The investment-product assembly line is in overdrive and private investors are pouring three times as much money into investment funds as into personal pensions. During the past year consumers have been inundated with glossy brochures from financial institutions explaining new twists on old products, emphasising guarantee features and boasting about past performance figures.
Last year, unitised funds were the fastest growing segment of the retail investment market, producing growth of 329 per cent over the previous year, according to a recent survey by the Irish Association of Investment Managers. Net flows into with-profits grew by 43 per cent and property funds by 15 per cent.
Investment funds are popular, but they are not necessarily the right choice for everyone, particularly if the individual does not have a pension fund.
Stock-market hype and increased affluence have whipped members of the public into a frenzy about where they should put their money. There are no easy answers as each individual has a unique risk profile and various needs over the short, medium and long term.
A young software engineer, and Family Money reader, e-mailed us recently to ask where he should invest his funds. "I could put my money in a savings account every week, but believe the interest rates are too low," he says. "I also know about PIPs. I am wondering what my other options are?"
He would like to know what would best suit his needs both medium and long term.
The best way through the investment paper pile is to seek assistance from a professional, independent fee-based financial adviser who is trained to sift through the intricacies to find the best product.
When choosing an adviser remember that tied brokers may only recommend one company's products, while an independent broker may provide offerings from a range of different companies. To call oneself an insurance broker it is only necessary to deal with five companies. Truly independent brokers examine all products in the market to find the best fit for their clients.
When they are fee-based it also reduces the temptation to recommend a product because it offers them higher commission than competing products.
Using Mr S as a sample customer, we sought advice from several independent fee-based financial advisers. Our reader is a 23-year-old engineer with £1,000 to invest immediately and then £50 a week or £2,600 yearly thereafter. He is currently earning £20,000, has VHI Plan B and life assurance but no pension plan.
The engineer hopes to put the money away for four to seven years in a medium-risk investment. The purpose of this investment is to build up a large lump sum for future investment in the stock market or in an investment fund. During the investment period he may move to Australia to work and travel for two years so he says his plan might need flexibility.
Financial Engineering Network, Mr Jeremy Walker: Financial planning manager, Mr Walker, says if he were to advise someone in a similar situation he believes the individual should address their lack of a pension plan. "Twenty-three is not too young to start a pension but perhaps he need not put all the money into it as a pension is a long-term investment."
Besides that, he should consider a savings-type vehicle but it must be invested in a nil-commission environment, says Mr Walker. He might consider investment bonds or international equity funds which are offered by most of the Republic's insurers.
"New Ireland has a savings plan which is very simple and although the annual management charge is slightly greater than average you're paying for flexibility," he said.
Mr Walker says every single penny of the money is invested at bid price and the customer is given access to all the new sector funds if he wants it. Unusually, the company does not ask for a term of investment so this means a person can invest flexibly - they may reduce or increase premiums and take out money whenever it is needed.
The investor must be willing to take on a medium risk and accept that the value of the contract may fall as well as rise, says Mr Walker. Unlike similar products, New Ireland's offering does not require the purchase of life assurance.
If a similar person decided they wanted a no-risk vehicle such as a deposit account, after DIRT and inflation were taken into account, their money would actually lose value. The willingness to take some risk means they can have exposure to the stock market.
A longer time period is also beneficial when it comes to riskier investments. "Five years really would be the minimum period we'd be looking at for an equity-based investment. The investment has time to recover if the markets start to fall," says Mr Walker.
If the pension route is taken there are some issues to consider. A reduction in tax is one of the main reasons for making pensions contributions, but this benefit does not apply if the individual is not paying taxes here. "If he put money into a pension and then went to Australia he should have a pension that is very flexible and allows premium holidays without penalty. That way he can stop and then start up again when he returns," he said.
Frank O'Brien Investment Strategies Limited: Mr O'Brien believes the sum is too small for investing in the stock market directly. Depending on the type of risk someone like Mr S is willing to take, he may consider an equity fund says Mr O'Brien. If he wants to stay invested in the tech sector where he works he might consider a high-risk unitlinked fund such as Irish Life's SCOPE technology fund. However, the tech sector is probably overheated at the moment, he says.
For a lower risk he may choose a managed fund with a mix of equities, bonds, cash and property. The managed fund from Eagle Star has a good track record, says Mr O'Brien. Tracker bonds are also an option from any of the providers as the charges are a little lower and many come with a guarantee.
Mr O'Brien believes someone in Mr S's situation really has two separate investments. Our reader might "decide to put the £1,000 lump sum into a managed fund as a single premium because the upfront charges are low then look for an equity fund for the £50 a week for the four to seven years," he said.
For tax efficiency it is better to go the pensions route although that entails a much longer investment period. "For example, if he's putting in £50 a week he may get up to £20 tax relief on it," says Mr O'Brien. Since our reader is young, he can afford to invest in a pension with exposure to equities or invest half in a pension and the rest in an equity fund.
LA Brokers, Mr John Geraghty: Mr Geraghty urges a bit of caution for someone in our reader's situation. He believes he needs to complete a fact-find with an adviser because his information is incomplete so it is difficult to get the full picture.
"There are so many changes that can happen over a short period of time for someone this age. They can change occupations, partners and homes," he said.
The reader must look at his short, medium and long-term aims. A short time is less than five years and usually involves savings products. Medium-term investments are five to 10 years and insurance products may be appropriate to suit particular risk profiles, he says. For the long term, or 10 years plus, pensions planning is important.
"Pensions are ideally suited to investing in equities and it may appeal to him because it's his intention to eventually invest in equities anyway," says Mr Geraghty. If choosing to do so, an investor should consider the financial strength of the provider, the number of investment choices within the fund and their performance to date.
It is essential that charges are taken into account and these may be negotiated if the investor goes to a broker who is fee-based.
Investors should not look at charges in isolation. If a pension fund performs well then the charges are usually justified. If it is doing badly and the company is still taking same commission I'd be asking some questions says Mr Geraghty. A pension fund should achieve above the average performance levels if it is eligible for consideration.
Our reader might consider putting some funds in a single-premium investment into a pension plan because paying yearly is less expensive than paying every month, he says.
Essential considerations: It is important when purchasing any investment product that payment is made out to the life or financial company and not directly to the broker. The broker or adviser should be a member of a professional organisation such as the Irish Brokers' Association or the Insurance Institute of Ireland and have professional indemnity insurance. Life companies should be members of the Irish Insurance Federation.
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