Thursday, September 23, 2010

Pension Companies and Business Retention

Even though I am short on the full technical details of Irish Life’s ‘New Deal In Pensions’; it looks like they are moving in the right direction with regard to addressing business ‘retention’.

The ‘retention’ issue has become a major problem for pension providers. Business that was ‘new’ to the a pension company 5 years ago (approx) is not staying on their books long enough for them to make money on the transaction. Instead, the business is being moved to a different pension company, who then register this a ‘new’ business to them. And so the cycle continued....

The major reason why this is happening is a symptom of the way in which pension companies remunerate advisors. A large chunk of commission is paid up-front which is normally conditional on the business staying with the pension company for 5 years, otherwise some/all of this payment would be clawed back by the pension company.

It has taken a while for pension providers to fess up to this. The move by Irish Life, which spreads and increases remuneration, is an attempt to stem the flow of business away from them so as to build a sustainable business model.

The bar has been set fairly high by Irish Life and it will be interesting to see how their competitors react to this strategic move. A rough estimate, on the figures to hand, would indicate that the break-even for Irish Life on the new structure has been pushed out to year 10+. A competitor would need fairly deep pockets to top that.

Monday, September 6, 2010

Don’t bank on getting the best pension terms from your bank!

PRSA: Meeting financial expectations

Discount pension services provide cost effective retirement planning for you and your employees, writes Gerard Sheehy

As business owners we are always on the lookout for ways in which we can save money. If we can find a more cost effective way of doing something we tend to jump at the opportunity to add value to the bottom line, even if this means taking on some extra responsibility ourselves.

Recent economic events have made us question what we are paying for goods and services and what value is being added by third parties. Some areas for making savings are obvious, others less so. Take pension provision for example. The charging structures on pension products have become more competitive. It may be in your and your employees’ interest to do an audit of your pension costs.

It is now possible to reduce the charges on PRSAs, AVC PRSAs, personal pensions, executive pensions; approved retirement funds (ARFs) or personal retirement bonds by buying these products without the costs associated with financial advice.

The trade-off is simple - it involves spending time in order to save money. This necessitates taking a more proactive role in the selection of pension product and investment funds which gives you greater control of your product costs.

You should consider this type of service if:

(i) You have a good understanding of what type of pension product is suitable for you.

(ii) You are comfortable with selecting investment funds appropriate to your risk profile.

(iii) You want to buy a low-cost product.

(iv) You do not require financial advice.

If you feel that you satisfy these criteria you will be able to limit your costs to a single charge on the pension product of your choice. This should be no greater than a 1% annual charge on the value of your pension fund. As there is no contribution charge, 100% of any employer/employee payments are invested in the pension.

This service is not restricted to employers/employees that are affecting “new” pensions, it can also be used by those who already have a private pension and wish to transfer their existing pension funds or redirect future contributions.

You should not expect your bank to offer you this type of service on PRSA schemes, as they more-than-likely put a premium on their advice. The employee and employer could be paying (up to) a 5% charge on each payment that is remitted but they may be getting very little in the form of advice for this cost.

Even if the employer has an existing PRSA scheme in place, they should consider offering a low-cost option to those employees that have a good understanding of their financial needs.

Gerard Sheehy is a financial advisor for PRSAS. For more information log on to

The above article is in the Pension & Investment Supplement of the Septmeber 2010 Issue of Business & Finance

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Friday, September 3, 2010

Education Fees and Investment Policies. Banks? No Thanks!

Just when you thought your bank couldn’t make you feel any worse via increases in mortgage rates, account charges, and the stifling of credit; they have the gall to start delivering sermons on the need to start saving for your children’s education with one of their investment policies.

It’s all designed to scare the bejaysus out of you: motivation to save through fear. They give the impression that they are doing you a favour by highlighting the issue of education costs and prompt you to start saving as soon as possible.

There’s nothing wrong with saving for education via an investment policy, but it only makes sense to do so if you are not going to get screwed on charges. Do you want to save for your own child’s education or for the education of the child of the person that’s selling the product? If you are going to start saving for education fees you have to get the product right from the outset, otherwise you will end up with something that is not fit for purpose.

It would not be unusual for a bank to charge you 5% of every payment you make to an investment plan, plus an annual management charge of 1.5% pa of the value of your fund. Or, to put it another way; if your fund had a growth rate of 6% pa over the term of the policy the charges would reduce the growth to about 4% pa. This ‘beast’ of a product is woefully bad value for money.

In addition, your ‘make-it-up-as-we-go-along’ Government have increased the tax on growth of these investment policies to 41% AND introduced an idiotic 1% Tax on all contributions that you make to the plan.

Seriously folks, you have got to put the time into researching what is on offer in this market. You can’t really do anything about the Government Tax, except giving your local TD a piece of your mind. What you can do is focus on the product charges. It is possible to save/invest in these products without the 5% charge on each payment and reduce the annual management charge to about 1% pa. Your bank will not be able to provide you with a competitive product.

Example: If you saved €150pm for 18 years in what the bank are offering you would end up with a fund of €43,088. This would be increased to €45,867 if there was a single charge of 1% pa on the value of the fund. A potential €2,779 more in your pocket, as opposed to the banks. Both funds assume a growth rate of 6%.