Buy Out Bond Charges

B

blue12

Registered User
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Just sorting out a Buy Out Bond to tidy up two paid up pensions. They amount to just over 76,000 which is being 100% allocated in selected funds. The sales remuneration is then being paid out in the first year of approx. 5% back to the broker. Does this sound about right? There's only about 16 years to run on the policy so it would work out at €240 per year for an annual update. I understand that everybody needs their cut but but it seems a bit high.
 
A couple of problems with this form of paying a broker.

You say you are getting 100% allocation yet the broker is getting 5% up front.
Who is paying the 5%? You of course. Don't be fooled here.

How are you paying it? Typically through a combination of annual management fees and early surrender penalties leaving you often in a position that you are damned if you stay and damned if you try to move.

Final consideration. You are paying upfront for the next 16 years of service. What is the brokers incentive to actually provide any service at all? They are being paid up front so how are you going to ensure that they look after you?
 
Is there a different way to pay a broker? What's the cheapest way to do a buyout bond. What about a self-managed pension?
 
The alternative is to agree a fee with an adviser.

A good financial planner operates on the basis of a fee for providing advice rather than commissions for selling products.

Around the world various countries (UK, Australia, Netherlands, Denmark, Finland, Canada) have sought to restrict commissions for these reasons.
 
The current broker would get paid €3,800 for arranging this transfer. If you feel that the service provided is worth €3,800 then go with it. If not, either go back to the existing broker and tell him that you think €3,800 is excessive for the work involved or shop around for another broker.
 

Can you give me an idea what an adviser actual does for that money? Presumably after getting advice, you still have to buy into some investment vehicle that will cost further money? I'm confused about what actually happens with a buyout bond (which is why I have put off getting one for a year, even though the fund my pension is in is closing).
 

If you're just seeking advice on the monies in your pension fund, an adviser should do the following: -

  • Discuss with you whether or not a Buy Out Bond is the most suitable vehicle for you. Depending on your specific circumstances, a PRSA might be a better option, or a transfer to a current employer's pension scheme, or early retirement.
  • Assuming that a Buy-Out Bond is deemed suitable there are nine providers of Buy-Out Bond products in Ireland at present. Each has their own charging structures - some providers themselves offer a variety of charging structures and funds. For example, some will offer higher allocation at the outset with early exit penalties. Or lower allocation and no early exit penalties. Or low annual charges, e.g. 0.4% with a policy fee or 0.5% without. Some offer self-directed options. Others don't. An adviser will go through the options and help you to select who the most suitable provider for you out of the nine is. That's assuming that your adviser has access to all nine. Ask.
  • An adviser will then assess your risk profile in the context of your personal circumstances, looking at aspects like your attitude to investment risk, your capacity for risk, your need to take risk in order to achieve goals etc. The adviser will then recommend some investments for your Buy-Out Bond that match your requirements within your risk parameters.
  • The adviser will then deal with the paperwork involved in setting up the Buy-Out Bond and also liaise with the transferring pension scheme to get the monies transferred into it.
The above four points are what you pay an advisor for. Commission is the more popular way of paying the advisor - the advisor fee is paid out of the pension fund. Some advisors will accept payment directly from you, but make sure that any such advisors are not also being paid any form of commission as well. Whatever way you choose to pay your advisor, make sure that you understand clearly from the start how you are paying for the advice and what exactly you're getting for your fee.

You're not obliged to get advice. If you know enough about the subject to be certain that you have gone through all the four points above yourself, then you can seek out a broker offering an execution-only service to set up your Buy-Out Bond. An execution-only service should cost you less but you get no advice - you must choose your product, provider and investments yourself. Going directly to a product provider does not mean that you get a better deal. If you go to a provider directly, they will still deduct normal commission.

Liam D. Ferguson
 
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