Monday, June 30, 2008

Reading (Chore?)

I was never in the habit of reading when I was younger and English was at the bottom of the pile when my Leaving Cert results came out.

In the past year and a half I have taken a keen interest in anything that would take my fancy in the non-fiction section of the bookstore. The non-fiction stuff was deliberate as I convinced myself that if I was going to take on this 'chore' I would be better off with something that I could learn something new from or help me understand an issue that had passed me by.

Recent titles would include Making Globalization Work, The 4 Hour Work Week, China Rises, The State of Africa and The Long Tail.

Each of these books provides some very valid insight into the way our world is changing and provides food for thought on where things may be headed in the not too distant future.

On a recent visit to the shop, I could not find anything that caught my eye and strayed to a shelf labeled 'Classics'. Two books jumped out at me, purely because I had heard of their titles but had no idea what they were about.

One of these, which I have just finished, was The Great Gatsby by F.Scott Fitzgerald. This was written in 1925, but the guy was way ahead of his time. For a work of fiction, it has these visionary references of a new world where consumerism, technology and leisure time are to the fore.

Some of the books, on the new found shelf of 'Classics', will definitely be packed for my next 'switch-off' holiday. The reading is not a chore anymore.

Saturday, June 28, 2008

Glossary (to date)

Active Management - A fund manager decides on what the money is invested in.
Annual Management Charge - The company that holds your investment or pension product charges a % of the total fund each year for managing your money.
Annuity - The regular pension payment you would receive from an Insurance Company after you hand them over your retirement fund.
Allocation Rates - This term applies to the amount of money that is actually invested for you. An allocation rate of 98% would mean that if you invested €1,000 , €980 would be invested in your policy. It's an up-front charge.
AMRF - Approved Minimum Retirement Fund. The portion of your retirement fund that you can only draw the growth from prior to age 75. At 75 it becomes an ARF.
ARF - Approved (by Revenue) Retirement Fund. Post retirement investment vehicle offered as an alternative to buying an Annuity.
Asset Allocation - The assignment of money to broad categories of assets
AVC PRSA - Additional Voluntary Contribution to an Occupational Pension Scheme using a PRSA type product
Contribution Charge - An up-front charge on the amount of money that is invested in your pension. It is normally about 5% so for every €100 you save, €95 would be invested in your pension.
Consensus Fund - A fund that mirrors the average asset allocation of a fund management industry.
'Default' Investment Strategy - An investment strategy that is designed to fulfil the reasonable expectations of a 'typical' investor.
Derivatives - A security/asset used to 'hedge' a risk or for speculative investment purposes.
Dual Life - You and your partner are insured for two separate amounts. If one partner dies, the surviving partner still keeps their part of the policy and is insured for the amount stated.
Defined Contribution - The amount you invest in your pension(plus any growth)will dictate the size of the pension that you receive at retirement age.
ETC- A Commodity ETF
ETF - A type of investment fund that aims to achieve the same return as a particular market index
EURIBOR - Euro InterBank Offer Rate - The interest rate at which participating banks can borrow from other banks on their panel.
Execution Only - The client selects the product provider, type of product and funds that they want to invest in. No advice is given by the intermediary.
Executive (Directors) Pension - Retirement account for directors of limited companies. Contributions can be made by the company, directors or both.
Fixed Interest Assets - Government or Corporate Bonds
Hedge Fund - A portfolio of investments that target high returns by using elaborate investment strategies.
Index Linked - Increasing you contribution or premium to keep pace with inflation.
Index Tracking Fund - A fund that tracks/matches the component parts of a specified market index. such as the EuroStoxx50.
Life Office (Product Provider) - The company that you hold the investment or pension with.
Managed Fund - A mix of equities, property, bonds and cash.
Market Value Adjustment(MVA) - The cash value is adjusted downwards to reflect the true value of assets held in a fund.
Mortgage Protection - sometimes called 'Decreasing Term Insurance', as the level of cover decreases as your outstanding mortgage balance decreases. It is the cheapest form of life cover available and the premium stays the same for the duration of the policy.
Non-Standard PRSA - Personal Retirement Savings Account where the Annual Management Charge can be higher than 1% and fund choices are more varied.
Personal Pension - Also know as an RAC (Retirement Annuity Contract). Mainly used by the self-employed as a retirement savings account. No legislative limits on charges.
Policy Review - The insurance company have the right to review your life insurance policy after a certain period and decide if the premium you are paying is sufficent to pay for the cover, until the next review date.
RACs - Retirement Annuity Contracts also referred to as Personal Pensions
Revenue Maxima - The Revenue allow you to claim tax relief, at your highest rate of tax, on the contribution that you make to a Pension/PRSA up to a certain percentage of earnings. This percentage is dependent on your age.
Risk Profile - The extent to which each investor views risk
Spot Price- The immediate price quoted for a security, currency or commodity
Standard PRSA - Personal Retirement Savings Account with charges limited to a maximum 1% Annual Management Charge and a 5% Contribution Charge
Surrender Value - The amount you would get (after tax) into your hand when you cash in an investment. Does not apply to pensions.
Term Insurance - Life insurance policy for a fixed period of time.
Unit Linked - Linked to the performance of the units you purchase within a fund.
Volatility Rating - The likelihood of underlying assets/securities being held to fluctuate dramatically (high rating) or steadily (low rating) over a period of time.
'Whole of Life' Insurance - An open-ended policy (as opposed to one for a fixed term) that continues till a claim is made and the amount you are insured for is paid out.

Friday, June 27, 2008

Unit Linked 'Whole of Life' Policies

There has been some coverage in the press recently regarding the workings of these type of policies, with particular attention being given as to when they are reviewed and the increases in premiums that are required to maintain the same level of cover.

I ran off some quotes for a Male & Female aged 30 next birthday, both non-smokers, €250,000 life cover on a 'Dual Life' basis over 35 years.

A Convertible Term policy would cost about €45 per month. The premium and sum insured are guaranteed for 35 years with an option to convert to another policy without medical evidence.

A Whole of Life policy will generate a 'recommended' premium of about €90 per month for the same cover. This is the premium that the quotation disc generates so that the policy would be sustainable for 35 years, assuming a growth rate of 6% on the value of units purchased. This plan will also be reviewed after 10 years and every five years thereafter to age 65. After this, it can be reviewed annually.

You don't have to have an actuarial qualification to figure out that this does not make sense. It may be time to overhaul this type of product or get rid of them altogether.

If you invested the difference in cost, €45, over the next 35 years and achieved a return of 5% net, you would generated a cash fund for yourself in the region of €50,000

Pension Term Insurance

If you are self-employed or in employment but not a member of an occupational pension scheme you can take out a Term or Convertible Term policy and claim tax relief on the premiums (subject to certain revenue maxima).

If you have a PRSA, you can set this type of insurance policy up on a stand-alone basis. You can claim tax relief on the premium, provided that you stick within the revenue maximum contributions for your age

Company Directors can also do this whilst getting the company to pay the premium.

You cannot assign this type of policy as collateral for a loan.

Pensions Green Paper Submission

The following are some issues where I feel that some improvements can be made to the current Pension/PRSA regime, in the interest of fairness and equality.


Under existing legislation governing PRSAs, Employers have to offer their employees the facility to put in place, at least one Standard PRSA in situations where:

 There is no pension scheme currently in place
 Some employees are excluded from the existing pension scheme
 The waiting period for membership of the existing scheme is more than 6 months
 The current pension scheme rules do not allow employees to make AVCs

There is no obligation on the employer to contribute to the PRSA.

However, if an employee decides to contribute to a PRSA, and their contributions are deducted at source through payroll, the employer saves 10.75% of that contribution through a PRSI saving.

It is my opinion that this saving should be automatically made by the employer to the employees PRSA.

I am not convinced that a SSIA type contribution to a Pension/PRSA will encourage more people to save for their retirement. The only way that this would be popular is where the consumer would have unconditional access to some of the money at an earlier date than normal retirement age.

This defeats the purpose of retirement planning and I feel that personal savings and retirement funding should be kept separate. The population is confused enough as it is with all the different types of products on offer, why make it worse.

I do believe that the tax-relief system that is currently employed should be maintained but that the relief should not be dependent on highest marginal rate. It is my opinion that all pension contributors should get a standard relief in the region of 35%.

Those that are not in the tax-net could either qualify for a rebate of the relief or be offered a greater percentage of their fund as tax-free cash at retirement age.

All defined contribution pension schemes should have a facility, whereby the fund should be made available, for legitimate medical expenses, at the behest of the pension holder, before normal retirement age.

Pension Product Providers should not be allowed to offer reduced allocation rates to those that are making minimum contributions to pensions. This is more prevalent in the Personal Pension market and involves giving those that make larger contributions more favourable product terms.

Thursday, June 26, 2008

Pension Survey (Part 1)

The following are the results of a 'value for money' survey that I carried out on all the Pension product providers that are operating in the Irish market at the moment. The estimated fund size figures relate to Personal Pensions but are very similar for Directors Pensions.

What I wanted to do was, to compare the estimated funds for a fixed number of contributions over a fixed period of time taking account of the lowest charges product available from each provider ie. the product is set up on an execution-only basis.

There were 131 contributions of €500 per month and the assumed growth rate was 6%.

Product Source - Fund - Fee Payable

Friends First - € 86,811 - Yes

Irish Life - € 86,773 - Yes - € 86,676 - No

Eagle Star - € 86,676 - Yes

Hibernian Life - € 86,658 - Yes

Canada Life - € 86,619 - Yes

Quinn Life - € 86,430 - No

New Ireland - € 85,958 - Yes

Standard Life - € 84,294 - Yes

AIB - Not Available

BOI Life - Not Available

Acorn Life - Not Available

Part 2 of the survey will show the the estamated fund size based on the highest charges possible under the different plans.

Invest Monthly or Once-Off?

The question is often raised as to whether it is better to invest a regular monthly payment over a period of time or just invest a once-off payment at outset (assuming you can afford it).

To the best of my knowledge, there is no clear answer to this. It is impossible to predict how markets will pan out in the future. The only information on which we can base our analysis is on what has gone before. This, however, is not something that sound financial planning is based on.

The following examples may give you food for thought.

Example 1.

€50 per month (level contribution) for 10 years
€6,000 Lump Sum invested for 10 years

Surrender Value of monthly plan on the 31/10/2007 is €8,862.11
Surrender Value of lump sum on 31/10/2007 is €12,618.25

(Both invested in the same unit linked fund and started on the 01/11/1997. The only charge is a 1% Annual Management Charge.)

Example 2

€100 per month (level contribution) for 5 years
€6,000 Lump Sum invested for 5 years

Surrender Value of monthly plan on 31/03/2007 is €9,130.94
Surrender Value of lump sum on 31/03/2007 is €9,025.56

(Both invested in the same unit linked fund and started on 01/04/2002. The only charge is a 1% Annual Management Charge.)

Please bear in mind that the results illustrated above are specific to the criteria noted and the time frames involved. I specifically requested the examples from the Life Office that would show where one method of payment out-performed the other so that I could highlight the quandry.

Perhaps the answer lies in a combination of regular and sporadic once-off contributions?

Donation Feature

Those of you who are familiar with my execution-only service websites will be aware that there is an optional donation feature on them. I would like to give you a brief explanation as to why I have included this.

If you want to set up a pension or investment product on an execution-only basis you can either do so through my websites or through an advisor. If you go through an advisor you will pay a fee in the region of €150 to €300 for their assistance in completing a similar transaction.

By buying the product through the websites you are effectively eliminating this cost.

Since 2005 I have been raising limited funds for some of the abandoned children that are in orphanages in China. I have a personal connection with one of these orphanages in Jiangxi Province.

To date, the funds transferred, through the Amity Foundation in Nangjing, have been used to purchase air-conditioners/heaters, an incubator, and rehabilitation equipment for kids with cerebral palsy.

In the last year, the focus of my attention has been on providing funds to purchase a milk formula for infants at Fengcheng orphanage that contains the necessary nutrients for early development. It is my intention to continue with this programme for the time being and I would also like to have the funds to pay for some harelip/cleft palate operations.

I am happy to deal with Amity, as all transactions are fully receipted and they do visit the orphanages and send reports. They have an administration fee of 7%, which I believe is fair.

Your donation is optional. If you do feel like making a donation, it does not have to be in the indicative ‘fee’ range above as every little bit helps.

Wednesday, June 25, 2008

Buying a Pension

There are two ways to buy a pension. You can opt for an 'advisory' service or an 'execution only' service.

If you elect to go the 'advisory' route you can expect to pay for the advice that your are going to get in respect of the type of product that is suitable to your particular circumstances, the level of contributions that you should be making and the investment funds that are most suitable to your investment risk profile. *

The commission charges that you should expect to pay for this type of service should be no more than 5% of each contribution and an annual management charge of 1% - 1.5% of the value of the fund each year.

If, however, you are comfortable with making your own investment decisions and you have a good understanding of what you are looking for, then it is possible to buy a pension on an 'execution only' (no advice) basis with just a 1% annual charge on the fund.

Example. A female aged 30 next birthday contributing €300 per month, indexed a 3% pa, to age 65 and assuming a 6% pa growth rate . With a 5% Contribution charge and a 1.5% annual charge the estimated retirement fund is €447,996

With a 1% annual charge only, the estimated fund is €518,654

As you can see, the savings are substantial.

*This advice is normally paid for through commission but you could also pay a 'fee' for the advice and buy the product elsewhere. The hourly rates vary but they are typically in the region of €200 per hour. This method is most suitable for those that do not require on-going advice on a regular basis.


I am a Financial Advisor who is authorised to provide broad based financial advice in relation to Personal Retirement Savings Accounts (PRSAs), Pensions and other Insured Investment Products.

Most of my time is taken up helping clients with their financial planning through my office in Cahir, Co. Tipperary. This client bank has been built up over the last 20 years and is added to annually by referrals from existing clients and a limited number of accountants. My income is derived from fees and commissions for providing this ‘advisory service’ to these clients.

What I want to do, is provide those of you, that have an understanding of the type of product you are looking for and know your limitations on risk, with the facility to purchase low-cost products on an ‘execution only’ basis ie. the cost of advice is removed.

It is my belief that, in time, more and more people should do their own research so as to try and reduce costs on financial products. If you can do this, then you are ensuring that charges, in all their guises, do not drag on the net return to you as an investor.

I hope that you find these websites appropriate to your needs and that you can use the products and information to take control of your financial future.