Ultimate Guide to ARF Charges & Fees
02nd Aug 2022 |
ARF Costs will have a huge effect on your ARF investment returns and its long-term value, this ultimate guide to ARF charges and fees, is designed to help you keep them to a minimum.
In seeking minimum charges, the first and most important thing to understand is that there are actually 3 combined charges levied annually against your ongoing ARF investment, which will display as the AMC (annual management charge) specific to your chosen funds.
• The first is the annual Product Provider (insurance company) “Fund Management Charge”
• The second is the annual “Financial Advisor Charge”.
• The third is your chosen funds * “Operational Expenses Charge”.
Outside of the AMC built into the ARF once set up, your chosen Financial Advisor may charge a direct set-up or administration fee. The amount will depend on the ARF investment amount, the complexity of the ARF advice, and the resulting set-up process required.
Note:
* Operational charges are nominal and will differ amongst individual funds (usually disclosed in the small print). Funds that are passively managed tend to have lower costs and expenses compared with their actively managed counterparts.
Annual – ARF Charges Breakdown:
1. Fund Management Charge (FMC)
This is an annual charge levied by the Fund Manager for the ongoing investment management of your funds.
2. Financial Advisor 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.
3. Fund Management Operational Charges
Most all fund options carry additional nominal costs, which relate to their daily operation, such as accounting, legal, and regulatory fees. These charges tend to be very small (relative to the total AMC), but you should still insist on their full disclosure for a true cost comparison of your options.
Typical Charging Example:
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, so for example (450K) ARF investment) a 0.75% FMC + a 0.35% advisor service charge, would result in a total annual charge of 1.10% PA, displayed as a 1.10% AMC.
However, a small additional operational charge may also exist e.g. Zurich PRISMA 4 has an additional AMC charge of: 0.07% PA. (Be aware of the small print).
Once Off – Direct ARF Advisor Fee
Your financial advisor may charge a once-off set-up fee for the work involved in consultation and in assisting with the set-up of your ARF. This is especially likely where you are transferring more than one pension contract into your ARF.
But be careful of advisors who highlight the fact they don’t charge any consultation fees and use this fact to charge a higher ongoing AMC, as this will have a much greater impact on your long-term investment returns.
Also, it’s very important to appreciate and distinguish between the process of:
(1) Claiming your retirement benefits e.g. Tax-free lump sum and ARF.
(2) ARF application which requires risk profiling, needs evaluation, bespoke investment advice, application completion, and transfer follow-up.
Sometimes, it is best to use your existing advisor/schemes broker on the claim side and your newly appointed advisor on the ARF application side, so as to avoid paying additional direct fees for assistance in claiming your retirement benefits.
But again, be careful of the advisor who states that they will handle the benefits claim piece in addition to the ARF application, as it leads to them charging a higher AMC.
What About Fund Choice?
Insured Route
There are 6 main fund-based (mutual funds) 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 internal and international external fund managers, under their ARF products.
Most of these fund-based providers offer both active and passive fund choices, with fund options to suit all investor types, from low to medium and even higher risk investments!
Self-directed Route
It is also possible to choose a self-directed solution, where you can choose your own assets to invest in e.g., ETFs, and Structured Products directly, but this option is only suited to very experienced investors, with strong investment market knowledge and adequate time available to them.
Dependent on the size of your ARF it can also prove more costly, with separate trading costs 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. Whereas it must also be remembered, that where a self-directed route is under consideration, the AMC costs are not already built in, so appropriate monies will need to be held aside (cash holdings) to cover the AMC as all as your withdrawals.
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 cost will become much less impactful if you choose the wrong advisor, look for a bespoke multi-asset and multi-fund portfolio that is well explained, not just a single fund currently topping the league tables.
3. Don’t only focus on cost and lose sight of the importance of long-term strategic investment risk management. An ARF is a long-term investment an expert highly qualified advisor relationship is paramount.
ARF Quotation Advice
A. Always start with a personal investment risk profile analysis, so that the funds that come recommended to you 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 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 do they hold. (A quick LinkedIn search on Google is the best way).
ARF Charges – Key Takeaways!
1. Never accept less than 100% investment allocation.
2. Never agree to a base fund manager charge, FMC in excess of 0.75% PA or 0.50% PA if your fund exceeds 500K to be placed with the one ARF provider.
3. Ongoing broker advice is paramount, but this charge should be kept to a maximum 0.30% PA built into the 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 pension scheme where the scheme administrators are offering pension and ARF-related advice, remember you still have the right to choose your own impartial financial 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?
Access to the right Fund Managers and Fund Options is key, we offer over 25 fund managers and over 200 funds, all risk rated to suit your personal financial needs. Moreover, our expertise, knowledge, and experience mean all recommended ARF portfolios are bespoke.
We charge our clients a built-in annual fee of just 0.25% of their ARF fund value (regardless of the ARF fund size) levied directly from the ARF. Our overall services include:
1. Lowest fully transparent Charges.
2. Widest Fund choice aligned to your risk profile and ESG preference.
2. Service 24/7 Online access, 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 to 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 advisor receive annual payments from the fund provider?
Some people may wonder why the financial 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.
Broker Relationship
It is key to develop a relationship with your chosen advisor 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, whilst, in addition, an annual review is a regulatory Central Bank requirement.
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 and make payment to your financial advisor, who provides personal financial guidance pertaining to your investment.
What is meant by a 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.
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%.
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. However, from age 66 no PRSI applies and from age 70 the USC rate is substantially reduced.
What are my initial & ongoing ARF considerations:
• Income Sustainability – what level of income drawdown can my AMRF/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/AMRF 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 annual support charge of up to 0.30%% 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 when 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 many providers.
Why do small differences in charges make a big difference?
Here also is a very interesting Irish Times article on how typical provider and advisory ARF fees can suck the lifeblood out of your investment.
Should I also consider an Annuity?
If you have a Defined Benefit Pension, you have a defined annual pension figure (annuity) which you can assess versus investing in an ARF, and as a general rule, where the scheme is properly funded to support all its members taking the annuity may well be the better option.
If on the underhand, you have a Defined Contribution Pension, (Employer Scheme, or Private) then rising interest could certainly make an annuity more attractive, but it should be remembered that annuities end on the death of the annuitant unless a spouse’s pension (up to 50%) or a guaranteed period (up to 10 years) is built in at set up. Adding a spouse’s pension, guaranteed period, and or inflation protection lowers the original pension payment (annuity). So, again, careful individual assessment and expert financial guidance are needed here.
Initial Consultation
Prior to contact, please note the following information will be sought:
1. Your name, age, and contact number.
2. Proof of existing retirement benefits.
3. Current value of existing retirement benefits.
Contact: Ken O’Gorman – Director – QFA, SIA, MCIBS – Investment Specialist – One Quote Financial Brokers on: 01 845 0049 or email: [email protected]
Learn more about how ARFs work once set up!
Or enquire online and give us a quick outline of how we can help.
Please Note
If you want to be assured of the lowest charges and maximum fund choice, with dedicated long-term support, do not hesitate to contact us.