Joining a group scheme pension at 64+

My father is 65 in September. For the first time in his life, he was enrolled in a pension plan (group scheme) this year in March with the company paying 2.9% of his salary into it. Prior to this he was in the same job but classed as self-employed (fishing industry).


He intends to continue working for at least a year and probably two years more. He has now been offered the option of purchasing AVCs up to 40% of his salary (tax free) as I understand it. The financial adviser handling the scheme (underwritten by New Ireland) has advised him to avail of this up to the maximum amount and stated his scheme would be invested in a cash fund due to his age.


My question is if he bought €2000 per month of AVCs for two years (for the sake of simplicity) then should the fund be worth at least €24,000 + employer contribution for that period? The offer letter for AVCs gave an example with a higher total and stated something about assuming 6% growth per annum (not sure how this could be even hoped for in a cash fund given current rates)?


The financial adviser handling the group scheme on behalf of his employer has been quite evasive when answering questions and suggested that no sum is guaranteed...I would have thought that by definition the €24k +employer contribution in the example above would be safe along with small growth (given current rates) less any fees.


I am just a little concerned about the bona fides of this guy and whether it is worth my Dad pursuing this policy at his age despite the obvious benefit of being able to buy such a high amount of AVCs and the employer contribution?

Should fees in a group scheme be made available? Would the contributions paid generally go straight to New Ireland rather than this advisor/broker?


I would appreciate any advice and am happy to clarify anything if it helps as best I can.

Also, I think my Dad has a small retirement annuity with BOI and am wondering if this conflicts with a employer pension scheme at all etc?

This is causing him a lot of stress and though I have limited knowledge of some of it, I would like more clarity so he doesn't make a poor choice of get ripped off by fees or some unscrupulous "advisor".

Thanks in advance.

Hi Funkel

I would say your dad has to be very careful here. There are a number of things he should be aware of (I don't think the advisor is one of them).

1. Allocation rate - how much of the €2,000 per month AVC's will actually be invested into his pension plan. As he is almost 65 years of age, he is not exactly the kind of customer that New Ireland are looking for. Unless the scheme is big enough and New Ireland have agreed to give all members the same allocation rate, he may get a lot less then 95% of his premium invested. With the short investment term and low risk approach, he will have difficulty making this money back.

2. Annual Management charge - what is it? Again, he is going to have to make this back. The New Ireland cash fund has posted negative returns over the last 5 years. How can this happen? Rates are so low and their cost of trading is also deducted before giving you a return.

3. Trivial pension - The actual pension you dad will be paid at retirement will be very little. If you have less than €20,000 after the lump sum has been deducted, he can take the remainder as a lump sum which is liable to tax at 10%. The other plan your dad has is taken into consideration for the €20,000 ceiling. Your dad should give the advisor the value of his other plan and request that New Ireland do a calculation on how much he can put in without going over this amount.

Alternatively, with years service, how much can he put in so he can take the whole lot out as a tax free lump sum at retirement.

I hope this helps.


Steven
www.bluewaterfp.ie

Thanks Stephen, that does help clarify things and based on your info, I am not sure how wise it would be for him to pursue this course.

SBarrett said:

Hi Funkel
1. Allocation rate - how much of the €2,000 per month AVC's will actually be invested into his pension plan. As he is almost 65 years of age, he is not exactly the kind of customer that New Ireland are looking for. Unless the scheme is big enough and New Ireland have agreed to give all members the same allocation rate, he may get a lot less then 95% of his premium invested.

Click to expand...

I don't understand what is meant by allocation rate or giving all members the same allocation rate?

Also, where else would the €2k a month (or €1k a month) go if it is not all invested in the plan?

3. Trivial pension - The actual pension you dad will be paid at retirement will be very little. If you have less than €20,000 after the lump sum has been deducted, he can take the remainder as a lump sum which is liable to tax at 10%. The other plan your dad has is taken into consideration for the €20,000 ceiling. Your dad should give the advisor the value of his other plan and request that New Ireland do a calculation on how much he can put in without going over this amount.

Alternatively, with years service, how much can he put in so he can take the whole lot out as a tax free lump sum at retirement.

Click to expand...

I don't understand most of this, could you kindly explain or point me somewhere I can read about this €20,000 ceiling and lump sum rules etc.

Many thanks for your help.

Hi Funkel

It comes as a great surprise to people that when they start a pension, not all of the money they pay over is actually invested into their plan. The actual amount that is paid in is called the allocation rate.

For very big premiums, the insurance company may actually invest more than 100% of the premium paid into the plan and for small premiums it will be less.

The commission being charged under the contract may effect what the allocation rate it too, although in your father's case, I would be surprised if there is any commission being charged due to his age (it is usually only paid on cases up to age 65, which your dad is in a few months).

Say your father gets 98% allocation, he will have €1,960 invested and the other €40 is taken as a charge by the life company.

Details on trivial pensions is on Chapter 7 of the Revenue Pensions Manual. Like below

http://www.revenue.ie/en/about/foi/s16/templates/pensions/

Steven
www.bluewaterfp.ie