ARF Allocation rate

Will Gilberson

Registered User
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I don't understand how an increased allocation rate is not good
Say I invest 10,000 with an Allocation rate of 101% , annual rate of return 2%, and Charge of .75%
So Investment goes to 10,100
Return = 2% = 202, so total Investment at end year 1 = 10,100 + 202 = 10,302
.75% charge = 77.27, so net Investment value at end of Year 1 = 10,244,73

Now , lets say there is no allocation rate, other parameters the same
So investment goes to 10,000 + 2% = 10,200 at end year 1
.75% charge = 76.50, so net investment at end year 1 = 10,123.50

So , with the Allocation Rate of 101%, I am better off at end of year 1, and this continues for life of policy
(I realise there may be early encashment, but assume I keep policy for minimum of 5 years)

As long as the Return Rate is higher than the Allocation rate, I will be doing better with an allocation rate > 100 %
Is the above logic correct , or am I missing something ??
 
The AMC is charged each month, AFAIK.
By that I mean the 0.75% is not charged once per year.
It is spread out across the year.
 
Nothing wrong with your logic. The issue is it tends to be a higher AMC with a higher allocation rate. So 101% allocation would have a 0.85% AMC ( or probably a 1.00% AMC)
 
The 1% extra you are getting is not free. It is recouped by the insurance company through higher annual management charges. The 1% you get is a once off payment. The higher amc is for the lifetime of the ARF. The insurance company will recoup the 1% plus a lot more.

The AMC is charged each month, AFAIK.
By that I mean the 0.75% is not charged once per year.
It is spread out across the year.
This is correct. It is the monthly equivalent of 0.75% per annum.
 
I met a broker in the early 1990s who told me he needed to move his clients pensions every 5 years so that they could get the “benefit” of the extra allocations that the life companies “give away”

I was horrified. Did he really believe that this was free money? He did and to this day so do many people.

It’s not.

Increased allocation rates are just one of the ways in which commissions are concealed to make the pill of an upfront commission payment easier to sell to an investor.

3% initial commission and 103% allocation “seems” like the insurance company is paying the commission.

This simply isn’t the case. The investor pays all the fees.

As I have pointed out before.

The annual management charge isn’t the real charge it’s the disclosed charge. The real charge is higher.

Nobody knows the real cost because it’s not properly disclosed but our estimate is in the range of 2%pa for a typical pension or ARF in Ireland today. Obviously you could get a lower cost with no advice but seriously who would take their life savings and DIY through retirement?

These hidden costs show up when you compare an insurance “mirror” index fund with the index it is tracking. Like this

FrFZ-GYXoAA0IH0



There was a detailed study of life Company mirror funds in the U.K. a few years ago



So how does increased allocation really work?

You pay in 100 and you get 102% allocation. Then your unit allocation day 1 is now 102. The life co protects themselves by applying early surrender penalties for, typically, the next 5 years so that the initial commission is "clawed back" if you move. Increasingly this clawback is from the broker rather than the investor which should eventually kill off this practice.


The life co then applies the ongoing costs to the unit price so if you are paying 1%pa your charge in year one is 1% of 102 which is 1.02 and not the 1 you were expecting.

Over time the insurance company recovers the extra allocation to such an extent that you are unlikely to really benefit.

What should you do instead?

Firstly and most important. Get an annuity quote. A competent advisor will set out the annuity that you can currently buy and compare with an ARF. For many people current annuity rates are the right answer and for almost everyone its the right answer for some of a pension during retirement.

See example here

https://www.askaboutmoney.com/threads/the-fallacy-of-lifestyling.230742/post-1816238

Always insist on a "clean contract" no smoke and mirrors.

Always insist on a reduction in yield illustration of the fees and an investment forecast based on the proposed investment. Examples attached

Marc Westlake CFP, TEP, APFS, QFA, EFP
Chartered, Certified and European Financial Planner
Registered Trust & Estate Practitioner
Everlake
 

Attachments

  • InvestmentForecasterPDF.pdf
    196.2 KB · Views: 12
  • ARF FEE DISCLOSURE.pdf
    89.2 KB · Views: 19
Last edited:
If you're buying a 101% allocation with 0.75% AMC then it's likely that your investment amount is substantial.

If it is, then it's likely that you could buy the product with a lower AMC with or without early enacashment charges.

Equivalent Total Expense Ratios are readily disclosed by some of the more progressive ARF providers and with an AMC of 0.75% on an Indexed Global Equity fund your TER would be 0.76%.

I suppose the only issue with early exits charges is finding out next month that you could have bought it at a lower cost and suffer from some buyer remorse.

Gerard

www.prsa.ie
 
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