Early AVCs worth it?

S

steve_doe

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Hi all,

I'm 33 years old and I have worked in the PS for the last 3 years (permanent)

I currently earn ~€110k
I have not decided if I will stay in the PS long term or go back to the private sector.
I have no other pensions entitlements currently.

I own my own home and have a small mortgage - I currently save approx ~4k per month.

I received a flyer through work with the following text from Irish Pensions and Finance Ltd.

Saving into a Group AVC scheme can boost your retirement benefits while making the mostof the tax relief available. And this year, Irish Pensions & Finance are offering a free Fitbit tothose who join the Group AVC Scheme before
31st of January
€50 p/w saved through your payroll into an AVC will provide you with a retirement fund of:
Years to Retirement / AVC Fund at retirement*
5 years - €11,722
10 years - €24,960
15 years - €40,952
20 years - €58,805
25 years - €78,630
30 years - €100,710
€50 per week saved into your AVC
costs
:
€30 per week from net pay (40% tax payer)
€40 per week from net pay (20% tax payer

*Assumes 3% p/a growth. Unit prices can fall as well as rise


I'm curious how this company makes it's money, does this seem like a good deal?
If you were me would you consider it?

Thanks for any thoughts/advice
 
Those figures are just projections.
I wouldn't pay much attention to them.
If you can afford it and don't need the extra money for other immediate or medium term priorities such a housing, living, family, paying down (especially high cost) debts etc. then, in general, the sooner you put money into a pension the better.
The tax reliefs on contributions, growth and encashment are very generous and the longer the money is invested the greater the growth to retirement.
However you should ensure that any pension that you use has reasonable/competitive charges.
E.g. ideally 0% charge on contributions and < 1% annual management fee.
The pension underwriter/manager makes their money through these charges.
You should check what charges apply to the scheme above and if they are not competitive then maybe consider a low charges PRSA for your AVCs.
And especially when you are young you can generally afford to select high risk/reward funds offered by a pension to maximise returns over the long term.
Don't make the mistake (that I've made in the past with some investments) of being unnecessarily cautious/risk averse! :(
There are loads of good posts on pensions here if you do a quick search and some research before making an informed decision.
 
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steve_doe said:
€50 p/w saved through your payroll into an AVC will provide you with a retirement fund of:
Years to Retirement / AVC Fund at retirement*
5 years - €11,722
10 years - €24,960
15 years - €40,952
20 years - €58,805
25 years - €78,630
30 years - €100,710
€50 per week saved into your AVC
costs
:
€30 per week from net pay (40% tax payer)
€40 per week from net pay (20% tax payer

*Assumes 3% p/a growth. Unit prices can fall as well as rise
Click to expand...

I agree fully with Clubman that the above figures are just projections which may or may not represent what your actual fund will look like.

But even taking that into account, they worry me. The projections assume that the fund will grow at 3% per year. Maybe this fund growth will be higher in practice or maybe it will be lower. We don't know in advance. But if we assume for a moment that the fund does grow at the assumed rate of 3% per year, the projections look bad. €50 per week = €2,600 per year. Let's look at their projected fund values again...

5 years - €11,722 (Paid in after 5 years: €13,000)
10 years - €24,960 (Paid in after 10 years: €26,000)
15 years - €40,952 (Paid in after 15 years: €39,000)

So what they'e saying is that even if the fund grows at a steady 3% per year, it would still take somewhere between 10 and 15 years before your fund would even be worth what you've paid in.

That tells me that the charges on this product are high.

Before signing anything, I'd ask the salesperson the following questions and ask for the replies to be e-mailed to you...

  • Based on €50.00 per week (or whatever figure you're thinking about), what are the charges deducted from each €50.00?
  • What are the ongoing charges (annual management charge etc.)
  • What's their fee for selling you this AVC? Do you pay them or is it deducted from your fund? If the latter, is it a once-off payment to them or do they receive ongoing payments from your fund?
Post the replies back here and the good people of Askaboutmoney can comment.
 
Hi, I've been following this thread as I'm in a similar situation. I've been in contact with the same provider and they've advised the fund management charge is 0.75% of the fund value per annum. The allocation rate from year 2 onwards will be at least 95%. Year 1 is less (they didn't specify) in order to pay for the initial set up. There are no other fees.

II'm obviously keen to find out more re. Year 1 but outside of that are the charges reasonable or could I be getting better elsewhere?
 
5% of each contribution in year 1 is horrendous.
You can avoid that and probably get an annual management charge lower that 0.75% (especially on index tracker/passive rather than actively managed funds) if you shop around and check out some of the threads here on Askaboutmoney.
 
Okay thanks Clubman - 'horrendous' doesn't sound like its at the right end of the charging spectrum. Think I'll do a bit more looking
 
Some of these pension advisors dazzle people with tax relief which obscures heavier than normal charges. In the public service since these AVCs are mostly I think used to juice up a tax free lump sum, clients may be slightly less aware of charges than someone who has to fund a pension (i.e. you can fund a tax free lump with these charges but would struggle to fund a pension)

Assume this must be it
www.ipf.ie

JG Fitbit

Join the AVC scheme and received a complimentary Fitbit
www.ipf.ie

What they wanted to do is highlight 30 euro after tax relief would provide the sums they mention, that's how they normally make it look like an acceptable deal.
 
ClubMan said:
5% of each contribution in year 1 is horrendous.
Click to expand...

It's worse than that. The 5% charge is from year 2 onwards. In year 1, it seems that a bigger percentage gets taken out, but it doesn't say in the posts above what that percentage is. I can see why it might take between 10 and 15 years just to break even if a substantial chunk is being taken in the first year.
 
There's a useful method of comparing charges between financial products like this. It's known as the Reduction in Yield or RIY figure. With so many different methods of charging, e.g. a charge on each contribution, a higher charge on the first year's contributions AND an annual charge it can be difficult to compare the overall effect of charges between this and another product where the charges are deducted in a different format. So the RIY figure distills all the charges into one figure - a calculation of the combined effect of the charges in one figure. For example, on a product like this the RIY might be the equivalent of a single annual charge of 1.4% or something like that. (I just made that figure up to illustrate the point.) If you then ask a competing provider for their RIY figure and it's 1.1% then you know that the second product has lower charges than the first.

So it's always worthwhile asking what the RIY figure is before signing on the dotted line.
 
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Dave Vanian said:
It's worse than that. The 5% charge is from year 2 onwards. In year 1, it seems that a bigger percentage gets taken out, but it doesn't say in the posts above what that percentage is. I can see why it might take between 10 and 15 years just to break even if a substantial chunk is being taken in the first year.
Click to expand...
I misread the post and thought that it was "only" in year one that 5% of each contribution was taken. So it's much much worse than I thought! :oops:
 
Hi Steve,

I am not going to try to offer any advice re products. But I started thinking about pensions and AVCs when I was in my early 30's and almost signed up a few times but decided to put it off for a while - I was in my early 50's when I picked up on it again and did something about it. At that stage I was scratching my head wondering why I hadn't done something before then.

If I could rewind the clock I would definitely go an do something earlier.
 
sidzer said:
Hi Steve,

I am not going to try to offer any advice re products. But I started thinking about pensions and AVCs when I was in my early 30's and almost signed up a few times but decided to put it off for a while - I was in my early 50's when I picked up on it again and did something about it. At that stage I was scratching my head wondering why I hadn't done something before then.

If I could rewind the clock I would definitely go an do something earlier.
Click to expand...
Are you public service? The OP will have the PS pension, AVCs are on top of that. I agree he should do something but this sounds like a poor deal
 
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