ARF charges will have a significant effect on your ARF investment returns and its long-term value, while risk management and capital preservation are key. This ultimate guide to ARF charges is designed to help you keep them to a minimum, aligned to a robust ARF portfolio focussed on long-term capital preservation whilst countering income withdrawals (imputed distribution).
Understanding ARF Charges
In seeking minimum ARF charges, the first and most important thing to understand is that there are normally 2 combined charges, expressed as a single charge called an AMC which is the charge levied annually against your ongoing ARF investment, as expressed on your policy schedule or client dashboard once your ARF is set-up.
Annual – ARF Charges Breakdown:
1. Fund Manager Charge
This is an annual charge levied by the ARF provider’s fund manager for the ongoing investment management of your ARF, plus the provider administration services. Known as the FMC (or base AMC), this charge is dependent on the fund’s asset construct, as well as its management style (active or passive), and can sometimes be as low as 0.50% PA for ARFs exceeding 500K.
Note: Choosing the appropriate fund, or a mix of funds, should be determined by your risk tolerance, age, overall asset holdings, income objectives, succession objectives, and ESG preferences.
2. Financial Broker Support Charge
This is an annual support charge made payable to your Financial Advisor (again levied directly against your ARF fund) for the provision of ongoing strategic investment advice, together with any related legal and tax guidance over the lifetime of your ARF investment. This is added to the FMC to form a total charge called the AMC.
Note: FMC + Advisor Ongoing Broker Support Charge = AMC
3. The ARF AMC
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.
Direct ARF Advisor Fees
When an advisor proposes a direct fee instead of receiving any provider 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 their charge, on top of the FMC, at a rate of up to 0.50% PA. You may find, for example, some brokers seeking to charge up to €7,000 directly just to set up your ARF.
If you agree to “Fee-Only” using an insurance provider for your ARF, then you must insist on bonus allocation i.e. that the commission is instead invested in topping up your ARF. This way your retirement advisor doesn’t take both a direct fee, plus commission, plus their ongoing service fee.
If you are opting to use a self-directed investment platform, exclusive of any insurance company, then a direct broker set-up charge and ongoing support fee will still occur. Notable this type of arrangement will always require 1% of your ARF fund to be held in cash to cover charges despite the lack of broker risk management services.
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 selection can make a big difference.
(1) Claiming your retirement benefits e.g. 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 Fund Choice?
Insured Route
There are 6 main fund-based (mutual 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 (mutual) multi-asset fund choices, through both their own and external fund managers.
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.
Self-directed Route
It is also possible to choose a self-directed solution, where you can choose your assets to invest in e.g., ETFs, bonds, and REITs, but this option is only suited to very 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 custody charges in addition to plan costs. Moreover, it adds the complexity of maintaining an appointed stockbroker for trading and a product provider for the ARF and your withdrawal payments.
It must also be remembered, that where a self-directed route is under consideration, all costs are not already built in, so appropriate monies will need to be held aside (cash holdings) to cover these, typically amounting to 1.00% of ARF holdings.
Be careful of hubris, although you may have learned a little about funds 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.
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’re nominal, for a proper comparison demand them.
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, not just a single fund currently topping the league tables.
3. Real value is not just down to charges, but the choice and performance of the assets held within your ARF. Choosing the right financial broker is therefore essential.
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. 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 3 product providers and up to 3 diversified fund 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.
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. I’m still seeing some brokers granting 99% or 99.5%.
2. Never agree to an FMC of more than 0.75% PA or a maximum of 0.60% PA if your fund exceeds 500K to be placed in actively managed funds with the one ARF provider.
3. Ongoing broker advice is paramount (especially for larger funds), but this charge should be kept to a maximum of 0.25% PA, built into the total AMC, to cover regular reviews and access to professional advice 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 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.
3. For ARF investments exceeding 500k, we can limit the FMC to 0.50% PA, or 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 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.
Frequently Asked ARF Charge-Related 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. However, for ARF investments of less than 100K an execution-only service may be suitable.
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 0.07% PA, hidden in the small print.
What is meant by a broker service charge?
A service or support 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 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 turn 66 from 1 January 2024 onwards, 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!
We believe that a Financial Advisor’s annual support charge to a maximum 0.25%% PA, is extremely competitive, in the provision of comprehensive ongoing support, which includes all the services below:
1. 24/7 online PIN Access.
2. Annual investment reviews and benefit statements.
3. Taxation updates as appropriate.
4. Legislative updates as appropriate.
5. Fund switching support if required.
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.
Speak with a Financial Advisor
To arrange your free no-obligation initial consultation by phone, 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.
