Thanks for that LD, Just so I make sure I have this correct if I set up my pension with an active managed fund like the Prisma series or a passive global index (both zurich products as i have their website open currently) then I would have to cash in those shares when moving to an ARF but if I set up a self managed fund where I choose any stocks or bonds etc personally then I could transfer those assets to an ARF once I retire?
That's correct, but as Steven has pointed out above, there's no cost involved in cashing in your units in a modern managed fund and there's no cost involved in buying units in the same fund in an ARF. There will be a cost involved in setting up your ARF, but that will exist whether or not you're cashing in units and buying back units in the same fund.
The original lifestyling options came under criticism because they shifted a policyholders funds to bonds automatically, no matter what the bond market was like.
With the introduction of the ARF, companies came up the the ARF lifestyle option where 75% of it would stay in a balance fund and the other 25% would go to cash to project the tax free lump sum. I always thought this was nonsense as the lump sum is a percentage of the entire fund, so if the Balanced element fell by 30%, the lump sum payable would decrease too.
Personally, I believe that clients should have an investment strategy they are comfortable with and stick with it all the way through and not to bother with a lifestyling strategy. But this is where emotions come into play. The tax free lump sum is sacrosanct and people want to protect it as much as they can. People are perfectly willing to forgo potential growth to ensure that the lump sum doesn't fall in value. They are happy to transfer to cash, even if it means they buy back into the market at a higher price when they start investing again in their ARF.
On a point Liam made about having to sell out of the pension and buy again in the ARF, it's not a cost to the client anymore. In the past, there was a 5% bid/offer spread where you sold less 5% of the value of the unit. That's gone in almost all cases. If you matured a pension, you will buy the same day you sell and at the same price.
And while I agree with Sarenco about Euro cost averaging, again, emotions have to be managed. If someone has a large fund, they may be willing to forgo some growth in order to feel more secure. While it is my job as an advisor to explain to someone that they are better to get their money working for them immediately, there's no point in having a client who is staying awake at night with worry.
I mentioned before, I use a piece of software called Timelineapp , which shows how successful a withdrawal strategy would have been going back to 1900. I can pick the asset allocation, number of years and withdrawal rate. Over a lenghty period of time (which an ARF is), most situations are successful. A key aspect to making your money last is to adjust your withdrawal with the market. As most ARF holders make withdrawals as a % of the fund, this is automatically done.
Steven
www.bluewaterfp.ie
SBarret has already made this point but I will make it in a slightly different way.
The transition to lump sum/ARF has no implications (other than emotional) for investment strategy.
Of course, the act of retirement may impact your financial plans. You might be planning the holiday of a lifetime and that has an impact on your investment strategy. But if you simply see retirement as a non event in the continuum of your plans then if you are x% in equities the day before retirement you should be x% in equities the day after, which may imply reinvesting some of your lump sum in equities.
I’m not convinced that the investment strategy can remain consistent when pre-retirement there could be circa €50,000 a year dropping in and post-retirement there could be the same going out.
Well I guess it depends on the level of pension you have saved doesn’t it? €1,250,000 @ 4% is €50,000.
It is an illusion that you have to move 25% into cash. You can reinvest immediately. There is the issue of transaction fees but this is small beer in this context.However if you have one opportunity to remove 25% of your fund tax free at that point wouldn’t it be best practice to reduce the potential volatility of your fund in those last years prior to your retirement, otherwise you would be forced to either consolidate the losses your equity portfolio would suffer during a potential downturn or postpone your retirement until the shares had returned to their previous level?
Of course, the act of retirement may impact your financial plans.
Ahh Gordon! My turn to make a mistake.Yes by definition, retirement brings a substantial change to your financial position and so it is a pivotal element of your financial planning, not just a negligible part of a continuum.
It is an illusion that you have to move 25% into cash. You can reinvest immediately. There is the issue of transaction fees but this is small beer in this context.
Absolutely but there is no reason it should stay in cash for more than a second. I presume that some providers facilitate seamless transition of the lump sum into fund investments.I was aware of that part but surely if you have an option to remove the tax element of €200,000 of your pension then it’s a no brainer to do so?
Well to be fair I was thinking more of that world cruise.Didn't you already make that point in your previous post Duke?
Hi Steven,
Can you elaborate on this please?
Say, I have a €1m and am aged 60 want to maximise the chances of withdrawing, say, €40,000 p.a. (increasing with CPI) for the rest of my life and that of my wife (say, age 57)......
1. What initial asset allocation is recommended?
2. Is re-balancing a feature and if so, on what basis?
3. What return assumptions are used?
4. What is the probability of success i.e. not running out of mullah in later years?
Finally, what would change if I wanted €30k p.a. (still better than an inflation proofed annuity) or €50k p.a.
Does Timelineapp help with this stuff?
I should probably elaborate the I’m assuming no other source of income at retirement other than your pension plan and a 100% equity portfolio in general other than that number of years leading into your planned retirement date.
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