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Aproved Minimum Retirment Funds (AMRF).
Read more about: Economy, Uncategorized
Charlie McCreevy introduced the AMRF concept to replace a flawed system, whereby an individual, upon retirement, was required to take out an Annuity, with an approved Institution, usually an Insurance Company.
If that individual were to to die the day after purchasing the Annuity, the Insurance Company trousered the proceeds and the deceased’s relatives - or beneficiaries - were procluded from claiming the amount paid for the Annuity.
Clearly a case for the intervention of the Minister of Finance.
Yet, in spite of years of representations to successive Ministers, including Bertie Ahern***, the matter was swept under the carpet & the Institutions continued to profit, in what was legalised theft.
Not too dissimilar to the fees charged by the clearing Banks today.
The AMRF concept was an honourable attempt to correct an immoral situation. The objective of the new system was to provide a pension income for the holder of an AMRF, from the proceeds of the lump sum invested.
However, the AMRF is controlled mainly by approved stockbrokers, who take a 1% fee annually, calculated on the Capital Value of the AMRF Fund.
If the lump sum invested was, say, €30,000, the annual fee appropriated is €300. Dividend yields on Equities, after taxation, can be as little as 2%. That means that the Pensioner receives an annual pension of 1% - €300!
Hardly what Minister McCreevy had in mind!
In addition, unless the pensioner can display that they are financially independent of the AMRF, they are locked into the scheme until age 75.
The logic is sound.
By being obliged to invest in an AMRF, the pensioner, in the event that he blows the €30,000 on something stupid, such as a motor-car, does not become a dependent on the State.
But surely there is a case for managing the AMRF free of commissions and fees?
*** It is significant that Bertie Ahern, who regards himself as a champion of the underdog and the ordinary man in the street, showed such contempt for Annuity reform.
He is known to work tirelessly for Fianna Fail and his constituents. If you live in Drumcondra and lose your Pension Book - or your NHS false teeth - Bertie is the man to find replacements.
Matters of National importance appear not to receive such diligence.
But that is not what Irish politics is about.
Is it?
I suggest you heavily edit, or just remove altogether, this post. It’s full of mistakes. This article shows a severe lack of understanding of what annuities are.
When a pensioner purchases an annuity, the financial institition promises to pay the pensioner a regular payment for the rest of their life, no matter whether it’s a day or a century. Therefore, if you live longer than expected the institution loses heavily. They could easily lose 100,000 euro on an annuity they sold for just 30000.
The whole point of annuities is that the average pensioner can’t exactly budget say 30000 euro for the rest of their life, unless they were to know exactly when they’ll die! So instead they buy an annuity and the institution basically places a bet on how long you live - if you keep living they keep paying. The institutions compete with each other to offer the highest rate they can afford.
Most pensioners are quite rightly required to buy an annuity. This AMRF is a rather technical loophole for the well off who can prove that they are able to budget for their entire life, especially given as they don’t know when they’ll die. If they can prove they can draw a reasonable income but keep the ‘fund’ big enough to last forever, they should be allowed to.
Aaron, I would prefer to leave the post and leave the comment which highlights and addresses any mistakes.I think it is of more value.
Here are figures from 2004, and I don’t expect they’d have changed much since then. They show that the institutions pay out well over 7% for annuities (and that’s fixed for life regardless of market conditions) purchased at 65 years old.
http://www.eaglestarlife.ie/servlet/EagleStarServletController/annuity
Aaron,
Answer me this.
You bought an annuity from an Institution for €30,000 in 1990. The following day you died.
Who got the €30,000?
As for the AMRF being a technical loophole for the well-off (90% of Irish earners), I don’t think a lecture on socialism helps the argument.
This is a financial issue about Institutions appropriating a pensioner’s investment.
SOS,
Apologies for the tone of my first comment.
Anyway, explain to me an alternative to annuities which can gaurantee an income to pensioners no matter how long they live? Institutions are not stealing or appropriating anything - if the pensioner lives longer the institution loses money heavily to the pensioners.
Annuities are pretty simple and a good product. The institution bets with the pensioner on how long they live. If the pensioner lives longer, the pensioner wins. If not, the pensioner loses. If you seriously think the institution should give money back when the pensioner dies early, then you destroy the annuities market. You will then simply be taking money off long living pensioners to give to the families of dead pensioners - where’s the logic in that?
Anyway, imagine the institution sells two annuities for 30000 each in 1990. One pensioner dies the next day. The other lives much longer than expected. The institutions makes money on one and loses on the other. The institutions takes the risk of not knowing how long the pensioner will live. It’s a great service and product, and the only thing to look out for is making sure they give a good rate.
The institutions are fully entitled to every penny when they make the money, just as the pensioners are fully entitled when they come out on top. To be consistent, you must surely argue that long-living pensioners should refund the institutions once they have got their money back. How do you propose to explain to 90 year old pensioners that they won’t be getting any more income because of your policy?
By the way, I called the AMRF a loophole, but I don’t think it’s a bad loophole. I support it, although I wouldn’t mind if it was dropped again. The loophole doesn’t cost anybody anything, it simply gives more flexibility. If anybody can prove they can use their money to gaurantee themselves an income for life, no matter how long they’ll live, I’m OK with that. But that loophole is actually totally irrelevant - the big issue is your false claim that annuities are somehow a rip off product.
I’m repeating myself here, but I wanted to clarify it:
Annuities are where the institutions makes a gauranteed payment for life at a rate well over the normal deposit account or bond interest rate, for example 7% over 4%. This costs the institution lots of money and they can only pay for it by the fact they “win” when pensioners die early. If the pensioner lives longer, the pensioner “wins” by getting a much higher interest rate than they would if they left it in a normal deposit account or if they bought a government bond.
The only alternative is to ban annuities and cut pensioner’s income from 7% to 4%. Simple as that. Annuities are the safest way for pensioners to make fully use of their money while they live, while also gauranteeing an income for their entire life, even if they live to 200!
Aaron,
Points well taken.
Perhaps there ought to be marginal relief - tapering on an actuarial scale. I understand that the Institution is taking a punt, but somehow, I feel that betting on how long a pensioner lives is not cricket!
My negative on the AMRF is the fact that the entire income (and today’s yields on equities and cash are minuscule)is all being gobbled up by the 1% fee, currently levied on the value of the Fund (not the Income) by all the approved managers of these funds.
If a fee is to be charged, surely regard should be had to the Income? As an AMRF is not permitted to go into deficit, the only recourse a manager has, to get his “pound of flesh” - in the event of the income being insufficient - would be to sell shares.
Again, this flies in the face of the intentions of setting up such funds.
It seems to defeat the purpose of providing a pension.