ARFs should not be permitted for AE pensioners

[Robzig]

I'm trying to educate myself on financial matters. The union guy at work here is known as the guru on pensions and investments. We're on the same shift these days so I'm picking his brains. It's gas but when he read your post, he had different questions than me. He wondered about the pensioners who did not get an increase if they were in a union? He also wondered what did the valuation say about giving increases to pensioners. He said that in his experience valuations say what benefits are expected to be paid and that's how the recommended contribution is worked out.

 

[Colm Fagan]

Hi @Robzig . Don't know if your question is addressed to me or to @Duke of Marmalade, but I'll try to give an answer to what I think it might be. Others more knowledgeable, feel free to row in.
Firstly, it's 40 years ago since I was a pensions consultant; bear that in mind.
I'll also say at the outset that DB (defined benefit) and DC (defined contribution) occupy different worlds. I get the impression that you are in a DB scheme (don't know why!). If so, you're a dying breed. There's fewer and fewer of you Most have moved to DC.
For DC schemes, the employer says bye-bye when someone retires. It wants them to disappear out of its life. I doubt if the unions care about them much either.
For DB schemes, there is now an obligation to grant inflationary increases in DEFERRED entitlements, i.e., someone who leaves before retirement with a deferred pension based on their earnings at or around the time they left. That right didn't exist in my time. As an aside, I was a big loser under this heading: I left Irish Life after 13 years and didn't get a penny (other than my own contributions back), since any deferred pension from my years there would have stayed static in money terms, with its value eroded by inflation - around 10% a year at the time.
However, there is no obligation to give increases to people who've already retired from DB schemes (except in very rare situations where there is a contractual entitlement to x% pension increases). Of course, I'm also excluding the public sector, where pensions are increased (I think) in line with increases for people on the same pay scale still at work. Otherwise, increases are at the company's discretion. Granting an increase in pensions in payment can be very costly, however, since the company must (almost invariably) cough up the full capitalised cost of the increase for everyone who's already retired. So, for example, if it is proposed to give an increase of (say) 100k a year collectively to all retired members, then the company has to pay more than a million into the scheme. Increases to pensions in payment may be in response to demands from unions. However, the union officials may also have to consider if they'd prefer that million to go to current workers - and giving a million to current workers only costs the same to the company in terms of the hit on this year's P&L as giving 100k to pensioners.

 

[Duke of Marmalade]

Personally, as a "retiree" of more than ten years' standing, I wouldn't touch annuities with a barge-pole. Very few in their right mind, having saved for a lifetime, would willingly part with those hard-earned savings at retirement in return for the promise of an income for life knowing that, if they fell under a bus the next day, their savings would disappear down the plughole.

1) I like the idea of telling people emerging from an AE scheme that they can't have all their cash immediately and then become dependent on the state if they blow it - or give it to their kids to get on the housing ladder.

These are in fact very strong arguments for compulsory annuitization which were in the DNA of the original State supported second pillar. Charlie was not quite right. It wasn't entirely the retiree's own money. Much of it was gifted by the taxpayer especially in tax free roll-up. This was a societal policy and it was valid for the State to put conditions on how benefits would be enjoyed, in the overall societal interests. Hence benefits had to be taken in the form of an annuity with possible reversion to a spouse and I think up to 2 orphans where allowed as well. (Don't ask me where the tax free lump sum came from.)
It was never intended for estate planning and indeed there are arguments that widespread inheritance/gifts is not beneficial to society as a whole*. Charlie's munificence to the rich and super rich has to some extent backfired. Within months of Charlie's revolution there was high profile coverage of one family transferring 70 million into an ARF. The result has been a big paring back of this unintended estate planning bonanza. For a start deemed distribution has to an extent neutralized the facility but the limiting to a €2m fund has really clipped it and into the bargain the TFLS has been cut back to €200k. I would say high income earners would ask for a reset to 30 years' ago.
A passing comment on Colm's example of the horror that some may feel of their annuity being worthless at premature death; we are reminded that shrouds don't have pockets and for someone without dependents this should not be too distressing and worth the say 3% p.a. "mortality kicker".
* For example has the bank of Mum & Dad's influence in the housing market been overall beneficial?

 

[Kilkenny06]

The ARF is one of the few innovations in the Irish personal finance space which I feel is designed to benefit the recipient, and not the government/taxman/broker. Does anyone have any statistics on how many pensioners have impoverished themselves as a consequence of being offered the ARF freedom, before we try and force people into expensive annuity products which have provided little in the way of return in recent years?

I also have much less faith in the word "State" when it comes to pension products, particularly considering the makeup of potential future governments who appear quite hostile to private pensioners in particular, and personal investments/wealth in general. The ARF has provided pensioners with an easy-to-understand product, and the freedom to invest that product as the pensioner sees fit.

 

[Colm Fagan]

Does anyone have any statistics on how many pensioners have impoverished themselves as a consequence of being offered the ARF freedom,

As a contended ARF holder, I can't disagree much, but I also have a lot of sympathy with @Duke of Marmalade 's argument that

It was never intended for estate planning

Unfortunately, ARF's are almost invariably seen as vehicles for estate planning. That was never the intention. Advisers (advisers on the forum, please correct me if I'm wrong) generally advise ARF holders to take the minimum allowable each year (4% or 6%, depending on size, I think) irrespective of how old they are, and to use up other assets for income purposes, or even leave themselves scrimping and scraping when the most advisable course of action - ignoring tax - at older ages (say, above age 80) is to take much more than 6% each year from the ARF.

(Don't ask me where the tax free lump sum came from.)

Duke, it came from the Civil Servants! They would never give up their tax-free retirement gratuity of 3/80th of salary for each year of service!!

 

[Kilkenny06]

Unfortunately, ARF's are almost invariably seen as vehicles for estate planning.

Maybe on this forum, and maybe for the very rich, but that's not how my peers see them. Most people in my age group are heading towards future retirement with just enough for them to survive on, and aren't particularly focused on estate planning, although maybe that's a conversation that happens a lot later.

I think the demise of DB pensions are perhaps also having an impact - if your retirement is funded by a base income from a DB pension, then any DC/ARF element might be soon as almost a "nice to have" which you can think about passing on, but I don't get the sense from those who have only a DC pension that this is how they think - they know they can suffer from severe equity downturns, and are very risk focused. An argument in favour of annuities perhaps, but those again haven't been particularly attractive in recent years, so this incoming cohort are stuck both ways.

 

[Duke of Marmalade]

...I don't get the sense from those who have only a DC pension that this is how they think - they know they can suffer from severe equity downturns, and are very risk focused. An argument in favour of annuities perhaps...

An argument in favour of annuities for sure.
The constituency you are talking about have seen a massive change in their retirement financial position with the pincer of the demise of DB and the freedom to ARF a DC. Under DB and under compulsory annuity DC at least it can be said that retirees enjoy the full "actuarial" value of their pension pot. It would not be off the wall to surmise that now on average a half of their pension pot will be left behind - a generosity to their kin which they cannot afford.
It also presents a fairly dramatic and undesirable shift in the socio-economic inter generational relationship. @Brendan Burgess has already mentioned pressure to help Johnnie on to the housing ladder, And then we will get the elephant in the room of tensions around inheritance which hitherto we have associated with drama series of the aristocracy.
This is all wrong but I agree that the commercial annuity market is almost dysfunctional which is why I am recommending State annuities for the AE constituency.

 

[Duke of Marmalade]

Of course compulsory annuity AE won't happen because the body pension is so infected with the ARF virus. The pensions industry would have a field day promoting their ARF magic alternative. Charlie has a lot to answer for.

 

[GSheehy]

Of course compulsory annuity AE won't happen because the body pension is so infected with the ARF virus. The pensions industry would have a field day promoting their ARF magic alternative. Charlie has a lot to answer for.

The average pension pot maturing at the moment is still under €150k.

Is a €112k ARF more profitable to a pension provider than a €112k annuity?

I'd have my doubts.

The popularity isn't sales driven. The customer demand is there. Huge customer demand.

Gerard

www.pensionannuity.ie