It’s the pension drawdown product that more and more of us are opting for and, yet, getting a fix on how much this product is going to cost us can confuse.
While shopping around can help with cutting costs when it comes to an approved retirement fund (ARF), you need to understand just what you have to pay for and how different options work, before you can make the best decision for you.
What is an ARF?
An ARF is a Revenue-approved financial vehicle that allows you to keep your pension fund invested after you retire. This means that the capital can continue to grow (hopefully) – although there is a mandatory withdrawal each year of at least 4 per cent, rising to 5 per cent once you reach the age of 71.
Mandatory at least in the sense that Revenue will assess you for income tax on the basis that you are withdrawing that amount so you might as well.
One advantage of an ARF is that you can pass it on, tax free, in the event of your death to your spouse.
“Most people now won’t have defined benefit pensions, it’s mostly defined contribution, so when it comes to drawdown, many people will be taking a lump sum and putting the balance into an ARF,” says John Tuohy, chief executive of Acuvest. “So, understanding and managing them are important for people.”
The alternative for those retiring is an annuity, which provides for a guaranteed income for life. This has been less popular in recent years due to lower interest rates, which means your pension pot delivers a lower annual income.
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These days, annuity rates have fallen back again to around 4.5 per cent (which means it pays out an annual income of €4,500 on every €100,000), so an ARF will be the choice for many.
Pricing ARFs
But how much is this investment product going to cost you? If you have been a member of an occupational pension, you probably haven’t had to worry too much about such things.
But once you retire, you are going out on your own via an ARF. That will inevitably mean higher costs – and the higher the costs, the lower the return to you. After all, this fund will have to last your lifetime and, while investment performance may be uncertain, fees and charges are a definite.
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When you retire, the company managing your occupational pension provider will likely offer you an ARF. But this doesn’t mean you have to jump into it. Better to consider all your options before making such a big decision.
“People shouldn’t shop for product until they decide what their investment strategy is,” says Tuohy. “What’s my strategy? Am I doing it myself? Am I getting advice? Have I got a plan?”
So what do you need to know?
“With an ARF, consumers need to understand there are three elements to it,” says Tuohy.
First up is the qualified fund manager or product provider, which is typically a life insurance company – Aviva, New Ireland, Irish Life, Standard Life, Zurich Life or Royal London – or a company regulated under the EU’s MiFID directive. This is the ARF platform, and takes on the custody, payroll, tax-deduction functions etc of the ARF.
The next element is the fund manager with whom your retirement savings will be invested, and this includes the likes of Vanguard, Blackrock etc.
Finally, you have a financial broker or adviser, who advises and arranges on the set-up of an ARF, “and I’d like to think advisers provide ongoing advice in helping to manage the ARF”, adds Tuohy.
All three of these have costs. But how much?
When it comes to the ARF platform, you can expect to pay around 0.4 per cent of the fund every year for this service. Next up is your investment.
As Tuohy notes, “most people in ARFs will invest in funds, cash or passive equity or bond funds”. These will typically cost from upwards of about 0.2 per cent a year in management charges – but it will depend on the complexity of such products.
“If you pick more expensive funds, you should expect to pay more,” says Tuohy.
On top of this there will be ongoing fund costs, which may be of the order of about 0.06 per cent.
Then you have the financial adviser charges. Your adviser may charge a flat fee for setting up an ARF – figures of about €7,000 have been quoted – or they may earn commission from the fund manager. This can reduce your allocation to the ARF so watch out for this.
“There should always be a minimum 100 per cent allocation,” says, Ken O’Gorman, a director of One Quote Financial Brokers, adding that a recent client was offered an ARF with a 99 per cent rate.
If you do opt to pay a flat fee for set-up, remember that your adviser may also be earning commission on this transaction, so make sure this is added as a bonus allocation to your fund.
There may also be a clawback if you move your ARF within a specified period.
Your financial adviser will also charge an annual fee, of about 0.5 per cent – although this can be less or more – for offering an ongoing advice service.
“In my view, many brokers may overcharge,” says, O’Gorman, who adds that charges should be dependent on the level of service on offer.
“You need to get what you’re being charged for,” he says, adding: “Unfortunately you will find brokers selling products. They think that’s the solution”.
O’Gorman charges between 0.2 per cent and 0.25 per cent a year for ongoing advice, depending on the size of the ARF.
“It’s about constructing ARFs in a more nuanced way to protect the client,” he says, adding that buying an ARF should not be “a rush job”, and that a typical approach will see him construct a portfolio that blends different managers.
All in then, your ARF can cost between 1 per cent and 1.5 per cent or so a year.
This is not insignificant; if your ARF is worth €100,000, it will cost you between €1,000 and €1,500 a year, increasing to between €5,000 and €7,500 for an ARF valued at €500,000.
“Everything is negotiable, especially if the ARF is particularly large,” advises O’Gorman. The larger your ARF, the lower you can expect your potential charges to be – at least as a percentage, if not in value terms.
For example, with Cantor Fitzgerald, you’ll pay 1.25 per cent a year on a portfolio that is smaller than €100,000 on an execution only basis, rising to 1.5 per cent for an advisory option.
Portfolios in excess of €1 million have a fee of 0.5 per cent execution only, or 0.75 per cent with advice. Transactional charges may also reply.
Types of ARF
Once you understand the different elements of an ARF, you can then consider your options.
If you just want a standard ARF, and are happy to take this out without ongoing financial advice, you could look for an execution-only standard product.
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Broker Gerard Sheehy of execution-only.ie, for example, offers low cost options with providers including Standard Life, Royal London and Zurich Life.
With Standard Life for example, you’ll pay annual charges of 0.65 per cent, which includes broker commission. Additional charges apply related to the specific funds you choose, but there are low-cost options here too – if you pick the Vanguard Global Stock Index tracking fund, for example, that 0.65 per cent would increase to 0.67 per cent.
Going through an adviser to buy your ARF from a life company – and getting the associated financial advice – will push the cost north of about 1 per cent.
Such products offer a lot of choice “but you’re going to have to accept limitations” says Tuohy, in terms of investment opportunities and choices. If you want “a much fuller window on to the market”, you’ll be looking at a more sophisticated option, such as that offered through Conexim, a subsidiary of Irish Life.
You can only get access to this through an adviser (so remember to add in the cost of this too), but for a fee of about 0.4 per cent, you’ll be able to access a much wider range of investment choices (it has more than 9,000 funds on its platform). And fees on these funds may be lower than those offered through the standard life company option.
If neither of these options (ie a standard ARF with advice, or execution only) suits you, you can also consider managing your ARF yourself. A self-directed option allows you to access a much wider range of investment options, such as structured products, property, private equity and gold, as well as traditional equity funds. And it gives you greater control over your investment decisions.
But should you opt for self-directed, you may find you have to pay more.
