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Pension Advice
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16-05-2012 4:52pm#1Hi all, I'm looking for some advice for my Father as I know nothing about pensions myself.
He will be collecting his pension soon. The Broker told him that it wont cost him anything as the Insurance co will pay for his services. ( I'm always skeptical when I hear of something for nothing. ) However he told him recently that the Fees would be 3 % of the fund and 1% per year going forward.
Is this normal or are these fees excessive considering he has a decent pot of a pension fund.
Is there a better way, or would he be better off paying the Broker for his services and maybe going elsewhere or to the Company direct.
Any advice would be much appreciated.0
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You're right to be sceptical about a claim that "it won't cost him anything". The broker's commission will be deducted from your father's pension fund. So while he won't be handing over a cheque or cash to the broker, the broker's commission is still coming out of his pension fund. He's paying for it alright - just out of his fund.
There are actually four forms of charges that your father will need to pay to get his pension set up: -- Initial charge to the pension company for setting up his pension.
- Ongoing charge to the insurance company for maintaining his policy. (Not applicable in the case of annuities.)
- Initial fee or commission to the broker for advice around what type of pension policy to choose, advice on his retirement options etc.
- Ongoing fee to the broker for ongoing advice. (This is optional.)
I'd suggest that your father should establish exactly who's getting what according to the four categories above. Ask for each one to be explained in terms of euros rather than complicated charging structures. Then he's in a better position to judge whether or not he thinks it's value for money.
As a broker myself, it wouldn't be appropriate of me to comment on whether or not I think 3% is a reasonable fee for another broker to charge. I don't know the size of your father's fund and I don't know how much work the broker is doing or has done for your father. Besides, each to their own. It's a competitive market and if your father doesn't believe that the amount of work that the broker is doing for the fee/commission is justified, he should tell the broker before signing anything.
As long as the broker is being completely up-front about what s/he's getting paid, it's actually in your father's best interests for the broker to be paid by commission rather than a separate fee. If my fee for something is €1,000 and a client pays me a cheque for €1,000, that €1,000 has come from after-tax income. If I agree that I'll get paid €1,000 as a commission from a pension company, that €1,000 is being paid from a pension fund and they would have got tax relief on contributions into the pension fund.0 -
Just one thing to add, if it is a with profits policy that is maturing there could be a substantially higher available annuity rate with the current company rather than a different company. Could be worth posting more details here for some additional advice.0
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Your father shouldn't be paying a penny to anyone, either upfront or ongoing. It sounds to me like he has a lump sum and needs to buy an annuity in which case he can shop around himself.
Go to the insurance companies direct and see what they have to offer. He doesn't have to use a broker, it's a simple process and there is absolutely no way that a broker should be getting 3% upfront and 1% p.a. going forward, that level of commission will punch a severe hole in your father's pension.0 -
Your father shouldn't be paying a penny to anyone, either upfront or ongoing. It sounds to me like he has a lump sum and needs to buy an annuity in which case he can shop around himself.
Go to the insurance companies direct and see what they have to offer. He doesn't have to use a broker, it's a simple process and there is absolutely no way that a broker should be getting 3% upfront and 1% p.a. going forward, that level of commission will punch a severe hole in your father's pension.
while you may be correct in your head, reality is different. read mr ferguson's post for clarity re fees. Pension companies and brokers charge fees. While i've no great love for either they dont work for free.
more great advice though, keep enlightening us!0 -
Liam D's advice seems to be based on setting up a pension policy and the fees that would be payable there. However from reading the OPs question, correct me if i'm wrong but it seems the father already has a policy and is looking to retire.
Assuming this is a DC fund and he wants to purchase an annuity there is no way he should be paying 3% upfront commission and 1% per annum. He should be able to purchase an annuity directly at a much lower cost by shopping around. It's certainly a bad time to be buying an annuity though given bond yields are so low. Might be an idea to look into deferring if possible.
He should also look at the ARF option if he qualifies.0 -
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If he's already been quoted 3% and 1% per year, I'm guessing that his broker is already quoting some sort of ARF.
Incidentally, annuity rates include a provision for paying a once-off commission. You don't escape that by bypassing brokers and buying your annuity directly from the company. The company just keeps the commission. I'm not saying that this is a fair system - just pointing out how the system works.0 -
while you may be correct in your head, reality is different. read mr ferguson's post for clarity re fees. Pension companies and brokers charge fees. While i've no great love for either they dont work for free.
He is a broker, what else would he say?
From the Pensions Board FAQ on annuities....
Who buys an Annuity?
An annuity bought with the proceeds of an occupational pension scheme is bought by the trustees of that scheme. A person who has a RAC or a PRSA is the purchaser of an annuity bought with the proceeds of such contracts.
Do I have a say where my Annuity is bought?
If you are the holder of a RAC or a PRSA, you may choose the insurance company from which the annuity is bought.
Q.E.D.
Shop around and don't go near a broker. The life companies will deal direct with you..
http://www.irishlife.ie/faq/annuity.html
http://www.zurichlife.ie/pensions/after_you_retire/annuities.jsp
http://www.canadalife.ie/pensions/annuity.phpmore great advice though, keep enlightening us!
If you have a problem with my posts in other fora, please confine your response to those threads and don't become a cyber stalker!0 -
Hi coylemj,
Yes I am a broker and proud of it. I don't know what you do for a living, nor do I want to. That's none of my business. Let's just look at facts rather than occupations: -
You mention Zurich Life, Canada Life and Irish Life as your recommendations where people should go to buy an annuity. Each of these companies operates direct sales staff. If you ring one of them looking to buy an annuity, you'll get through to one of their direct sales staff, who will quote you for the annuity. If you then proceed to purchase from that company, the direct salesperson will receive a commission.
To make sure you're getting the best annuity rate you can, you need to go through the process with these three companies as well as New Ireland and Friends First who also offer annuities.
Or you can go to a broker who will be able to get you quotes from all of these. If you place your business through the broker, the broker receives the commission instead of the direct salesperson.
Where's the advantage to you in bypassing the broker?0 -
Other question - Finance Act 2011 made the ARF options available to virtually all members of DC pension schemes, in addition to the annuity options. We know very little background on sky6's father's personal circumstances, requirements, attitude to risk etc.
Are you still convinced that he should bypass brokers, ignore even considering the ARF options and purchase an annuity?0 -
He is a broker, what else would he say?
From the Pensions Board FAQ on annuities....
Who buys an Annuity?
An annuity bought with the proceeds of an occupational pension scheme is bought by the trustees of that scheme. A person who has a RAC or a PRSA is the purchaser of an annuity bought with the proceeds of such contracts.
Do I have a say where my Annuity is bought?
If you are the holder of a RAC or a PRSA, you may choose the insurance company from which the annuity is bought.
Q.E.D.
Shop around and don't go near a broker. The life companies will deal direct with you..
http://www.irishlife.ie/faq/annuity.html
http://www.zurichlife.ie/pensions/after_you_retire/annuities.jsp
http://www.canadalife.ie/pensions/annuity.php
If you have a problem with my posts in other fora, please confine your response to those threads and don't become a cyber stalker!
Im a broker myself and usually stay away from these kinds of forums because there is always some misguided people giving advice on things they know little about, like your post. Thats as generous as I can be about your post.
Liam Ferguson has posted very informed comments that I would suggest the OP considers before what they decide to do next. The next thing they should consider is asking friends/family if they can recommend a trusted financial adviser, most of the ones I know are good honest professionals. Anybody worth their salt will do whats best for their client so that they get recommended to other people (best marketing a broker can do).
coylemj didnt attach a link to New Ireland's website for Annuity's for some reason. I know for a fact that in many cases they can offer better Annuity rates then the other Life Offices.
It sounds like the OP's father is being advised to go an ARF route at retirement (difficult to ascertain exactly given limited information supplied) for one reason or another. Before any decision is made (even forgetting charges), it is vitally important that the OPs father understands the differance between the options he has (Annuity v ARF v Tax free cash).
OP - Alot of Life offices are offering 5 year fixed deposit rates of 5%+ at the moment which means if you are drawing down 5% of your ARF , after the management fee, the net loss is roughly 1% per year. This is a good alternative to Annuitys if the rate isnt great. Make sure your father asks about the best fixed deposit rates on ARFS.
As Liam politely put it, if you phone a Life office directly you will not get impartial advice, just advice on that specific life office. Apart from that, you will seldom (if ever) get a better deal off the life office then you can going directly with an independent broker. Why not phone around and then contact a Broker and see if they will offer a better fund allocation or offer execution only service ?
The life offices have in many cases already factored in brokers fees which means that irrespective of whether you go directly or through a broker you are paying for independent advice whether you receive it or not. Ive worked in a life office so I know how the charging structure works, in many cases if you goto them directly, they get the same fees, the client just doesnt get impartial advice.
While I believe most in our industry are good professionals there are some things you can do that are prudent guidelines to ease any concerns:- Ask for company comparisons to show that broker shopped around
- Ask for breakdown of charges, including comissions paid
- If managament charge is above 1% ask why (might be fund related or good reason, just ask)
- Get reasons why specific recomendations made and for signed copy to be given to your father
- Ask why Annuity or ARF chosen
- Ask what maximum potential tax free cash available is ( in case its an occupational PP that might be entitled to up to 1.5x Final salary tax free)
- If you are unsure, phone around or get friends/family to recommend an alternative broker/adviser. You are not obliged to go directly through a broker who looks after specific pension scheme
- Do not take everything you read on internet forums as sound advice. There are plenty of people willing to offer well intended but ill informed advice based on their own experience (rather then their professional experience).
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Liam D Ferguson wrote: »If he's already been quoted 3% and 1% per year, I'm guessing that his broker is already quoting some sort of ARF.
Incidentally, annuity rates include a provision for paying a once-off commission. You don't escape that by bypassing brokers and buying your annuity directly from the company. The company just keeps the commission. I'm not saying that this is a fair system - just pointing out how the system works.
OK guys, if there's a once-off transparent commission I'd have no problem with someone doing it through a broker. What got my goat up was seeing a mention of an ongoing 1% commission for a broker who arranges an annuity which I felt really takes the biscuit.
There is though the niggling feeling that I'm afraid I have to air - how does the client know the broker is getting him the best possible deal? That would be my personal motivation for shopping around and doing it myself. Sorry if this causes offence but that's an unavoidable issue for me.
I quoted those life companies as examples of life companies who offer annuities, I did not intend that it be taken as a recommendation or as an exhaustive list.0 -
OK guys, if there's a once-off commission I'd have no problem with someone doing it through a broker. What got my goat up was seeing a mention of an ongoing 1% commission for a broker who arranges an annuity which I felt really takes the biscuit.
There is though the niggling feeling that I'm afraid I have to air - how does the client know the broker is getting the best possible deal?
I quoted those life companies as examples of life companies who offer annuities, I did not intend that it be taken as a recommendation or as an exhaustive list.
If there is seperate 1% ongoing fee then the broker has added a very high renewal/trailer fee which is unusual. My interpretation would be that the 1% mentioned is the Life office annual management charge for the administering and investment of the ARF that most life offices charge.
Annuitys - Usually broker can get a flat comission at start (ranging from 1%-3%) and thats it. Then there are usually small admin/policy fees per annum charged by the life office but client gets a set amount for life.
ARFs - Usually broker gets maybe 3% fee upfront and they can choose (or agree with client) an ongoing trailer fee (usually a percentage of the fund per year thats added to the management fee). Client re-invests their pension funds and drawdown specified amount. AMRFs cant be drawn down until 75.
Like I said, shop around if you do not trust your broker , but theres nothing to stop cutting a deal with them if you know exactly what you want . .0 -
There is though the niggling feeling that I'm afraid I have to air - how does the client know the broker is getting him the best possible deal? That would be my personal motivation for shopping around and doing it myself. Sorry if this causes offence but that's an unavoidable issue for me.
As it happens, I agree with this line in thinking. I've had some terrible experiences with doctors and solicitors over the years and these experiences have taught me never to trust someone just because they have letters after their name.
I've met some fantastic doctors over the years and I've met some that were negligent to the point that we received that rarity - an apology from a hospital. I've met some great solicitors and I've met some charlatans who were utterly incompetent and charged exorbitant fees. By the same token, I fully accept that there are great brokers, good brokers, mediocre brokers and some cowboys out there who care little about their clients and far more about how much commission they can squeeze out of every deal.
How does the average man in the street tell the difference? I'd echo everything of what Drumpot says above. Get a recommendation of a broker from someone you know. Get the broker's advice in writing. Don't sign anything on your first visit. Show the recommendation to informed friends or family for opinions.
A good broker will not try to confuse or impress you with jargon. Quite the opposite. A good broker will explain the jargon to you in language that you understand. If your broker cannot explain a financial product to you so that you understand how it works, what the alternatives are, how much the broker is getting and how much the product provider is getting, walk away.0 -
Hi all, Many thanks for all your help and advice so far. I'm learning quite a lot here myself. Can I just ask what is a D C . To help clarify a few issues my father
was with the same independent broker from the day he set the pension up.
he looked after him very well during that time but sadly is not here now.
So my dad has to make his own arrangements. He actually retired a few years ago, but as he was comfortable he decided to leave his fund run until 65. However it seems that was not a good idea as the insurance co IL have lost a third of his fund. He got a little of it back in the last year, but he is worried about the current crisis in Europe that the same will happen again which is why he has decided to take his pension now. He still has a 6 figure sum in his fund.
Is that a good decision or should he wait until things pick up. But then again how long is that likely to take.
The Broker he spoke too was highly recommended by a friend of the family.
He has suggest to my dad to go the ARF route as opposed to a weekly pension. To take a lump sum of 25% then an amrf for the max allowed.
he has suggested a fixed int cash fund for the armf.
He said they will be paid a commission of 3% of the amount invested.
Then the on going management fee would be 1%.
My Dad was told that he cannot touch the amrf until he reaches 75 but that he can take out any interest earned if he wishes too.
That's all ok with him as he says himself he is low maintenance. No Mortgage, He doesn't Drink or Smoke drives and old car that he is in love with and play a little golf to keep himself fit.
Can I just ask what is a D C
Can I also take it that he is better with the Broker as the charges will be similar.
I'll ask him to query the charges with the broker and see what he has to say.
Thanks again for all the helpful advice.0 -
OP, 'DC' is a 'Defined Contribution' pension which refers to an occupational pension scheme whereby the employee and/or employer contribute money into a scheme which is invested over the course of the employee's service. When the employee retires, he has to make the same choice that your father has to make when he reaches 65 as in there is a lump sum and you have to decide what to do with it, with certain restrictions imposed by the revenue.
The other employee pension scheme is 'DB' which stands for Defined Benefit (often referred to in the UK as a 'final salary' scheme) where the pension is based on the employee's final salary and his/her years of service. For example an employee might get 1/60 of final salary per year of service so someone retiring with 40 years service would get a pension of two-thirds (40/60) of their final salary. With a DB scheme, the employer has to bear the risk that the investments won't produce a return adequate to provide the income so over the past 20 years a lot of private sector employers have shut down DB schemes to new members and have put new employees on to a DC scheme.
With a DC scheme, the employer bears no risk whatsoever since the employee ends up with a lump sum at retirement and once the money has been disbursed to an Annuity/ARF/AMRF/tax-free lump sum, that's the end of it as far as the employer is concerned. Self employed people are effectively on a DC scheme even if it's called a RAC or PRSA, they end up at retirement with a lump sum and have to make some choices like your father.
In relation to ARFs and AMRFs, your father may have his hands tied depending on whether he already has or does not have a pension or income of at least €18,000. Take a look at the data on pensions on the Citizens Information website....
http://www.citizensinformation.ie/en/money_and_tax/personal_finance/pensions/personal_pensions.html
You can claw back some of the 3% commission the broker mentioned, you can ask for the money to be put into an ARF or AMRF with a top-up in lieu of some of the broker's commission so you could for example get 101% of the money in an ARF and the broker would then 2%. Brokers tend not to mention this option to clients, for obvious reasons.0 -
Coylemj answered alot of your questions but there are some things I just want to add. As a disclosure, please understand that any information/tips being supplied are based on the limited information available and is only to be used as a guide - you should always get advice from somebody you trust when getting information off the net in this kind of instance. Im only trying to give you some tips of the trade, not give you or your father professional financial advice.
My guess is that your father was prob invested in a standard managed fund (pension Consensus or the likes) and it seems unfortunate that his fund didnt have at least have a default strategy (coming closer to retirement it moves to safer funds). I wouldnt blame somebody who isnt here to say what their plan was because your dads previous adviser may have had plans to move him into something safer in the later years himself.
While you father is making up his mind, he should consider moving his funds into a Pension cash or lower risk arrangement (cost is usually small , if anything). The markets are indeed erratic and while conventional wisdom would be that they will recover, if you are talking months/weeks until your father decides what he wants to do, he might not have the time to recover what he has lost (he might get a bounceback or a further fall).
Even at that, once he has setup the ARF/AMRF there are fantastic fixed cash (like fixed bank deposit) funds available that are ideal for these kind of pensions. I believe in all investments you should always work with what you have, not what you wish you had or what you used to have. Ask a broker what is the potential loss in any worse year in a particular fund. We cant predict what the worst will be but we can indicate what the worst fund performance year had been. I also think as a very basic rule (not an exact science), the potential gains an investment can have can be matched in the negative. Put simply, the greater the risk the potential rewards and losses are higher.
In terms of charges, I actually just phoned up (only one life office) to see what their stance was and I used to work for another life office. Standard procedure was to try to encourage direct clients to goto brokers or tied agents. If they wanted to go directly, they would get the same offer that brokers give them, with the same charges and penaltys, without any advice (again this might not be the case in all situations but I know it was standard practise where I worked).
Most Life offices get most of their business of Brokers so they dont want to undercut us. Its like the way the average Joe cant purhcase bulk goods in Musgraves , shopowners can avail of the offers.
In terms of charges, the most important thing is that you are getting appropriate advice. If your father trusts the advice he is getting and you feel that his broker is giving him sound advice then there is no reason he shouldnt go ahead with the advice being given. What I would also say is that while its ok to ask (no harm in trying) for enhanced allocation, if your father is getting professional top class advice, he should factor that in when considering what extra allocation he would like. Trusting a financial adviser is worth paying the going rate if you are comfortable with the advice given and you feel that you have been advised professionally and to your satisfaction.0
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