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Approved retirement funds offer more choice but more risk

Unlike annuities, ARFs remain under control of employees and their estates

Pensions are often the last thing on the minds of the under-30s but the earlier you save, the more you can accumulate over time due to compound interest

Pensions are often the last thing on the minds of the under-30s but the earlier you save, the more you can accumulate over time due to compound interest


Striking the right balance between living for the now and saving for the future is hard. It’s even harder if you haven’t kept pace with the changes taking place on the retirement funding front.

“The most significant change is the widening of the availability of the approved retirement funds (ARF) option to all defined-contribution employees,” says Andrew Fahy, head of tax and financial planning at Investec, a financial adviser.

“That enables people to keep their pensions and for their pensions to form part of their family’s wealth.”

Previously an employee in a defined-contribution scheme accumulated a pension fund during their period of employment, which they used to purchase an annuity on retirement. A portion of this might go to their spouse but the rest was, in effect, gone when those two died.

Now, at retirement, you get your tax-free lump sum and an ARF which becomes part of your estate.

As a result, what used to be a person’s retirement strategy, is now also a “family wealth strategy”, he says.

The result is more choice for the individual but also more risk. “In the old way of doing things people were tied to annuities, which meant that a devastating move in markets in the run up to retirement, when you had to purchase your annuity, had a lasting effect. Now, with the ARF route, your investment horizon extends. It doesn’t stop at 65,” says Fahy.

A couple aged 65 today has a 47 per cent of one of them living until the age of 90, so decisions made at retirement have long consequences. “In effect that mortality risk becomes investment risk,” says Fahy.


With deposit interest rates hovering at zero and bond yields at historical lows, people’s fear is that they will run out of money.

Despite all the changes that have taken place in pensions legislation, ongoing since former finance minister Charlie McCreevy began overhauling the sector in 1999, the biggest mistake people make is still the same one they always have: starting late.

“Younger people in their 20s and 30s are getting on the property ladder, starting a family, all that good stuff, but the advice remains the same: the sooner you start the better,” says Fahy.

“The biggest mistake people make is in missing the power of compounding. It is as a result of compounding that starting earlier has such a dramatic effect on the end result. Unfortunately pensions don’t tend to come on to people’s radar until they are in their 40s and 50s.”

Market volatility

Another common mistake, particularly following recent years of economic recession and stock market volatility, is to place too much emphasis on market returns.

“Assets can go down in value but if you invest in a diversified way, you should be better protected. The mistake is to blame the structure. When it comes to tax planning, wealth planning and succession planning, a pension is a great structure and the events of ’08 and ’09 didn’t change that. But for a variety of reasons people weren’t suitably diversified.”

For younger people, it can be a mistake to be too risk-averse. “Arguably younger people don’t take enough investment risk. There is this misguided notion that volatility equals risk, but if you are a longer term investor you will be rewarded. And if you are investing in a downturn, you are buying more units at a lower level as a market falls. Ultimately you’ll be rewarded for that,” he says.

Be careful about currencies, however. The current low-yield environment is encouraging some investors into riskier asset classes. If these have an overseas element to them, there is another risk to be considered, warns Bryan McSharry, managing director of Moneycorp, a foreign exchange specialist.

“The big challenge here is the volatility of the currency,” says McSharry.

“If you bought a sterling asset last year, post Brexit you will have seen its value fall as a result of currency alone. Sterling is now 20 per cent weaker than it was last December. In the dollar too we have seen volatility, with a 10 per cent swing. If you fancied Apple stock right now, it could go up in value by 10 per cent, but currency volatility of the same amount would wipe that out and leave you flat. It’s something to factor in over and above stock performance.”

Simply sitting on cash may be a mistake too, however, if cash is giving you nothing. “Especially if inflation kicks in, it is the silent assassin of savings,” says Andrew Fahy of Investec.

Another fallacy is to equate investment property with a pension. “People call it a pension, it is not. You are getting hammered on the tax side. If you did a cold, hard analysis of pension versus property in terms of tax benefits and pitfalls, you’d find pensions win,” says Fahy.

Wrong focus

For Megan Yost of State Street Global Advisors, an investment specialist, one of the biggest mistakes people is to focus on the wrong thing. “People don’t recognise just how much of a driver savings is, not market returns. And as an industry we don’t do enough to be clear to people that it is savings that drive their retirement readiness, not market returns,” says Yost.

An even bigger mistake is to feel that if you haven’t started funding for retirement yet, it’s too late. It rarely is.

“Too often people hear the advice to start early and, if they haven’t done that, let it stop them from starting at all. Don’t,” says Yost.

Five most common mistakes

Not joining an employer’s pension scheme Typically a defined contribution scheme requires employees to give 5 per cent of salary, with a matching 5 per cent from employers. By not joining, you are refusing your employer’s contribution. Schemes differ so make sure you know how yours works.

Believing you are too young to start a pension Pensions are often the last thing on the minds of the under-30s but the earlier you save, the more you can accumulate over time due to compound interest.

Having no pension goal The most you can have in your pension fund is €2m but you should be aiming for at least €400,000. For example if you start a pension saving at 45, you would need to contribute about €1,000 a month to reach that target at 65.

Being put off by the fact that you may be leaving your employer in the future You always get your contributions back if you leave within two years – and after two years, you have a legal entitlement to your own and your employer’s contributions.

Being vague about the details Check if the scheme is defined benefit (DB) or defined contribution (DC). If it is a DC scheme the value of your pension will depend on how much you and your employer (if it does so) pays into the scheme – and how well it has been invested.