ARF charges will have a significant effect on your ARF investment returns and its long-term value, alongside the level of risk-management expertise employed.
This ultimate guide to ARF charges, is designed to help you keep charges to a minimum, aligned to a well constructed ARF investment portfolio, which can be monitored and tweaked, focused on long-term capital preservation, whilst countering regular income withdrawals (imputed distribution).
Understanding ARF Charges
In seeking minimum ARF charges (using a standard fund based arrangement), the first and most important thing to understand, is that there are normally 2 combined charges, expressed as a single charge called an AMC. This charge is levied annually against your ongoing ARF investment, as expressed on your policy schedule, and client dashboard once your ARF is set-up.
Annual – Standard (unitised funds) ARF Charges Breakdown:
1. Fund Manager Charge
This is an annual charge levied by the ARF provider’s fund managers, for the ongoing investment management of your ARF, plus documentation, administration and for paying out income, whilst deducting and remitting Tax, PRSI, and USC as appropriate.
Known as the FMC (or base AMC), this charge is dependent on the chosen fund’s asset construct, as well as its management style (active, passive, or fixed allocation).
For ARFs exceeding 500K, an FMC of 0.40% may be achieved on some fixed allocation funds, 0.45% on passive multi-asset, and 0.50% on active multi-asset.
Note: Choosing the appropriate fund managers and funds mix, should be determined by your risk tolerance, age, overall asset holdings, income objectives, succession objectives, and ESG preferences. Long-term market monitoring, risk adjusting and asset rebalancing, is essential to maximising returns. Notably, you don’t have to rely on just one investment manager for you ARF, but can combine fund managers, whilst still under the umbrella of one ARF product.
2. Financial Broker Support Charge
This is an annual support charge made payable to your Financial Advisor/Broker (again levied directly against your ARF fund) for the provision of ongoing strategic investment advice and related administration, together with any related legal and tax related guidance, over the lifetime of your ARF investment. This is added to the FMC to form a total combined charge called the AMC.
Ongoing broker support is key in managing your ARF investment and ensuring that it is kept on track, so make sure that your chosen advisor has the necessary expertise to support you for the long term.
Note: FMC + Advisor Ongoing Broker Support Charge = AMC
Combined Charges
Remember, once you set up your ARF the “Fund Manager” and “Financial Advisor” charges will be expressed as a single AMC charge in your policy contract.
Example (500K) ARF investment: 0.50% FMC + 0.25% advisor support charge, resulting in a total annual charge or AMC of: 0.75% PA.
Certainly operational charges such as custody, legal and audit may combine with the AMC to form the TER, but his tend to be nominal and depend on the funds in question (see FAQ below).
Direct ARF Advisor Fees
When an advisor proposes a direct fee instead of receiving any provider paid set-up commission, this is where you need to be extra careful. They may propose a large once-off direct fee for the work involved in the set-up of your ARF, and then add a high ongoing support charge, on top of the FMC. You may find, for example, some advisors seeking to charge up to €7,000 directly to set up your ARF and still adding up to 0.50% on top of the FMC.
Fee Only – Financial Advisor/Financial Broker Option
If you agree to “Fee-Only” on a standard insurance company ARF through a financial advisor, then you must insist on bonus allocation i.e. that the entire set-up commission, is instead invested in topping up your ARF. This way your advisor doesn’t take both a direct fee, plus a level of set-up commission.
Self-directed ARF Options
1. Qualifying Fund Manager/Financial Broker
If you are opting to use a “self-directed” investment platform, you can choose to use a financial broker, alongside an insurance company and stockbroker e.g. chosen Financial Broker + Aviva + Cantor Fitzgerald, or go directly to a wealth management firm such as Davy, or Brewin Dolphin.
Where you include a Financial Broker, you may be able to reduce the plan FMC to as low as 0.40% PA, but this will mean the Financial Broker will charge you a direct set-up fee, typically in the region of €5,000 and support commission, may still be added to the FMC at a rate of up to 0.50% PA.
Outside of traditional fund options, are also dealing charges, administration costs and custody fees, plus each account held on a trading platform, needs to retain a minimum 1% of the overall account value in cash, to cover charges, even on an execution-only account. Trading or dealing commissions taken by the stockbroker are least expensive under an execution-only trading basis.
2. Direct to Investment Firm Option
If you are an experienced investor and decide to go directly with an investment advisory firm, in an effort to limit charges, you may be able to negotiate a a minimum execution-only, ARF AMC equivalent platform charge of circa 0.40% PA, with additional dealing and custody charges on single assets, whereas purchasing EFTs and Funds will carry their own internal AMC in addition. Shop around and seek to negotiate requesting fully transparent costing examples.
The ARF Process
It is important to understand that there are many stages, and a fair amount of paperwork involved in setting up an ARF, so again careful financial advisor (intermediary) selection can make a big difference.
(1) Claiming your retirement benefits i.e. Tax-free lump sum and ARF.
(2) ARF application which requires risk profiling, needs evaluation, asset evaluation, bespoke investment advice, application completion, and transfer follow-up.
What About Investment Decisions/Risk Management?
Insured Route
There are 6 main fund-based (unitised funds) ARF product providers in the Republic of Ireland: New Ireland, Zurich Life, Standard Life, Irish Life, Royal London, and Aviva all of whom provide a wide range of unit-linked single and multi-asset fund choices, through both their own and external fund managers, under their ARF products.
Most also offer both active and passive fund choices, with fund options to suit all ARF investor types, from low to medium-risk investments. Some providers may also offer guaranteed short-term returns using cash deposits as an ARF fund choice.
Self-directed Route
As previously mentioned, it is possible to choose a self-directed solution, where you can choose your own assets to invest in e.g., Shares, ETFs, Bonds, Options and REITs, but this option is best suited to experienced investors, with strong investment market knowledge and adequate time available to them.
Do-it-yourself, can also prove more costly, with separate trading costs and fees in addition to plan costs. Moreover, it can add to the complexity of maintaining an appointed stockbroker for trading and a product provider for the ARF and your withdrawal payments (e.g. Aviva SDIO).
It must also be remembered, that where a self-directed route is under consideration, all costs are not already built in, and appropriate monies will need to be held aside (cash holdings) to cover these, typically amounting to 1.00% of ARF holdings. Real cost will be wholly dependent on the size of ARF investment and on what you trade and how often.
Where there is no insurance company or financial broker involved and you opt for an investment advisory firm that offers self-directed ARFs acting as a QFM, then you will be able to choose between execution-only, advisory or discretionary trading. Here, unless you are able to purchase funds to be nominate for your imputed distribution, you will need to retain monies for income payments in cash or cash instruments.
If opting for the execution-only route, be careful of hubris, although you may have learned a little about investing and risk management in building up your retirement pot, risk managing an ARF is much more complex, especially due to imputed distribution (regular withdrawals), a possible lack of asset diversification, and sequence risk.
Sequence risk is the danger that the timing of withdrawals from a retirement account, will have a negative impact, on the overall rate of return available to the investor. This can have a significant impact on a retiree, who depends on the income from a lifetime of investing and is no longer contributing new capital that could offset losses as is the case with an ARF.
Top Tips
1. Cost is the first thing to get right, so remember to insist on full transparency. Operational costs are not always made obvious and although they may be nominal, for a proper market comparison demand them also.
2. Reduced costs will become much less impactful, if you choose the wrong advisor. Look for a bespoke multi-asset and multi-fund portfolio, that is well-defined and robustly constructed, not just a single fund currently topping the league tables and question the level of long-term advisor support.
3. Real value is not just down to charges, but the choice of the assets held within your ARF, so monitoring these assets, in terms of their allocation, in line with changing market conditions is hugely important. This is where your broker can add most value if well chosen by you.
ARF Quotation Advice
A. Always start with completing a personal investment risk profile, so that the funds that come recommended, match your risk requirements e.g. ESMA 3 low to medium risk, as well as your sustainability preferences (is ESG important to you?).
B. In choosing the standard fund route, never accept just one fund recommendation, insist on an ARF provider comparison, based on both fully transparent charges and past performance, aligned to your risk profile. This should ideally include at least 3 leading ARF product providers and up to 3 diversified portfolio options from each.
C. Always investigate your Financial Advisors’ credentials how long are they in operation, what is their background in pensions and investments, and what professional qualifications they hold. (A quick LinkedIn search on Google is the best way). Look for specialist asset management qualifications in addition to QFA e.g. SIA, RPA, CB, or CFP.
D. When focused on charges, it’s easy to lose sight of real value, you’ve spent your entire career building up your retirement fund, so don’t be penny wise and pound foolish, when it comes to paying a fair charge for broker support.
ARF Charges – Key Takeaways
1. Never accept less than 100% investment allocation on a commission-based ARF, or higher where a direct payment “Fee-only” setup is agreed upon.
2. Never agree to a base FMC of more than 0.75% PA or a maximum of 0.50% PA, if your fund exceeds 500K to be placed in actively managed funds with the one ARF provider.
3. Ongoing broker advice is paramount, but this charge should be kept to a maximum of 0.25% PA, built into the total AMC, to cover regular reviews, any related taxation and regulatory updates, and the ability to make strategic alternations whenever needed.
4. If you have a large number of pension plans, each will require a separate claims process and separate transfer into your new ARF. Where this added complexity and added workload exist, most advisors will charge an additional adviser fee. Discuss and try to negotiate this!
5. If you are a member of a large DC pension scheme, where the scheme administrators are offering ARF-related advice, remember you still have the right to choose an impartial advisor, and you should be conscious of forming a long-term relationship based on choice, transparency, and expertise. Don’t be fooled by financial advisors already associated with your pension scheme who say the process will take much longer if you don’t use them.
Why Choose One Quote Financial Brokers?
1. Unlike other financial advisors and brokers, we work on your behalf to keep the ARF provider’s annual charge (FMC) to a minimum.
2. For ongoing support (outside of the provider FMC), we charge our clients a built-in annual fee to a max of 0.25% of their ARF fund value, levied directly from the ARF, this includes quarterly market updates and fully detailed annual reviews, including portfolio rebalancing.
3. For ARF investments exceeding 500k, we can limit the FMC to 0.50% PA or less depending on fund choice, and for ARF investments exceeding 1 million, we reduce our added support charge to 0.20% PA.
Access to the right Fund Managers and Fund Options is key.
- We offer 25 fund managers with a huge array of risk-rated funds.
- Our expertise, knowledge, and experience mean all recommended ARF portfolios are bespoke.
- We have been advising ARF clients for over 16 years.
- You will retain a dedicated advisor.
- Robust options for the investment of your tax-free lump sum.
Our unbiased broker services include:
1. Lowest fully transparent AMC Charges.
2. Widest Fund choice aligned to your risk profile and ESG preference.
2. Service 24/7 Online access, personal annual portfolio reviews, and quarterly market updates.
Our 3 Stage – ARF Advisory Process
A. One Quote Financial Brokers provides a no-obligation ARF consultation.
B. With your go-ahead, we then produce your investment risk profile, followed by a detailed market comparative report, to help you choose the most appropriate funds.
C. Finally, we produce a personalised report outlining the effects of charges, investment returns, and withdrawals on your ARF over its lifetime.
FAQ – Frequently Asked Questions:
Why should my financial broker receive annual payments from the fund provider?
Some people may wonder why the financial broker or advisor should receive an ongoing payment once their ARF has already been set up. The answer is that ongoing service is paramount to the prudent investment management of your ARF over its lifetime and as the world and your life changes.
Why do larger ARF funds get the benefit of a lower AMC?
The larger the ARF the more money the ARF provider (insurance company) gets as a percentage of the fund, so to keep their charges more consistent, the larger the fund the lower the percentage charge. Remember our broker service charge never exceeds 0.25% PA, whereas some brokers may charge up to twice this amount. Also, like the ARF providers, if your ARF exceeds 500K, we can start to reduce our broker service charge.
Why is the broker relationship important?
It is key to develop a relationship with your chosen financial broker from the get-go and to understand that changes in your Health, Family Circumstances, Tax Law, and Investment Market Volatility are all long-term considerations. Your ARF is an asset, and should also form part of your will and will have inheritance tax considerations.
What is meant by the AMC?
The AMC on your ARF is the annual management charge levied directly against your fund value, it combines a payment to the fund managers who manage your chosen funds with the provider’s administration costs, together with a payment to your financial advisor, who provides personal financial guidance on your ARF investment and monitors its performance and any changes to your needs over time.
Is the AMC an absolute reflection of all fund manager charges?
One wider measure of the impact of fund charges is the total expense ratio or TER for short, which is calculated as the total cost of all charges to a fund over a set period, divided by the average value of its assets over that same period. The TER counts not just the fund’s AMC, but also custodian fees, trusteeship fees, audit fees, and legal fees charged to the fund before the unit price is set. It is however important to point out that these charges do always exist, with all providers but they tend to be nominal e.g. Zurich Prisma 4 the additional charge of 0.06% PA, detailed in the small print.
What is meant by a broker service charge?
A service or support trail commission is an annual percentage charge levied against your ARF fund to pay your broker or advisor for ongoing support over the lifetime of your ARF investment, it is built into your AMC i.e. FMC + Broker Support Charge = AMC.
What is meant by the allocation rate?
This is the percentage of your money that is invested on day one. As mentioned previously never accept any less than 100%, or if you agree to a direct fee or have a particularly large fund to invest, then seek a bonus.
What is meant by a reduction in yield?
Reduction in yield is simply a calculation used to compare the impact of the charges on one product over another. A calculation can be done to identify the extra investment return one product would have to achieve to match another product’s return, over the same investment time horizon. In the ARF space, the charges of most funds will be very similar, however, at One Quote we place primary focus on what we consider the best value lower cost solutions.
What taxes are payable on ARF withdrawals?
ARF withdrawals are subject to your marginal PAYE tax rate (currently 20% or 40% after your tax-free allowances), PRSI & USC.
Effective from 1 January 2024 the upper age limit for the PRSI exemption was changed by legislation from 66 to 70. This change applies to all ARF holders born on or after 1 January 1958, aged between 66 and 70, and who have not been awarded the State Pension (Contributory).
This means that ARF holders who turned 66 on or after 1 January 2024, will have to pay 4% in PRSI on their ARF withdrawals unless they confirm that they are receiving the State Pension (Contributory).
The USC rate is substantially reduced from age 70.
What are my initial & ongoing ARF considerations?
• Income Sustainability – What level of income drawdown can my ARF sustain?
• Fund Choice – Do I have adequate fund manager and fund selection options?
• Ongoing Support – Does my advisor offer adequate investment risk monitoring?
• Tax – Do I understand the income tax and inheritance tax implications of my ARF?
• Inheritance – What are the possible inheritance opportunities I should be aware of for my ARF?
• Investment Risk – Am I comfortable with the risk profile of the income-generating funds?
What represents fair ARF charges for ongoing ARF investment updates and advice?
It is a Central Bank regulatory that all Financial Advisors provide an annual review as standard, to all ARF clients, given the long-term nature of these post-retirement investment products!
- 24/7 online PIN Access.
- Quarterly market updates.
- Annual investment reviews and benefit statements.
- Taxation updates.
- Legislative updates.
- Free fund switching.
- All related administration.
Can I move my existing ARF?
To avoid any penalties, you normally need to wait 4-5 years from the ARF start date, after which you can transfer your ARF to a new provider. However, you can switch funds for free with most providers.
Where to go from here?
You may be nearing retirement as a member of a DC Group Pension arrangement or under a one-man arrangement, such as an Executive Pension Plan, PRSA, Personal Plan, or even perhaps a PRB. Or you already have your ARF in place but you’re not happy with your charges, investment performance, or the level of contact you receive.
Here at One Quote Financial Brokers, we have access to the world’s leading fund managers, offer the most competitive charges, and lead the way in the provision of premier-level service not only at set-up but throughout your retirement.
Free ARF Consultation
We have already outlined the highly competitive terms that we can offer, so should you have a genuine interest in doing broker based ARF business, and wish to start the process, with detailed personalised recommendations, please get in touch. Proof of funds will be sought.
To arrange a free initial 30 minute consultation by Phone, Teams, or Zoom, please contact us today. Contact: Ken O’Gorman – Director – CB, QFA, RPA, SIA – One Quote Financial Brokers on: 01 845 0049 or email: ken@onequote.ie
Or enquire online and give us a quick outline of how we can help.
Note:
This article is written on the basis of general information and guidance, individual advise from a professional qualified financial advisor, should be taken prior to making any investment related decisions.
| Warning: Past performance is not a reliable guide to future performance. | |||
| Warning: The value of your investment may go down as well as up. | |||
| Warning: Some funds may be affected by changes in currency exchange rates. |
