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Wealth Options - Irish Times Article
The Irish Times - Tuesday, March 13, 2012
Keep your pension pot away from the sharks
Many of the 7,700 public sector workers who opted for early retirement packages are scratching their heads and wondering how they can keep their money safe and their futures secure in this time of turmoil
THESE ARE good times for more than 7,000 public servants who have just retired on pensions that many in the private sector would die for. Many of the 7,700 public sector (ex) workers have now cleared their mortgages, reared their children and are still relatively young. And as if all that wasn't good enough, they have also just received six-figure lump sums as part of their pension deals.
Good times, then? Yes, clearly, but that is not to say there are no clouds on the financial horizon. There are – and many of the most pressing concerns facing recent retirees are totally beyond their control.
We are living through the worst economic turbulence in the history of the State and many of the recently retired are scratching their heads and wondering how they can keep their money safe and their futures secure. One of the most pressing issues has to do with the lump sums as the cash is most vulnerable to volatility on the stock market and banking floors of Europe.
The general rule of thumb is that unless there is some pressing need for the cash, it should be placed in a low-risk, easily-accessible asset class. Generally speaking this means cash deposits.
Of course, there are many who have understandable fears about leaving their cash on deposit anywhere in the current economic climate, but the reality is that options are limited and while cash deposits may be a concern, when it comes to equities and (whisper it now) property, the situation is even more volatile.
As soon as the lump sum hit their accounts, the chances are that many of the recently retired will have been bombarded with calls from their suddenly attentive bank managers and sales people from the big financial institutions offering to help them navigate the choppy financial waters, but with so many sharks in the water in can be hard to work out what is the best thing to do.
In recent months, the director of Squaremile Financial Consultants, Andrew Russell, has been dealing with a lot of public servants, many of whom have wads of cash for the first time in their lives and have no idea what to do with it.
He says while many of his clients are "jubilant" at having reached the finishing post and excited about a fresh start, "many are very fearful and very, very few have any appetite for high risk".
Russell says the first step retirees need to take is to set an investment objective and determine their attitude to risk. They will also have to sit down and work out how much access they will need to have to their cash in the years ahead and work from there. Locking away your lump sum for five years when your only daughter has just announced she is pregnant, getting married and buying a house may not, for instance, be the smartest move you will ever make.
The key to managing retirement money wisely is diversification, says Russell. He believes most people should have instant access to 25 per cent of their capital, with a further percentage on deposit in a higher yield account. "People with a bigger appetite for risk can look towards unit funds," but he says it is essential to establish the fees associated with such a move. "There can be annual management charges of over 1.5 per cent, irrespective of whether that fund performs or not."
Capital guarantee bonds are popular and can give between 1 and 2 per cent more than deposit accounts, but while you will never lose a capital investment with such a bond that does not mean they are without risk – and if all you have left after a five-year period is what you put in the first place – then that is a loss by any measure.
Foreign currency funds are increasingly popular as would-be investors eye the perilous state of the Irish economy and the euro zone as a whole. There are, however, risks associated with investing in foreign currencies, and years of cumulative growth could be wiped out in a single bad day on the foreign exchange markets.
Some banks have been clever in courting the new retirees. One of the first out of the traps was Bank of Ireland which yesterday launched a six-month term Retirement Options Deposit Account targeted directly at that market. It delivers a fixed rate return of 3.43 per cent with a minimum investment of €25,000 and a ceiling of €500,000. Crucially people can access up to 50 per cent of their money during the term.
According to head of retail deposits at the bank, Damian Young, the product has been "specifically designed for retirees who suddenly find themselves with a lump sum and really need time to look at the best options to provide their income in retirement.
"For most retirees, handling a lump sum will be a new experience and this product gives them peace of mind whilst they seek qualified advice before making long-term decisions on funding their retirement."
Russell agrees that timing is everything and he says the biggest pitfall facing many people is acting too quickly and making rash decisions as a result.
While Bank of Ireland may be pleased to hear financial advisers singing from the same hymn sheet when it comes to taking their time and getting their investments right, they will be less thrilled with his next piece of advice. Russell warns people against dealing with the banks directly. They can only tell a would-be investor about their own products and their advice is absolutely useless when it comes to gauging the state of the market as a whole.
Russell believes dealing with anyone other than an independent authorised adviser is a mug's game. Under the new Consumer Protection Code, intermediaries may only use the term "independent" in a legal/trading name or any other description if they provide advice based on a fair analysis of the market.
This means examining a "sufficiently large number" of products, assessed and recommended in accordance with "professional criteria", and offering the consumer the option of paying in full by fee.
"If an adviser is not prepared to work on a fee basis, then you have to question whether they can be independent or not as intermediaries do not make any commission advising clients to invest in deposit accounts," Russell says.
When it come to instant-access accounts, three options spring off the page. There is the AIB Easy Access Reward account, which offers a rate of 3.1 per cent and allows a maximum of two withdrawals over the course of 12 months. Then there is the RaboDirect account, which offers the same rate as the AIB account. A less attractive rate of 3 per cent is available from Nationwide UK, but it does allow a greater number of withdrawals – six – over the first 12 months.
When it comes to fixed-rate deposit accounts, there are a broader range of options some of which are very attractive. An Post has a number of products aimed at either a lump sum or regular savings, and offers a rate varying from 3.23 per cent to 3.53 per cent AER (annual equivalent rate), depending on the term of the account. To avail of the top AER, the money must remain on deposit for five and a half years, long by any definition.
Over the shorter term, Investec currently has an attractive rate of 4.52 per cent over an 18-month term. The account does allow one withdrawal over the term of the deposit and is backed by the UK guarantee, which some people may consider important given the fluid nature of the global economic situation.
With capital guaranteed bonds there are also a range of options available from the big players in the market, BCP Asset Management and Wealth Options, backed by Bank of Ireland and Ulster Bank respectively. BCP has a 50/50 Split Deposit Bond which sees 50 per cent of a deposit (it has a minimum of €10,000) invested in a high yield deposit account paying a fixed deposit rate of 6 per cent AER. This portion of the money is returned to the investor after the first year with the remainder invested in a global equity bond for a period of four years and three months. The same company has an Absolute Return Bond ,which lasts a year longer and allows for 50 per cent of the fund to be taken out after three years.
Wealth Options has a five-year Global Absolute Return Bond, which is linked to the Standard Life Investments Global Absolute Return Strategies Fund with the stated aim of providing "positive investment returns in all market conditions over the medium to long term". It also has a multi-asset global bond.
Since last year, holders of additional voluntary contributions (AVCs) are allowed to transfer their fund into an approved retirement fund (ARF) on retirement rather than into an annuity. With ARFs, the recently retired do not have to lock their money into an annuity at punitively low rates – such as now – which effectively cut the value of the pension fund. Instead, an ARF stays invested and tax is paid on it only as funds are drawn down.
In addition, should the holder die, the balance of the fund forms part of the estate unlike an annuity which generally dies with the person. On the downside, as the funds are still invested, they are vulnerable to the sort of shocks that have hit markets in recent times.
And to stop wealthier people using ARFs as a tax avoidance measure, the Government has decided to "assume" a minimum annual withdrawal from your ARF of 5 per cent and it imposes tax accordingly, whether you actually draw down the money or not.
One very important point to remember when it comes to lump sums, big or small, is the need to spend some of it. "Generally speaking, people don't have to use their lump sum to live," says Russell. "I always say people should treat themselves and remind them that they have earned it. They have worked for 40 years for this." It's hard to argue with that.