recommended method I should follow or use as a guideline in choosing funds. Obviously step 1 is to identify my risk tolerance but identifying and selecting appropriate funds is such a key element for future gains/losses that I feel quite a bit of time and effort should go into this stage? Just a thought, any advice on how to approach this would be much appreciated.

Thanks in advance.

 

[Conan]

Firstly, you should open a Directors Pension (not a self employed pension). If you effect a PRSA you are limited to how much you can contribute, so I would not go that route.
An occupational pension (Directors Pension) can be established under a number of guises:
- a self administered
- a self directed
- an Insured scheme

The determining factor will be how much you want to be involved in the investment decision making. Typically a self administered scheme requires you to make all the investment decisions. A self directed scheme (often operated by a life company) allows you the flexibility to influence the investment decision making, but offering a variety of a funds as a default. An Insured scheme will generally only offer Funds as investment options.
I would consider the following issues before implementing any structure:
- your time frame to retirement (is it 8 to 10 years)
- what level of contribution (company plus personal ) will be invested
- what is your risk tolerance
- do you want to manage the funds or hand them over to a professional manager( but based on your attitude to risk)
- what other pension assets do you have (if any) and where will they be held

Based on all the points you mention, I do think you need to get expert advice. You will have to pay for this in some shape or form (commission or fees). However if you can determine exactly what structure you want you can save on the set up costs by going "execution only" through a broker (who will charge you a lower fee since they are not providing advice).
When you look at the Life Assurance companies there are only a limited number (5 or 6 major players), but the charging structures can be confusing for the uninitiated. There are a larger number of operators (Pensioneer Trustees) offering self administered structures. But that's probably only going to work if you are comfortable taking on all the investment decision making (what to buy, when to buy, when to sell etc etc).
Ultimately the investment decision will be critical. I can certainly tell you who was the best manager in each fund category in the past. But it's the future that matters. As the saying goes "predictions, particularly about the future, are difficult".
Finally, if you are going to adopt a low risk profile, then returns are likely to be low also. So the difference between various managers may not be hugely significant.
Summary, I think you need expert advice from a pensions specialist.

 

[galwegian44]

Thanks Conan, I appreciate the detailed response.

I have about 8 years experience investing in equities in the USA market through a low cost execution only broker but I'm definitely not up to speed on the vagaries of pension investing. I've talked to 3 brokers to date, one BOI who was by far the most knowledgeable but obviously limited in what he can offer, one QFA at a meeting set up by a friend who had little knowledge and a third independent financial advisor who I'm meeting again tomorrow to try to answer some of my questions.

As you stated, with my limited timeframe I'm looking more at protecting my capital and extracting the tax benefits rather than looking for a huge increase in my investments so costs are a major factor. I've seen mentions of ETF investing in another thread so that may be an option.

Thanks again for the advice.

 

[North Star]

Hi galwegian44,

I would agree with Conan that a Directors pension is the more flexible option for you in relation to maximising contributions. His comments re Life Co. or self administered pensions are likewise very sound, I would add that for a self administered pension there can be a issue, where for smaller pensions the minimum annual charge can make self administered schemes more expensive until you have crossed an effective breakeven size. Any decent adviser can work out these numbers for you.
I think you are doing absolutely the right thing by talking to several advisers in relation to your pension planning, though you need to recognise that any bank employee is in effect a tied agent and can never be considered as being independent. If I were you this is roughly how I would approach the issues you are looking at;

1) Firstly I would do the boring but vital financial planning exercise; an adviser should do this for you but if you are comfortable doing the numbers yourself than that is also an option. Decide what level of income in retirement you need or are aiming for. Quantify what income will be provided from all current pension benefits and see what the shortfall is. Now look at your funding plans/capacity for the pension you are setting up. Quantify what rate of return after costs you will require to meet your pension fund target at retirement. This gives you your target or required rate of return. Once you have that you are better placed to look at various investment options and rule out unsuitable ones. If for example you only need a 4% per annum growth rate on your new pension, then this should frame your investment decisions. You may not need to take on higher risk/return investment options.

2) Get your adviser to provide details on the cost structure of both self administered and insured options. You will be looking to ascertain what net allocation rate you receive on all contributions ( i.e is there an entry charge), what the on going annual management charge is for the various funds/investment options and if there are any early exit charges and/or any other charges. Again this is reasonably straightforward to provide. All advisers should be able to clearly lay out the cost structure options and the various pros and cons.

3)The harder piece is the important and often neglected piece, i.e how do you suggest/recommend that we invest to meet the 4% (or whatever target you have ) return after all costs, required to deliver the required amount at retirement to provide the income you require. In our view an 80/20 rule probably applies i.e 20% of the outcome will be driven by the cost structure but 80% will be driven by then investment performance. We have done our own analysis of the historic net investment performance of all the main life company offerings and found that for the same asset class e.g Eurozone equities there was a surprisingly large performance difference over 5 years i.e there was an over 4% per annum differential between the best performing and the worst. This is historic data, clearly no one can be certain the differential will be repeated but I would certanly at least want to see the relative performance numbers for all the various providers.
Recently we have the innovation of fund platforms being offered where we can now access the best fund managers from across the world. If you have the time I would look at these options as well. If as you say your priority is simply to protect our capital this step may not be required in your case.

4) Once you have decided on your plan, funding levels and suitable investment strategy, you then need to choose who to transact the pension with. If you are clear on all of the above and dont need/require advice then shop around for the lowest cost execution only offering. If you feel that you do need advice and help with the analysis and investment piece, then I suggest you talk to several firms, preferably all independent and not tied agents. Ask several adviser firms to provide you with both terms and investment recommendations - the best way to get price/value discovery. Then you can assess what is good value and which investment approach makes the most sense for you.

I know this is a bit extra work, but in the long term it could be time very well spent on what is an important issue. There are plenty of good independent advisers who post on Askaboutmoney and you can look at those posts if you want a starting point to identify advisers who should be able to help and add value. If your decison is to work with an adviser make sure to clarify with the adviser as to what services they offer, the charges involved, their qualifications and credentials and how they can add value to you.

Regards Vincent

 

[galwegian44]

Thanks Vincent, that's great advice, much appreciated.

My follow up meeting with an independent advisor this morning is pushing me towards a Self Directed pension primarily because the costs are lower and the option of investing in property is not one I'm interested in right now.

I need to do some research on the options available to me now from an investment perspective and contact other financial advisors. I agree it's a lot of work, especially when I'm in uncharted territories but required because there are major and far reaching decisions to be made.

Thanks and Regards.