When should I think about retirement

My first contribution, so sorry if this suggestion has been discussed before. Is there any reason why the state, via a pension bond, or other such instrument cannot enter this market?
Would it be possible for them to offer citizens a savings vehicle, with the tax exemptions, and a modest state backed interest rate, with no charges? The investment would have to follow the same rules as all pension products and be locked in until retirement, but it would, presumably, incur no charge, or a very minimal charge.
Equities are all over the shop these last few years and are no longer a guaranteed source of growth. There are many people who might like the choice of a secure, free, savings vehicle through which they can access the tax allowances available to pension products.
 
Hi Mods

Allpartied has posed a question that arguably warrants its own thread? I think we have an interesting debate going here and it would be a pity to dilute it.
 
Hi,

This is an interesting thread alright. Ongoing pension charges post retirement are a bug bear of mine. It feels like there are too many intermediaries that all have to get a cut of the fund that I have spent years building up and a major industry has built up around this I converted a buy out bond from previous employment to AMRF / ARF when I reached 50 as I needed access to lump sum. I'm paying ongoing fees of 1.6% pa on the AMRF / ARF made up of broker fees 0.75%, Insurance Co 0.4% and Fund Manager 0.45% on a c. €90K total fund. I will pay a lot more attention and shop around for competitive fees when I get around to my main DC fund which I am still contributing to as still in full time employment. I have no issue with set up fees but feel that 1.6% ongoing is too high especially when I'm only considering drawing down c. 5% annually myself from the funds when I retire. All the risk appears to be on the individual as intermediaries will still get paid regardless of how the funds perform.
 
Elacsaplau if I may, you have given an example of the fees charged on a pension fund which I would agree seem to be on the high side for the amount of work you or I perceive is actually done
Based on your example what do you think would be an acceptable fee to be charged ??

For me I'm coming at this from two angles as an early retiree at 51 I have both a self managed pension and what would be called an ARF so I kind of have a foot in each camp
and like you I am starting to question the level of fees and the return that I'm getting
 
Apologies but this was meant to be my question also. What do people regard as reasonable total ongoing charges e.g for a fund worth say €400K.

1.6% to me or €6400K per annum looks high when I would only be thinking of drawing down say 4% or €16K per annum. Or am I being unreasonable. I don't envisage changing fund selections frequently once set up
 
The following analysis relates to some of the issues when drawing income from an ARF.

The objectives at retirement can be boiled down to the following:


1. an overwhelming need for income and the sustainability of that income, and

2. a secondary (typically less important) need to leave assets for beneficiaries


The forces working against the achievement of these objectives can also be boiled down to the following:


1. financial market risk

a. this includes general market risk and sequencing risk

2. longevity risk

a. the time horizon in retirement is unknown

b. this speaks to the real risk of an investor outliving their capital base


We wanted to introduce real world constraints in a modelling framework to draw realistic conclusions and guidelines from our research.

The largest differentiator of our research is that we used a simulation process to produce portfolios that take any number of different paths possible given the risk and return characteristics of the portfolio.

Higher risk portfolios can withstand higher drawdown rates over long periods of time.

However, even with low drawdowns there is a small
chance of failing over the period.

Low risk portfolios over long periods of time guarantee failure.

Risk assets are absolutely necessary to generate inflation beating returns and to
maintain living standards
Drawdowns above 6% become touch and go. 4% drawdown rates seem generally sustainable but not for conservative portfolios.

How much risk do you need to take in order to support a given income?

What happens if the first few years of your retirement experience negative returns? What should you do?

How do you adapt to changing market conditions, changing interest rates changing inflation expectations?

Should you expect mean reversion in asset classes? If so how should you respond?

Now how much is it worth paying in order to manage these questions?
 
There are three separate fees here”
- the Product Provider: For ARFs (for example) they manage the administration of the product, record keeping, paying out drawdowns (whether monthly, quarterly or yearly), deducting of Income Tax at source, accounting for that tax to Revenue and communication to policyholders.
- the Investment Managers: managing the Fund(s) chosen by the policyholders

The cost of both of these are often combined and can range from say 0.75% ( say for a Cash Fund or some Managed Funds) to say 1.50% ( for more complicated funds).

The third charge (often referred to as a “trail fee” ) is what might be paid to a professional advisor. Typically this might be 0.5%. But the client needs to consider what service is being provided for this 0.5% and indeed if any ongoing advice is required. That may well depend on the particular product.
In the case of an ARF ( for example) if the client is happy to get establishment advice (what ARF provider and what investment strategy to adopt and pay just for that service) it may be that they will not need ongoing yearly advice if they are content to take a medium term investment time horizon (say 7 years) and accept say the yearly drawdown of 4% pa. If they want to review the strategy every 3 or 4 years then they could pay just for that advice as required.
In my experience, many ARF policyholders tend to be somewhat more conservative investors and tend not to change their investment strategy radically from one year to the next.
I am not suggesting that regular advice is a waste of time (or money), but it may not be necessary for everyone. It depends on the product, whether there are ongoing contributions (generally not for ARFs), the clients investment experience etc.
 
Conan

I think our posts crossed.

Ive set out in detail some of the reasons why everyone needs to review an ARF annually and especially those pursuing a conservative investment strategy.
 
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Cervelo and McIvor,

It's hard to know what the correct level of fees should be because I don't see all this behind the scenes compliance work. This compliance work sounds like a lot of useless form filling. Steven quoted brokers taking 5% initial commission on a €1million ARF so it doesn't even protect the vulnerable consumer - which presumably is its primary purpose.

What seems clear though is that a uniform % advisory fee is a bit of a nonsense. For example, suppose my wife's existing fund and future contributions were half of what they are. Per the fee scales that I've been quoted, all the brokers were still going to charge, broadly, 0.5% p.a.

So we have the ludicrous situation that the fee was going to be 0.5% p.a. whether my wife had (a) €250K initial investment and €15k a year thereafter or (b) €125k initial and €7.5k. There simply can't be double the work in scenario (a) versus (b).

The bottom line in relation to these scenarios is that either (a) is subsidising (b) or alternatively (b) generates sufficient fees and (a) is just getting screwed. Either scenario is not at all good.

There is an analogy that an investment fund is like a bar of soap - whereby the more it's handled (think fees) the less of it remains. McIvor - the fees that you mentioned suggest that your bar of soap is being used by a posse of mechanics.

During this debate, I will face resistance for expressing my views. In this regard, my sense is that it is difficult to get a man to understand something when his salary depends upon his not understanding it!
 
I've campaigned for the last 10 years in Ireland for more transparency around the financial advice process and adviser charging in particular.

I've lost count of the number of times I've used the Upton Sinclair quote;
"It's difficult to get a man to understand something when his salary depends on his not understanding it" or "money is like a bar of soap, the more you handle it, the smaller it gets"

To rephrase Mark Twain; “good people do good things, bad people will do bad things. To get a good adviser to do bad things takes commissions”

I even produced a manifesto which set out the following objectives:

Professional Fees not commissions

In addition to establishing a specialist fee-only Financial Planning Consultancy Business myself, I set out to campaign for a simple, pro-consumer mission of the abolition of all commissions on all investment products.

Education

To campaign for higher professional standards than the current entry-level standard of the QFA and for grandfathering to be phased out.

To campaign for more relevant Continuing Professional Development content, to require advisers to pay for their seat at CPD events and to campaign for advisers to undertake more than the bare minimum of 15 hours CPD.

Ethics

“Integrity is doing the right thing even when no one is watching” CS Lewis

To campaign to improve the integrity of the Financial Services Industry

Financial Planning

To campaign for higher standards of technical proficiency and competence to provide Financial Planning rather than product sales.

Supporting Independence

Independent advisers in Ireland would be best supported by the formation of a network within which they could specialise and benefit from economies of scale.

I've also studied the evolution of the financial advice profession and the evolution of adviser charging and have first hand experience in the U.K. USA, Australia, South Africa.

I also commissioned a detailed analysis of the Irish VAT regulations from a tax expert in addition to making submissions to Revenue on the correct treatment of VAT on adviser charges.

This year I have reviewed and implemented EU regulations relating to MIFID II, PRIIPs, GDPR, the 4th AML directive and a host of business as usual issues including an office move.

I rarely use the word but in respect of this subject I would like to venture that I do, in fact, have some expertise.

Some observations in no particular order:

1. Adviser charges in Ireland are not out of line with the rest of the world
2. It is possible to obtain fee only consultancy. I work that way myself for specialist matters and expert witness. But these fees are subject to VAT.
3. Regulations are intended to protect consumers. They are not optional for advisers and compliance costs money. Describing regulations as red tape, tick box or form filing exercises doesn't change the fact that advisers must comply with regulations and that expense is passed on to the consumer.
4. Technology can assist advisers to be more productive. Around the world fees have started to come down as advisers adopt Fintech to improve their business processes.
5. As in all things this really comes down to a question of value for money. If an adviser is charging for a service, its incumbent upon them to demonstrate that they are delivering that service
 
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Marc,

Given your knowledge of the field, please post the website links to 3 brokers that operate on a fee only basis for setting up a pension plan.

Please note that AUM charging is not fee only. It is trail commission.
 
Some of the contributions have tempted me to make a rare foray outside my "home" territory of updates on my investing activities.

Here goes:

Allpartied said:
Is there any reason why the state, via a pension bond, or other such instrument cannot enter this market?
Click to expand...
None. In fact, I've suggested the state as the ideal provider of the "default" option under the proposed auto-enrolment scheme. I attach the submission. (It's the same as the attachment to a recent contribution on the "Diary of a Private Investor" thread).

Mcivor said:
Ongoing pension charges post retirement are a bug bear of mine.
Click to expand...
They're also a bugbear of mine. The charges are crazy when risk-free rates are around 1% a year. It's one of the reasons why I started managing my own pension fund. I realise that most people will not be as lucky in being able to manage their own fund, which is why I've made the submission on auto-enrolment.

Marc said:
How much risk do you need to take in order to support a given income?

What happens if the first few years of your retirement experience negative returns? What should you do?

How do you adapt to changing market conditions, changing interest rates changing inflation expectations?

Should you expect mean reversion in asset classes? If so how should you respond?

Now how much is it worth paying in order to manage these questions?
Click to expand...

These are all fair questions. If you take a "conventional" approach to the problem, the answer to the last question is "It's worth paying a heck of a lot to manage the questions", but if you take a completely different approach, as I've proposed in my AE submission, then the entire caboodle can be covered with a 0.5% annual charge, both pre- and post-retirement. It also answers other questions that a financial planner couldn't even hope to answer.
 

Attachments

  • Colm Fagan AE Proposal 4 Nov 2018.pdf
    324.4 KB · Views: 13
Fair play, Colm, I will look at your submission later (when the Christmas decorations are in situ!)

A good start also would be for brokers to be compelled to disclose each year in writing how much money that have taken from the clients' funds. This would help to overcome the surreptitious impact of same. What I envisage is a letter from the broker addressing this issue only - i.e. not buried within a pile of other material.
 
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“A good start also would be for brokers to be compelled to disclose each year in writing how much money that have taken from the clients' funds.”

Both ex ante and ex post charge disclosure now required under MIFID II and written into the Consumer Protection Code
 
I agree with Marc here, my FA is very upfront about their fees that they charge me and this can be viewed online at anytime or discussed at any meeting that I have with them,
I would have presumed that that was standard practice these days.
Speaking of charges I've just opened a letter from ITC informing me of a .5% increase in their annual management charge :eek::mad::(
 
My Dad’s pension fund was always with Eagle Star/Zurich Life. His adviser was also his friend. Dad got the entire 5% the life company were offering and then he’d agree a fair fee with his mate.
 
Also, what about firms who provide all of the advice and manage the money? e.g. they charge 1% for everything. Can’t get much more transparent than that.
 
Lads,

If I don't start the Christmas decorations, this will all be academic for me. I won't see Christmas, let alone my next birthday or retirement age!! But I will revert later!
 
Gordon,

In your last post are you referring to traditional stockbrokers?

If so, please tell me you were being sarcastic..
 
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