Pension "fragmentation" and options for consolidation

Discussion in 'Pensions' started by ClubMan, 13 Dec 2018.

  1. ClubMan

    ClubMan Frequent Poster

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    Last edited: 13 Dec 2018
    I'm a bit confused about my pension situation with a decade or two to go to retirement age. Especially what way things will work at retirement time.

    I have three different pensions:
    1. A PRSA
    2. A Pension Retirement Bond (PRB) into which I transferred a previous occupational scheme years ago
    3. A paid-up Personal Pension Plan (PPP)
    Only the PRSA is being contributed to on an ongoing (monthly) basis by myself and my employer. The other two are paid up and not taking contributions.

    Due to the takeover of my current employer the plan seems to be to switch from the PRSA to the new company's occupational scheme - I don't have full details about this yet though but the proposal seems to be to switch to a DC occupational scheme with the employer matching the employee's contribution up to 3% max and the employee allowed to contribute a max of 5%. The current PRSA arrangement is that the employer matches the employee contribution up to 6% and the employee can contribute as much as s/he wants (i.e. total employer + employee contribution only really limited by the age related tax relief limit).

    Note that the PRSA actually comprises three separate contracts in case that matters - two for lump sums made at different times and one for the main fund still accepting contributions. The PRSA is also my main pension fund - i.e. worth a lot more than the other two.

    I think that the retirement age stated in the various pension documentation may not be the same in all cases - e.g. some 60, some 65 etc.

    My questions are:
    1. All things being equal (in particular charges being reasonable etc.) can/should I merge some or all of the above into one pension?
    2. If that is not possible then isn't it going to be very complicated at retirement time dealing with three/four pensions separately?
    3. Are PRSAs, PRBs, PPPs and occupational pensions treated differently at retirement time or are they all aggregated when calculating things like 25% tax free lump sum, ARF/AMRF purposes etc.?
    4. On a general note should I be looking at anything in particular in relation to all of these funds heading towards retirement age? Charges are competitive on all of the pension products and I'm happy with my fund selection for the moment in case that is relevant.
    5. If (as I expect) my new employer's occupational scheme has higher charges than my current PRSA can I contribute the minimum to take advantage of their matching contribution and then use my PRSA for the rest of my age related tax relief limit?
    6. Can the new employer unilaterally change the pension benefits like this or do I have any statutory rights in this respect?
    Thanks a lot.
     
    Last edited: 13 Dec 2018
  2. Marc

    Marc Frequent Poster

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    Last edited: 14 Dec 2018
    All things being equal (not knowing anything about charges or your circumstances etc)

    The legislation sort of points you in this direction.

    Put the Personal Pension into one of the PRSAs (you can go from a PRSA to an occupational scheme but not from a personal pension and you can go from a personal pension to a PRSA)

    Put all the PRSAs into the new occupational scheme.

    With less than 15 years service in the scheme at retirement you can still go from an occupational scheme to a PRSA if its suitable and appropriate.

    The logic here being that the charges on a PRSA are made up by the Pensions Authority and they are a law unto themselves to the extent that they are totally ignoring the MIFID II rules and seem to be resisting being forced into the Central Bank of Ireland where they really belong.

    That said; however, I would consider a series (ie more than one) PRSA and phased retirement.

    see this post for explanation (https://www.askaboutmoney.com/threads/dc-lump-sum-drawdown.210780/)

    It really depends on the size of your fund, other sources of income, state of health at retirement etc

    You may decide to take 1.5 times salary as a lump sum which is an option under the occupational scheme (not under a PRSA or the Personal Pension) and purchase an annuity with the balance.

    Or you may decide to go into an ARF which is the same rules as the PP and the PRSA.

    The only snag to look out for is the death benefit under an occupational scheme is a max of 4 times salary with the balance paid as an annuity whereas under the PRSA and PP it is 100% of fund paid as a lump sum.

    Another consideration would be if the personal pension has a guaranteed annuity rate you may wish to leave that behind.

    This is a classic example of where it is worth paying for advice.

    If you go to a commission-based adviser, they only get paid if you move to a new contract they set up for you.

    I have set out that the "best advice" could be to put it all into the new occupational scheme. That's not going to earn the commission adviser a cent.

    I'm not saying its definitely the right course of action for you, but you should certainly consider it as an option.

    For the avoidance of doubt I knocked this out on my phone without consulting any reference texts

    E&OE
     
    Last edited: 14 Dec 2018
  3. ClubMan

    ClubMan Frequent Poster

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    Hi Marc

    Thanks a million for that info (and I appreciate that you're operating on only partial info here).

    Does it make any difference that the only charge on my PRSA is the 1% annual management charge and 100% of each contribution is invested?
    I would be very surprised if the new occupational scheme comes close to that but I'll only know when I get more info about it.

    Also do people really buy annuities these days? I thought that there were many arguments against them versus ARFs not least of all the ongoing low interest rates on offer?
    Or are there circumstances where an annuity is the ONLY option?

    I have to read up more on this stuff and I take your point about getting independent advice.

    Somebody sent me these two links which seem to contain some useful info although I've only skinned them so far...

    https://brokersireland.ie/wp-conten...-guide-to-individual-pension-arrangements.pdf

    https://brokersireland.ie/wp-conten...st-retirement-income-planning-and-options.pdf

    Thanks again for the post.
     
  4. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Hi Clubman,

    I would not consolidate them necessarily.

    Having the Buy Out Bond gives you decent flexibility in that you can access it from age 50.

    The occupational scheme will be better in that the employer contribution won’t count towards the age related limited (whereas it does with a PRSA).

    Plus, keeping the Buy Out Bond and Personal Pensions separate will facilitate staged or partial access of your overall pot.
     
  5. Marc

    Marc Frequent Poster

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    Last edited: 13 Dec 2018
    There is so much wrong with PRSA charges that it’s hard to know where to start.

    So many people I speak to genuinely believe that a 1% charge is all they pay and that this somehow equates to a great deal.


    Here is a section from the reply by the Society if actuaries to the 2015 consultation paper for example:

    “1. The restrictions on charges may prohibit Providers from being able to offer best in class investment options under a PRSA e.g. some diversified multi assets funds where the TER may vary according to underlying assets held. It may not be in the interest of contributors if the investment offering provided by a PRSA Provider is driven solely by these restrictions rather than the provision of an appropriate range of investments.“

    This speaks to the real issue that having access to a full range of investment options is more important than a charge cap.

    For example

    Let’s say I put a charge cap on pensions of 0.25%. Everyone would rejoice.

    But if the only option was a cash fund, the excitement would soon wear off.

    Equally, if I randomly pick a fund that is eligible for a PRSA and map the tracking error against the index that it tracks I can establish how much the fund underperforms the index. It shouldn't be more than 1% if its eligible for a PRSA right?

    See attached random fund.

    This has underperformed the index it tracks by 1.95%pa

    Annuities

    The point here is if you are able to extract the fund value as mostly a lump sum under the 1.5 times salary rule then the balance MUST be used to purchase an annuity so sometimes this can make sense
     

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    Last edited: 13 Dec 2018
  6. ClubMan

    ClubMan Frequent Poster

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    I should've said that my PRSA(s?) represent about 80% of my overall pension savings. The PRB about 12% and the PPP 8%. They all have low charges and I have been maximising my pension tax relief for about 20 years now.

    Marc, surely what you say about fund performance "drag" could apply to ANY type of pension and not just PRSAs? As such surely my saying that the only charge (excluding levy etc) is 1% is not incorrect?

    Thanks for the additional info about annuities but again, would anybody actually opt for one given interest rates over the last decades?

    Gordon Gekko, thanks for the info about the preferential tax treatment of employer occupational versus PRSA contributions. I was aware of that already.

    If I do participate in the occupational scheme to the max according to the contract that I have seen (3% employer + 5% employee) can I still use the rest of my age related pension tax relief with the PRSA?

    Also, anybody know if the takeover employer can unilaterally change (reduce!) the pension benefits like this? Does TUPE not have some relevance here?

    Thanks again for all the comments so far. The whole area of pensions is ridiculously complicated... :-(
     
  7. Marc

    Marc Frequent Poster

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    Last edited: 13 Dec 2018
    The issue of misleading charges is present in every Irish pension contact simply because the PRIIPs regulations do not apply to pensions.

    My point was that a fund that is eligible for a 1%pa standard PRSA contact has an observed tracking error against the index it tracks of 1.95%pa

    The 1% is a red herring if you are actually suffering a drag of nearly 2%

    What matters is what does the alternative cost?

    I’ve just spent that last few days setting out that it is possible to construct an unbundled pension account with the following approximate costs

    Pension cost 0.4% or 0.50%
    Plus fund charges say 0.25% to 0.40%

    So you can get within the PRSA charge cap before distibution costs.

    If your adviser is any good they should easily cover their costs so the net position should be cash flow positive.


    The reasons why anyone would take an annuity

    You have to if you use the 1.5 times salary lump sum option

    Excess death benefits over 4 x salary must be paid as an annuity

    No dependents and want to see the “last Cheque bounce”

    Max contributions

    You can of course use AVCS or a PRSA AVC to top up your matching contributions to the maximum possible under the age related limits
     
    Last edited: 13 Dec 2018
  8. ClubMan

    ClubMan Frequent Poster

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    But you're just picking one fund to illustrate a more general point? This doesn't make sense to me. And the same could apply to a non PRSA fund? Anyway, if the issue of misleading/opaque charges is across the board then what's the point in picking on PRSAs if there's nothing that a punter like me can do about it?
     
  9. Marc

    Marc Frequent Poster

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    How to make this clear?

    You said “im only paying 1%”

    I illustrated how the 1% could actually be nearly 2%

    The culprit is that life companies don’t have to clearly disclose charges on pensions (even in a PRSA)

    The answer is to not use a life company for your pension

    QED
     
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  10. ClubMan

    ClubMan Frequent Poster

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    But you originally specifically criticized PRSA charges which seems confusing if the issue applies to all (life company?) pensions.

    So how does one avoid life companies? Is it only really an option for very high net worth individuals?
     
  11. Marc

    Marc Frequent Poster

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    I see the confusion now. Sorry.

    My point is you will set out to compare the "1%" PRSA fee with whatever charges you are shown with the occupational scheme.

    If these are higher, you might conclude that the PRSA is therefore "better"

    Both are subject to lax cost reporting and therefore you would need to dig deeper to get any real feel for the "better" scheme
     
  12. ClubMan

    ClubMan Frequent Poster

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    But if the only way to compare other costs is by looking at past performance of the two versus their underlying induces/assets then it's surely a pointless exercise?
     
  13. Marc

    Marc Frequent Poster

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    Last edited: 14 Dec 2018
    I don't understand why it would be pointless.

    It the guidance to the Society of Actuaries says, and I'm paraphrasing, you can accept the published Net Asset Value (NAV) figure from a collective investment fund.

    Then it follows that all funds leave "footprints in the snow"

    The published NAV has been prepared by the fund accountant and in the case of a UCITS is independently audited.

    So where you have a fund which is tracking a publicly disclosed index (FTSE or MSCI) for example then you can make an educated guess at what the reduction in yield has been.

    That is to say the impact of charges on the performance of the fund.

    Rather than ask the question; "how much am I paying in charges?" to be told "err, 1%?"

    I prefer to seek to establish how much a fund underperformed its assigned benchmark, that's going to be much closer to the real cost to the investor.


    For example, the more a fund trades, the more it pays expenses (brokerage commissions, bid offer spreads, stamp duty etc) these have nothing to do with the cost of "managing" the fund and are simply a function of turnover multiplied by the cost of a roundtrip trade.

    If I was running an Irish Equity fund and I was turning over 20% of my holdings each year I'd add around 0.2%pa to the cost of the fund. Why? Because I'd be paying Irish Stamp duty. On top of that I'd have to pay brokerage commissions etc.

    Typically a really actively managed fund will turn over around 80% of the holdings in year. That will typically double the Total Expense Ratio of a fund.

    So, you are seeking to establish what you should do right?

    You have imperfect information with which to make an assessment. I would have thought the more light you can shine on the alternatives the better.

    Here is an example I provided to another adviser


    This is a great example as it is the same fund offered by the same company (albeit different subsidiaries one in LUX and one in Ireland)

    So there should be no difference at all in performance other than distribution costs.

    We know from Morningstar what the actual costs of this share class are for the UCITS

    AMC 0.85%
    TER 0.89%
    Transaction costs (part of MIFID II disclosure) 0.31%

    So that's a baseline total annual cost on a like for like basis with the Life company of 1.2%pa

    But the Irish version under-performed this by an average of 0.59%pa over the last 7 years.

    So the implied annual cost of the Irish contact (ex-post) based on the returns reported by the investment company to Financial Express is 1.79%pa

    The new KIID document required for investment funds but not pension funds since January discloses the total fees of 1.81%pa.

    So, if the pension fund just discloses the Annual Management Charge they will tell you it is 0.85% (see AMC above)

    Whereas the real cost is around 1.79% to 1.81%pa
     
    Last edited: 14 Dec 2018
  14. ClubMan

    ClubMan Frequent Poster

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    Past performance is no guide to future returns...
     
  15. Marc

    Marc Frequent Poster

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    Ah, I see.

    Yes, we are not using the past performance to predict future performance.

    We are using the past performance relative to a known quantity, simply to estimate the reduction in return from charges.
     
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  16. elacsaplau

    elacsaplau Frequent Poster

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    From post 2

    From post 7

    This is a common enough error. Excluding retained benefits which complicate matters somewhat, the maximum lump sum is as per the relevant extract from the Revenue manual, below

    On death-in-service before NRA a lump sum not exceeding the greater of €6,350 or four
    times the deceased employee's final remuneration may be provided.....A refund of the employee's own contributions (with
    or without interest) may be paid in addition to any other lump sum.


    Probably best to explain by way of an example in a DC plan.

    Let's say someone has a salary of €50,000 and between other earnings, BIKs, etc., the total remuneration was €60,000
    Let's say that the person's pension fund was made up of 5% employee, 5% employer and 5% AVCs and that at the point of death, the fund was valued at €450k, made up of €300k of the value of personal contributions and €150k of employer contributions.
    In this example, the maximum allowable lump sum payment is:
    (4 x €60,000) plus €300,000 = €460,000

    As the fund is only valued at €450,000 it can all be paid out in lump sum format.

    For the precise treatment of retained benefits, I would suggest looking at the relevant section of the Revenue manual, per this link
    https://www.revenue.ie/en/tax-professionals/tdm/pensions/chapter-10.pdf
     
  17. Marc

    Marc Frequent Poster

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    For the avoidance of doubt I knocked this out on my phone without consulting any reference texts

    E&OE
     
  18. ClubMan

    ClubMan Frequent Poster

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    But how often are you going to have two (or more) pension products that invest in exactly the same underlying assets to make such a comparison meaningful? Index trackers tracking the same index maybe, but anything else is surely apples and oranges? Don't we (in Ireland) simply have to accept that TER may be higher than the stated headline charges and work within that constraint? Unless something like a self managed/directed (?) pension is an option which I presume is only an option for high net worth punters?
     
  19. SBarrett

    SBarrett Frequent Poster

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    Back to the OP

    My questions are:
    1. All things being equal (in particular charges being reasonable etc.) can/should I merge some or all of the above into one pension? - Yes, you can. Everything can go into an occupational pension. The personal pension will have to go in via a PRSA first.
    2. If that is not possible then isn't it going to be very complicated at retirement time dealing with three/four pensions separately? It is not complicated at all. A bit more paperwork alright but that's about it.
    3. Are PRSAs, PRBs, PPPs and occupational pensions treated differently at retirement time or are they all aggregated when calculating things like 25% tax free lump sum, ARF/AMRF purposes etc.? - Occupational pensions & PRB's give you the option of up to 150% final salary as a lump sum (based on years service). With the remainder you must purchase an annuity. You also have the option of 25% tax free lump sum and invest in an ARF with the remainder. With a personal pension & PRSA, the lump sum is 25%. You can buy an annuity or invest in an ARF with the rest.
    4. On a general note should I be looking at anything in particular in relation to all of these funds heading towards retirement age? Charges are competitive on all of the pension products and I'm happy with my fund selection for the moment in case that is relevant. - Always be aware of your capacity for loss. What will the impact be of a market crash before retirement. Will my lifestyle be effected.
    5. If (as I expect) my new employer's occupational scheme has higher charges than my current PRSA can I contribute the minimum to take advantage of their matching contribution and then use my PRSA for the rest of my age related tax relief limit? - You must use a PRSA AVC plan in this case. Employer schemes are very competitively priced these days, so they should be cheaper.
    6. Can the new employer unilaterally change the pension benefits like this or do I have any statutory rights in this respect? - I don't manage group schemes but I am almost sure they can.

    Steven
    www.bluewterfp.ie
     
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  20. elacsaplau

    elacsaplau Frequent Poster

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    Excellent post, Steven

    That's fair enuff, Marc

    As I said in my post, it's a common enuff error which often causes confusion.

    The main thing is that the information is correct now.