Self-administered Pension V Traditional Pension

There are a bewildering amount of different Pension products available in the Irish market, no wonder may clients get disillusioned and end up burying their heads in the sand when it comes to retirement planning. One of the most common complains I hear from people without a pension is that they don’t like the fact that they have very little control over how their money is invested. That doesn’t have to be the case and it’s one of the reasons why self-directed pensions have become so popular in the recent years. A lot of people get confused when trying to understand the difference between traditional insured pensions and self-directed pensions. So this week I’m going to take a look at the key similarities and differences between the two types of pension plans.

What are the similarities?

A self-directed company pension also known as a small self-administered pension scheme. The amount of money you are allowed to Invest in this type of plan is exactly the same as if you are investing in a traditional insured pension plan. When you reach retirement, the way in which you access your benefits are also exactly the same, you will not get any bigger tax-free lump sum and the ARF and annuity options are the same.

What are the differences?

The main difference between an insured pension plan and a self-directed plan is in how the money is invested. Traditional Insured pension plans invest in unit linked funds. In other words, your monthly contribution is pooled together with other people and the collective amount is invested as one. This generally gives you better buying power and you can diversify into areas that you could not buy your own. Your investment options are also limited to those Funds being offered by the respective insurance company. However insurance companies offer a wide range of investment funds so it is very unusual for you to not have a sufficient number of funds that are suitable to your investment strategy.

Self-directed pensions on the other hand give you a much greater investment choice. You can choose whichever fund manager or stockbroker you want to use, make your investments in ETF’s, funds or purchase shares directly. You may also purchase direct property through your self-directed plan and the pension will receive all rental Income completely Tax free.

In practice, When you trade your money is not pooled with anybody else’s, it is an individual trade. With fund platforms and ETF’s now readily available, it is easy enough to get diversification on your own as you can access thousands of different funds.

There are a number of Revenue rules you must adhere to with a self-directed pension. The most significant rule is that all transactions must be at “arm’s length”, in other words you cannot buy property or shares from yourself and put them into your pension plan. If you do hold a property in your pension plan you can’t rent it out to your family, business or any connected party. An Independent pensioner trustee must be appointed to ensure that you are compliant with all Revenue rules.

Small self-administered pension schemes must first be submitted to Revenue for approval, depending on the time of year this approval process may take up to 6 weeks, it’s worth bearing this in mind if your year end is fast approaching and you want to make a pension contribution.

Self-directed pensions were traditionally more expensive to implement and therefore the preserve of those with larger pension funds. However in recent times the cost of administering a self-directed schemes has become more affordable, in most cases you would need to have an accumulated Pension fund of €100k to make this type of plan cost effective. You may have a transfer value from a previous employment or even a transfer value from a Defined Benefit scheme which has closed down, all of these can also be converted to a self-directed plan if you wish.

As with all Financial decisions and particularly long term retirement planning, always seek the advice of an Independent professional before making any decisions.

Barry Kerr BBS QFA CFP® is the owner of Wealthwise Financial Planning, Bridge St, Carrick on Shannon, www.wealthwise.ie. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland. All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use.