The Sunday Times - Money Questions 05/07/09
Posted by Jill Kerby on July 05 2009 @ 21:15
NW writes from Dublin: I read your column regularly and have noticed that for some time you have recommended that savers make sure their bank is safe as well as getting the best interest rate. I am wondering if you have any views about Investec (I have never seen you mention them before.) My husband and I took the last of our savings – about €40,000 out of Irish Nationwide (we were hoping to get the windfall) and saw that Investec is now offering between 3.75% and 4% for six and 12 month fixed rate accounts. They only pay 3.1% on their three month fixed account in the UK. How safe is this bank?
The banking side of Investec is regulated by the UK Financial Services Authority and all deposits up to stg£50,000 come under the UK deposit compensation scheme in the event of insolvency. The Irish fixed rate accounts all require a minimum €20,000 deposit and allow one or two withdrawals only (depending on the term) without incurring an interest rate penalty. As with Irish depositors who are depending on the Irish government’s bank deposit promise, your money is safe as long as the UK Treasury can afford to guarantee every depositor with €50,000 but according to Investec’s own website (see www.investec.com/en_ie/#home/investor_relations/financials___forcasts/credit_rating.html+uk), Investec Bank UK has an individual rating of C from the ratings agency Fitch, and a C minus Financial strength rating, a Baa1 (negative outlook) Long term deposit rating and a Prime-2 Short term deposit rating from Moody’s. By comparison, RaboDirect is rated AAA by both Moody’s and Standard and Poors and is the highest rated bank in Ireland but its deposit rates are quite a bit lower because it does not have to pay a risk premium to depositors.
EB writes from Dublin: On the advice of a broker, which I accepted at that time, and agreed with them that they were giving me the best advice available, I signed up for a policy from Friends First called Special Savings Account. This was in April 1999 for a nine year policy which matured this year when I was a few months over 70 years and would be needed as a supplement to my state pension. I paid into this policy over €12k. Then due to a lack of funds and on the advice of an actuary friend I stop paying. In April 2007 the account was worth €17k. The policy has now matured and Friends First has told me it is now worth approximately €8,000. At no stage was I aware that I could cash in this Savings Account. The broker has checked this out with Friends First and assures me this is the correct amount. I am at a loss of €4,000 and can do nothing about it, maybe this letter would be of assistance to other readers. If you take out a Friends First Special Savings Account or similar, be careful, it may turn out to be a Special Savings LOST Account.
The timing of the maturity of this policy was very unfortunate – stock markets everywhere fell by 30%-40% in the year to March ‘09 and here in Ireland, by over 60%. This situation has been repeated across every investment company, so your experience with Friends First is not unique. What is unfortunate is that your broker didn’t do more to advise his customers whose policies were closer to maturity to consider a free switch within the selection of funds at Friends First as the markets started to slide in early 2008. My personal view is that in the case of actual Retirement Annuity Contracts and other personal pensions, it should be mandatory that clients be offered a review as they get closer to retirement age so that they can move their funds out of risky assets like stocks and shares and into ones that protect their capital, like cash funds and ideally, indexed-linked bonds. Your story does make a good lesson for others: first, always know exactly what you are buying before you sign an investment contracts and then make sure you review your policies every few years, especially as it gets closer to its maturity date or your retirement.
JM writes from Dublin: I left my employer a few years ago and have an AVC in addition to my occupational pension. The AVC has lost nearly a third of its value since this time last year. I would like to access the tax free part of the pension and AVC (for pressing financial reasons – I am nearly 60) – and have read that transferring my pension and AVC to a PRSA would allow me to do this. But I have been advised not to do so because the transfer costs would be too high. I thought you could transfer a pension with less than 15 years worth of contributions to a PRSA for no charge? Despite meeting with the company’s pension manager I still don’t fully understand how the charges are determined.
The calculation of transfer values from defined benefit pensions (the kind you have) to other employer’s schemes, into buy-out bonds or PRSAs has been a bone of contention with fund holders for many years. The calculation is done by actuaries who must take into account not just the value of your portion of the pooled pension, but its projected value up to retirement, how much it would cost to buy similar benefits on the open market and a consideration of the various fees and charges that are also involved in your portion of the pooled pension. Independent financial advisors I know say they frequently challenge the calculation and have succeeded in having transfer values improved. You are entitled to move your AVC to an AVC PRSA right now, but you cannot access the money in an AVC/PRSA separately to your DB occupational pension before your retirement age. If this had been a private pension plan – the kind self-employed people own, or those whose companies never operated an occupational scheme - you could have transferred it to a PRSA at no charge (except the cost of the actuarial certificate) and access the funds prior to your retirement age (so long as you were over age 50). The transfer process, whether it involves your entire pension and AVC or just the AVC, requires an actuarial certificate. If you still want to consider such a move, you should engage a private pension advisor/actuary who can act on your behalf with the company actuary at your former company. In the end, he may very well agree that shifting your DB scheme would be against your financial interests. As for the AVC he may be able identify a better asset fund within your existing provider’s stable of AVC funds so that it too can remain in place but produce a better or safer return. If there is no suitable fund, then he can also help you shift the AVC alson into a PRSA AVC. But remember you cannot access the money until you reach your official retirement age.