Thursday, November 24, 2011

Improved Charging Structure from

With immediate effect, there will be no 1% Levy on contributions to the InvestAndSave product, for the duration of the contract, provided that the minimum Single and Regular payments are made. This applies to business transacted from 24th November 2011, or business that is currently in the pipeline but has not yet been issued.

So, if you invest €5,000 (or more) as a Single contribution and €100 (or more) per month as a Regular contribution you will avoid the Government Levy of 1% on all contributions.

If you invest a Single contribution only, the levy will apply to this payment.

There are no entry or exit charges on this product. You can choose to invest in any of the 17 Actively Managed and 13 Passive Funds available. The annual management charge on these funds is 1%pa.

Monday, August 8, 2011

Pension Anomaly - Tax-Free-Cash and Guaranteed Annuity Rates

Under current pensions rules a person with a mix of multiple Personal Pensions (RACs) and PRSAs, that elects to draw down the 25% tax-free cash, must take this percentage from each individual policy.

If none of the policies had a guaranteed annuity rate (GAR), this would not make any difference to the policyholder.

However, if a GAR applied to one (or more) of the policies then you could be put at a financial disadvantage if your preference is to take the maximum tax-free cash (TFC) and buy an annuity with the balance.

The best way to illustrate this is by way of an example:

€300,000 in a GAR product with annuity rate of 11.11%
€100,000 in a non-GAR product

1. Current rules dictate that you take €75K from GAR product and €25K from non-GAR product, giving you total tax-free cash of €100K. You would then get a pension of €24,997 from GAR product and €4,218 from non-GAR product (buy annuity on open market) Total = €29,215 per annum

2. If you were allowed to take 25% of the total aggregate fund (€100K) from the non-GAR product alone, you would get a pension of €33,330 per annum

Option 1. would put you at a financial disadvantage to the tune of €4,115 per annum

If this anomaly applies to your pension contracts, you (or your advisor) should write to the retirement benefits section of Revenue and ask for a ‘concession’ by outlining the full details of the policies to show how you might be put in a disadvantageous position by being forced to take 25% of each individual policy.

If you (or your advisor) don’t ask, you shall not receive.

Monday, July 4, 2011

Life Insurance Managers should 'put a sock in it' about retention & profitability.

Those that are in the space of product providers of Life Insurance are a funny old bunch.

Life Insurance Companies are moaning about how difficult it is to retain business, as clients cancel policies and advisors re-write policies every few years. This means that life offices are not making money on these products.

I have approached a number of them over the last 12 months with a view to altering the structure of the products so that the client gets a better deal and the policies stay with the Life Insurance Companies for longer periods, thus making them more profitable.

Result : The only appetite providers have is to increase commission payments to intermediaries and not to change the product structures. The consumer is forgotten again.

Prediction : When the shareholders start copping on as to what is happening, they will change the structures but it may take a few more years.

In the meantime, I’d appreciate it if the Life Insurance Managers would 'put a sock in it' about retention & profitability.

Thursday, June 23, 2011

Blogger Interview - Brian Lucey

What is the best business/investment decision you ever made?

The best business decision I ever made was to leave the Central Bank of Ireland and to take the subsequent pay cuts and move to my present position as an academic. The most important asset most people have is their human capital, and I felt that doing this was quick to enable me to maximise my return, in a holistic sense, on this.

What kind of car do you drive?

I mostly take the train, but I have a 12-year-old Saab 93 convertible for the infrequent days that you can actually take the top down :-)

What is the worst financial advice that you ever received?

I'm glad I didn't take it, but I was offered an opportunity to get involved in a partnership for oil exploration shares. These did not work out…

Do you own property abroad?

No, I don't.

Should basic finance be included on primary school curriculum?

It actually is, in the sense at least of using money as a learning aid. I think it would be much more useful for all University students to be required to take a mandatory course on life skills, or perhaps even have this at the second level. When I was in school in the 70's we had classes in Civics, and I think this might be the place to put these issues into the curriculum. Most people in their late teens or early twenties don’t have the financial maturity or the financial capacity to really benefit from financial literacy classes. Maybe we should however have something at University.

Do you contribute to a pension plan?

No, I don't, I'm Lucky enough to be one of those people that has a defined benefits package through the public sector.

What's your favourite film of all time?


Have you ever won money?

Not any significant amounts, I don't really gamble. I have won some cash in a few table quizzes.

Do you own your own home?

Yes we do.

Do you invest directly in the stock market, through funds or both?

Not really, I'm quite risk averse.

What is your preferred method/system of saving (Deposits, Funds, Shares, Property)?

Right now I think having access to cash is important, so the most useful savings method therefore would now be deposits.

What financial product/s do you consider to be bad value for money?

I'm not sure that there is any such thing as bad value for money, I think people need to decide what their risk profile is and then make a decision. That said, it does strike me as quite extraordinary the fees charged by some fund management institutions, particularly for anything as basic as a tracking or index funds.

Do you trust your bank?

For a given value of trust yes… I trust that when I want to withdraw my money, it is going to be there. I think given the experiences of the last couple of years we can't really trust the Irish financial institutions to behave themselves when left to their own devices. Hopefully this will have been a lesson learnt, and the financial institutions including banks will be able to proceed in the future to do what they should do, just provide the vital infrastructure and credit channel that modern economy needs.

Brian Lucey is Associate Professor in Finance at the School of Business, Trinity College Dublin

Thursday, June 2, 2011

Victims, Spectacle Makers or Whiners in the Workplace

I like this analogy in ‘What They Teach You at Harvard Business School’ on how important it is for business owners to identify “victims”/ “whiners” / “spectacle makers” in the workplace, before the pollute or contaminate your business and turn customers away.

“..if I had my favourite bowl of ice cream over here and a bowl of shit over here, if I took one speck of shit and put it in the ice cream, would you eat the ice cream?”

Friday, May 27, 2011

Beat The 0.6% Pension Levy

The following are some ideas on how to reduce the impact of the new levy on pension schemes.

1) Reducing the contribution charge or annual management charge on your existing pension would offset some/all of the new levy

2) If you can afford to increase your payments to your pension (subject to Revenue limits) this increase could negate some/all of the levy in the form of tax relief on the higher contribution.

3) If you have a Pension Retirement Bond (Buy-Out-Bond) and you have reached the age of 50 you should be able to ‘mature’ this, take as much tax-free-cash as you can and use the balance in accordance with the rules of the original scheme.

Low Cost Pension Products

Monday, May 16, 2011

The 0.6% Pension Levy

There has been much negative comment on the introduction of an annual levy on the pension scheme assets of private pension savers. While no one likes paying additional taxes, there has been little or no commentary in the media on providing constructive information on minimising the damage the levy can do to your pension fund.

This levy was flagged in the Fine Gaels ‘Perspectives on Budget 2011 and the 4‐Year Plan’ published last December so it should not come as a great surprise that it would be implemented at some stage. The previous Government had an annual ‘bill’ of €700m for the pensions industry and it was up to them to argue/lobby which method of payment would suit them best.

The levy will apply to the ‘private’ pension assets of Defined Benefit and Defined Contribution Pension Schemes, Personal Pensions (RACs), Pension Retirement Bonds and PRSAs. Currently, it will not impact on the Defined Benefit Schemes of Civil and Public Servants.

The pension industry is pretty stagnant at the moment with many pension savers reducing or stopping their contributions. Those that were considering starting a pension have put it on the long finger. They have more urgent uses for their money and find it difficult to rationalise putting away funds that they cannot access for years to come. The foregoing of tax relief on their contributions is already saving the exchequer money but their current financial needs are more immediate, an indirect benefit to the exchequer.

Some, within the industry will decry the levy as ‘the’ catalyst for the decline in pension savings that will force financial advisors out of business and redundancies within the pension companies: the ebb of pension savings started well before now.

So, rather than describe the water when folk are drowning in a sea of increased costs/charges, why not throw them a lifeline? It’s time for a serious review of your pension.

It is unlikely that the pension providers are going to voluntarily reduce their contribution or annual management charges to offset the cost of the new levy. One of the biggest impediments to the ‘performance’ of a pension fund is the level of charges that are on the contract.

It may be possible to reduce your existing charges by rolling up your sleeves and taking a more proactive role in the choice of pension product and its charging structure. The two main charges on a pension product are a Contribution Charge and the Annual Management Charge. The contribution charge is a percentage of each payment that you (and/or employer) make to your pension: this can be up to 5%. The annual management charge is a percentage of the value of your pension fund that is deducted each year : this can be up to 2%pa.

If you can reduce either of these these two charges you will benefit from an increase in the value of your pension fund and offset some/all of the levy imposed by Government.

Let’s assume that you have €100K accumulated in your pension fund and that you are contributing €500 a month for the next 4 years.

If the Annual Management Charge (inclusive of 0.6% levy) was 1.5% and the contribution charge was 0%, then the estimated value on your fund at the end of 4 years would be €135,632.50*

If the Annual Management Charge was 1.75% (inclusive of 0.6% levy) and there was a contribution charge of 3% on each €500 paid in over the next 4 years, the estimated value at end of year 4 would be €133,413.95*

€2,218.55 in potential savings over 4 years by focusing on charges.

*Assumes 4% Growth Rate

It is possible that some of the media commentary will deter folk from making contributions to their private pensions. However, it could be argued that now is a good time to increase contributions up to the maximum allowed by Revenue because i) tax relief at the highest marginal rate (41%) may be reduced at a later date and ii) increasing the contribution would negate some/all of the levy in the form of tax relief on the higher contribution.

The new levy will only work if the revenue stream raised can be measured against specific employment generated in the broader economy. If the revenue is pooled in the general exchequer fund, like the National Solidarity Bond, there will be no measure ability or accountability in respect of ‘job creation’. On the plus side, we will get the opportunity to sack the instigators if it's not removed or does not fulfill its intended purpose in 4 years time.

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Monday, May 9, 2011

Harvard Business School & The (Irish) Department of Social Protection

I recently read how students that were accepted to Harvard Business School emptied out their bank accounts, by either transferring the money to their parents or by buying luxury cars. They legitimately did so to qualify for financial aid.

I then got to thinking about a proposal by the Irish Department of Social Protection that would require motor tax applicants (car buyers) to provide their PPS number so that they could cross-reference this number against those that are in receipt of social welfare payments.

Is there a major scam going on whereby those applying for State benefits empty out savings accounts or transfer assets to family members in order to qualify for State financial assistance here in Ireland? Could it explain some of the upsurge in new car registrations?

Think about it. You have €30,000 in savings but you wont ‘qualify’ for full/partial State Benefits because you hold this asset. If you blow it on a luxury car (not deemed an asset) you could get the State to fund, or partly fund, your penchant for a nice car.

How sweet is that? Your taxes paying for your neighbours new car.

Wednesday, April 20, 2011

PRSA (Personal Retirement Savings Account) Anomaly

Seriously, does anyone know of any other Country in the World where a employee would be put at a financial disadvantage (via legislation) in choosing one pension product over another?

There is currently an anomaly for PRSA (Personal Retirement Savings Account) policy holders where the employer is contributing to the employee’s PRSA.

If an employer is contributing €100 to an employee’s PRSA, the employee is €11 worse off than an employee whose employer in contributing the same amount to an OPS (Occupational Pension Scheme).

Although Fine Gael have committed to putting the PRSA & OPS on an equal footing in respect of this anomaly, it probably will not happen before the next budget.

So, what’s happening in the meantime? Well, PRSA policy holders (where employer is contributing) are being advised to switch to OPS’s and I am aware of one PRSA Provider that has written to the employers suggesting that they change their PRSA Schemes to OP Schemes.

To me, this seems a tad extreme. i) There is no cap on charges on an OPS - Initial commission is way more generous and providers can increase the annual management charge if they see fit and ii) The OPS route will involve some form of Trustee Training for the employer or failing this, they will be charged for complying with the legislation.

If I may make a suggestion, while this anomaly is ‘put on an equal footing’. It would make a hell of a lot of sense for Revenue/Department of Finance to allow those that are disadvantaged to claim back the 11% via the PRSI Refund Section of Revenue in Limerick.

This might stop a mass exodus from PRSAs before the legislative changes can be made.

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Monday, April 18, 2011

Life Insurance 'Model' Implosion

I’m finding the Life Insurance Industry response to ‘business retention (profitability)’ a little bit bizarre; to say the least.

You see, there’s a problem with the length of time that Term Life Insurance business is staying on the books because the product is being re-written every two or three years.

In the majority of situations the policy is moved to a different insurer by an intermediary and justified on the basis that the ‘new’ insurer is cheaper ; fair enough. As Insurers keep tweaking/reducing their Term Insurance rates, it is probably no harm for the consumer to benefit from the reductions, so long as the terms and conditions of the policy are identical.

Those consumers that avail of the commission rebates on first years premiums via discounted life insurance websites can save money by moving around this market on a regular basis also, provided they are in good health.

So, who’s ‘benefiting’ from the current model? The Consumer - because they are getting a cheaper premium. The Intermediary - because the commission structure is such that it is lucrative to re-write the policy every few years.

If the break-even for an Insurer is 7 years on a Term Insurance Policy, how are they ever going to make it profitable for themselves; and when will the current model implode?

To acquire this type of business, Insurers have resorted to i) Price matching i.e. our ‘real’ premium is €100pm but if another insurer is quoting cheaper, we’ll match it ii) Increase initial commission and override to Intermediaries & iii) Spreading higher commission out over longer periods of time.

God forbid that the Insurers ‘offend’ the Intermediary market by putting the Consumer at the top of the priority list but, in my humble opinion, these actions are not going to solve the problem.

Insurers (and Re-Insurers) need to get their act together and come up with a different business model for these products.

I’m sure that they are worried about the extent of how much re-writing will take place when the latest European Court of Justice ruling on gender equality on insurance premiums. Good for some consumers, an income bonanza for intermediaries and another nail in the coffin for Insurers.

Tuesday, January 11, 2011

Government 'Policy' in Savings/Investment Market

It would appear, to me, that the Irish Government is systematically distorting the savings market. It seems to be a case of ‘We’ve blown ours and now, we need yours’. They are running out of road in terms of the options they have, to deal with the Exchequer Deficit ie raise taxes, cut spending, growth, default/restructure and now enforced buying of Government Debt.

You may have been prudent enough to save for your family’s future but the last two budgets have provided us with an insight into how desperate the Government have become in trying to relieve you of your hard saved cash.

It’s being dressed up as a sense of ‘civic duty’ so that you don’t feel too bad about helping them out of a sticky situation.

Increases in DIRT & Exit Tax, introduction of a 1% Tax on Unit Linked Savings/Investments, Inflated Deposit Rates from Government controlled banks and building societies, Solidarity Bond MK 1 (with MK 2 on the way), and Sovereign Annuities.

These are all designed to force companies and individuals to buy Government Debt via savings/investment and pension products. It seems that the Government savings policy is that you should bet the house on Ireland Inc., with a total disregard for any sort of diversification.

The Solidarity Bond is being flogged on the basis that your investment will help with “stimulating economic recovery and assisting in the maintenance and creation of employment”. Of course there is no disclosure requirement, or annual update, on how the punters money is being spent. How many jobs were created from the €350m invested in 2010?

The Government also tell us, in relation to Sovereign Annuities, that “This type of investment in ourselves is vital to our national recovery” Not a ‘Wealth Warning’ in sight, it’s all good stuff because “...there is absolutely no risk of Ireland defaulting on its sovereign debt”.

Perhaps, if the Solidarity Bond and Sovereign Annuity products were regulated by the Central Bank, the Government would not be so bullish in their comments regarding security/guarantees and how fit these products are for purpose and how they distort competition.