This is a real case study, using screen shots of actual documents received by the client who we shall call Jim.
Jim, I fear, is typical of many people in Ireland.
He is a Professional, well-educated and at the top of his own field. Yet when it comes to his finances, like many people in Ireland, he has been happy to go along with recommendations from friends and colleagues.
Many people in his profession have used a particular firm and they, in turn, proudly display testimonials from people just like him.
Now, don't get me wrong here. Even as a blow-in I understand how Ireland works and most of the time the three degrees of separation serves us well. I met a Munster Rugby player in the Merrion Hotel having only lived in Ireland a few years and quickly worked out that the only way to establish my credentials was to play my strongest hand. My wife went to UCC says I. What's her name says he? Turns out he played Rugby with my brother-in- law for London Irish.
But, when it comes to taking financial advice, 'yer man' might not only not cut it, but frankly can be extremely damaging to your wealth.
Jim had an old occupational pension from an employment he had left and had been encouraged by a Financial Broker to move it out in order to "take control"
"Do you need to take control?", I asked
"Well the relationship with the previous employer is acrimonious and the ability to move it out was what I latched onto", he said.
Jim was concerned he would need to approach his previous employer in order to be able to retire. So a reasonable basis for considering moving his old pension.
Jim has established a new company in which he is a controlling director so Jim is entitled to a very tax efficient executive pension arrangement. But Jim had completed an application form for a Buy out Bond.
I wonder why the broker has put you into a Buy out bond rather than set up an Executive Pension for your new company I wondered?
Jim should be able to change the employer company on the executive pension. However. the executive scheme would need to maintain the same Normal Retirement Age which can have an impact on future pension funding.
The reason we would see people moving to a Buyout Bond is if they were no longer looking to contribute and wanted to preserve their past benefits.
From a retirement calculation point of view, if Jim is planning on retiring in the short term (he isn't), it could also be beneficial to transfer to a Buyout Bond, again if he is not planning on funding any further (he is), so that he can maintain the salaries and service from the previous employer. There is an argument that if the benefits transfer under the new employer then it is the salary and service for that new employer that will be used on retirement.
Again this depends on the size of the scheme, his Normal Retirement Age, and salaries.
"Could you send me a copy of the statement of suitability so we can see the rationale?", i asked.
"I don't have one",said Jim.
Its a condition of the Consumer Protection Code that you are provided with a Statement of Suitability BEFORE signing the application form.
It MUST have the following at the top
Jim had not been provided with a Statement of suitability in clear contravention of the Consumer Protection Code.
Did Jim have an illustration? Not one provided when he signed the application form but he did at least receive one directly from the Life Insurance Company.
"How much is this costing you"?, I asked
"They (verbally) told me it wouldn't cost me anything", Jim replied
From the actual Life Assurance Company illustration that Jim hadn't read in detail
Where do you think the commission is coming from? Jim's pension in the form of high, undisclosed charges.
We advised Jim to immediately cancel the contract (fortunately he was still within the cancellation period) and referred him to our colleagues at Ethical Financial to arrange a suitable product.
On further analysis it was discovered that Jim had a "self-directed pension" (Jim has no desire to make his own investment decisions) and that his investments within the pension consisted of a complex mix of investment products and tracker bonds - all of which were ALSO paying a commission to the broker.
This practice is known as "double-dipping" and allows the broker to receive a commission payment from BOTH the pension and the investments within the pension.
We estimate that it will take several years to unwind the mess since unfortunately for Jim all the investments he holds carry substantial contractual early surrender penalties in order to make the commission payments.
- Did you receive a Statement of Suitability before signing the application from? If not, this is a really big red flag.
- Did the financial adviser go through the illustration with you in detail explaining the charges in a way that seeks to inform you? If they focus on the brand of the product provider, "allocation rates" or "past performance" these are all red flags.
- Did they say that they are paid by the Insurance Company and you will receive 100% or more allocation? These are ways in which contractual charges are disguised in order to make the true cost appear lower. YOU ALWAYS pay for the charges and the best place to find the real cost to you is not by focusing on the upfront charge, instead focus on the reduction in yield figure in the illustration
This is a calculation provided by the Insurance Company actuary and is the closest we get to knowing the real cost of investing in an Irish Pension. In Jim's example illustrated an annual cost of 2.32%pa (1.83% +(-.49%))
If you would like a second opinion please do get in touch