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Types
of Funds
Unless you are lucky enough to have a Defined Benefit/
Final Salary scheme (see Occupational
Pensions ) where the value of your pension
is guaranteed and the performance is an issue only for
your employer, the growth record of the funds where your
contributions are invested is what determines the value
of your pension.
Past performance is no
indicator of the future. However, the stability of the
companies sponsoring the selected funds, and the
expertise of their managements, are key issues.
If a fund manager has financial strength
i.e. a high proportion of free assets over its
liabilities, it will have the flexibility to invest more
in equities (high returns over the long term) than in
fixed interest products (lower returns but lower risks).
Performance is the key and the expertise
of your pension adviser is crucial in making informed
choices. Pensions are too important to be a discount
shopping choice as the Equitable Life policyholders have
discovered. In our introduction, we noted that their
manta in the Irish market and elsewhere was that
resources did not have to be wasted on intermediaries.
In the aftermath of a July 2000 House of
Lords judgement that Equitable was liable for a GBP
£1.5bn bill to 90,000 customers in respect of policies
that had been missold in the 1980's, John Sclater,
Equitable's Chairman, publicly apologised for the events
which forced the insurer that had been founded in the
eighteenth century, to close its doors to new business,
cut investment returns to policyholders and put itself on
the auction block.
"We
are profoundly sorry for what has happened. We deeply
regret it. I am conscious it touches the lives of very
many people and I could not be more sorry about
that," Sclater said.
Index-linked Tracker Funds which are
usually the cheapest as they just track chosen market
indices and don't require skilled management, are also
the safest as the market always rises in the long-term.
However that is not the full story. Take for example the
ISEQ, the Irish Stock Exchange index in 2006, 10 companies account
for about 80 per cent of the total market capitalisation
(see the current Market Capitalisation Values ).
We wrote the following in December
2001-Elan Corporation accounts for about 20 per cent of
the total. So if Elan fell on hard times, the impact
would have a disproportionate influence on the
performance of your fund. The same applies to Vodafone in
the U.K., which then accounted for about 14 per cent of the
FTSE 100 market capitalisation.
Our December warning about overreliance on
one stock, was well before the 2002 collapse of Elan's share
price in the aftermath of concern about accounting
practices, following the disclosure of the fraudulent
vehicles for hiding losses, that were used by Enron, the
bankrupt U.S. energy trader.
Some people might have
considered us alarmist to question the risk of exposure
to the then most valued company in Ireland but it usually
takes the horse to bolt the stable for the penny to drop.
In February2002, Elan's proportion of the Irish market
capitalisation, had fallen to below 8 per cent. By early
August, it had fallen to less than 1.3% of the market.
Elan's percentage was 3.85% in January 2004.
Having recovered in the following 12 months, the share price fell by 70 per cent on February 28, 2005 when Elan had to suspend sales of its multiple sclerosis drug Tysabri.
Individual
Pensions Funds Group Pensions Funds can be classified
under four headings; Cautious, Measured,
Active Aggressive. The importance
of the pensions adviser relates to the advice on the mix
of funds that you should have in your portfolio.
ARF and
AMRF Funds
An ARF (Approved
Retirement Fund) and AMRF (Approved Minimum Retirement
Fund) are funds managed by qualifying fund managers in
which you can invest the proceeds of your pension fund.
Your pension fund is the proceeds of Retirement
Annuity Contracts as they mature. For a
proprietary director, the pension fund will be the value
of the pension entitlement.
The choice of
investments offered within a fund will vary from one
qualifying fund manager to another. They can range from
bank accounts to unit linked funds in a specified
financial institution or investment body. You are free to
withdraw the money invested in an ARF. The capital
invested in an AMRF may not be withdrawn until you reach
75. However, income or gains made on your investment in
the AMRF may be withdrawn. If you die before reaching 75
the AMRF becomes an ARF and your personal representatives
are free to withdraw the money invested in it.
The new options
give you more control and flexibility about how your
pension fund is used to meet your needs.
Proprietary
directors, who are in an occupational pension scheme, are
also entitled to the new options.
The new options
apply to all Revenue approved contracts made on or after
6 April 1999. If your contract was approved before that
date you can avail of these new options with the
agreement of your pension provider.
More information
is available in the Personal
Pension category.
Taxation
of Pension Funds
Pension funds are
exempt from taxation. Neither income, capital gains, or
DIRT taxes are levied on the income nor gains realised
from the investment of the assets of these funds.
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