What Is An ARF?

Let’s face it, pensions are boring, complicated and full of jargon. Unfortunately they are also very important to our wellbeing so whether we like it or not, it’s important to know the basics.

If you have a private pension (ie, anything other than the State Pension) you can generally take up to 25% of the value of the fund at retirement in the form of a tax free lump sum. So what happens to the remaining 75%? You will normally then have a choice between an Annuity and/or an Approved Retirement Fund (ARF). An Annuity is a pension product where you buy a (taxable) income for life in return for a once-off upfront payment – I explained more about this in a previous blog, What Is An Annuity?

So then, what is an ARF?

An ARF is a retirement fund where you can keep (75% of) your pension pot invested after retirement. Instead of a set Annuity payment for life, you decide when to withdraw funds as (taxable) income. Key point – unlike an Annuity, any money left in the ARF fund after your death can be left to your next of kin.

Advantages of an ARF

  • You keep control of your retirement fund – a major plus if you are in poor health (as an Annuity dies with you) and/or want to leave your money to your dependants after you die.
  • You have flexibility in terms of when and how much you withdraw from your ARF in retirement – but you must take an annual minimum of 4% in your 60s and 5% after that.
  • You can choose how to invest your ARF and select investments that suit your needs and attitude to risk. Remember, growth in your ARF is tax free, but withdrawals are taxable.
  • You can always use your ARF to buy an Annuity later on, if you decide that you need a secure, regular income – you may be able to get a higher Annuity rate (ie, a bigger income) later on for the same lump sum as you will be older.

Disadvantages of an ARF

  • Your retirement money is not guaranteed to keep its value because the assets in which your ARF is invested may not perform as well as expected – whereas the Annuity income is set in stone.
  • Your ARF funds could run out in your lifetime if you take out too much income or if investment performance is poor or if you live longer than expected.
  • You will have to pay ongoing ARF / investment charges.
  • There is no guarantee that your ARF will be able to buy you a higher Annuity pension later on – annuity rates could be even lower in the future.
  • Revenue automatically assume that withdraw 4% to 5% each year and tax you on that amount whether you like it or not.

To conclude, if and when you face the choice of Annuity versus ARF, it is important to weigh up the pros and cons of both, and consider your total financial and personal situation (perhaps with the help of a financial advisor) before you make a final decision.

What Are Binary Options?

The UK financial watchdog recently warned that hundreds of thousands of pounds are lost every year to investment scams. Last month I blogged about How To Spot A Scam. This month I want to concentrate on a growing segment of this ‘market’, binary option scams. So, what are binary options?

A binary option is a financial option in which the payoff is either some fixed monetary amount or nothing at all. The binary option player faces a simple ‘yes’ or ‘no’ proposition – will the underlying stock / commodity / currency / index be above a certain price at a certain time?

But here’s the problem …

1. Deals were often promoted on Facebook, Instagram and Twitter alongside images of luxury cars or watches to entice people to invest while often fraudulently using fake expert or celebrity endorsements. It’s a fact that people ‘investing’ online are much less likely to double check claims and are prone to the addictive attractions of instant online gambling.

2. Some binary option internet trading platforms may overstate returns on investment by advertising a higher average return than a customer should expect given the payout structure.

3. Many binary option brokers fraudulently distort prices to cause customers to lose. While advertised to punters as requiring little or no knowledge of the markets, no one, no matter how knowledgeable, can consistently predict what a stock or commodity will do within a short time frame – except a broker with an unfair ‘house edge’.

4. Even if a client has good reason to expect a payment cash withdrawals can be regularly stalled or refused or the broker will simply stop answering your calls.

5. On non-regulated online platforms client money may not be kept in a segregated account as required by most financial regulators and transactions are not monitored by third parties in order to ensure fair play.

6. In some cases there is no real brokerage at all – the fraudsters don’t actually place trades, they simply disappear with innocent investors’ money.

To sum up, binary option trading websites are so prone to fraud that they are banned by regulators in many jurisdictions. The FBI is investigating binary option scams throughout the world, and the European Union is updating regulations that will ban binary option sales. Facebook, Instagram and Twitter just recently banned binary option and cryptocurrency ads, but unfortunately not before a friend of mine succumbed to a bitcoin binary option scam which had fake endorsements by Dragon’s Den and Money Saving Expert Martin Lewis. To quote the latter (correctly!), when it comes to binary options, do not touch with a bargepole.

How To Spot A Scam

The golden age of the internet has given us ease of connectivity and instant online payments. No wonder it’s also the golden age of the scammer. Here are a few tips on how to spot a scam …

  • You are promised investment returns that are too good to be true.
  • You are asked to pay in advance.
  • You are asked to make a quick decision.
  • You are asked for your credit card or bank account details.
  • It’s not clear exactly who you’re dealing with.
  • You are asked to click on an email link.
  • The message has suspicious wording.

And here are some common scams doing the rounds …

The friend in need – the scammer hacks a friend’s email and tells you they are abroad, their money and cards have been lost or stolen and they need you to wire money to them immediately.

The tax refund – you get an email from ‘Revenue’ telling you to click on a link to claim a tax refund.

The lottery win – out of the blue an email tells you have won a prize (in a draw you have not entered) which you can claim by paying a small administration fee.

The premium rate con – you’re told you’ve just won the holiday of a lifetime but you have to call a (very expensive) premium rate hotline to get the details.

The philanthropist – an African king or a Saudi prince has for reasons unknown chosen you as their beneficiary if only you’d give them your bank details.

The bogus company – an email from your bank (or EBay or PayPal or Netflix…) asks you for account details and password.

The Microsoft scam – a phone call warns you that your computer is at risk from a security threat which they can fix if you just give them some information…

The scammers are getting more inventive all the time so watch out and if you have been scammed you should contact the Competition and Consumer Protection Commission.

Probate In Ireland

It’s not a subject we like to dwell on but it is important to know what happens to our money after we die. Knowing the processes involved (and how long they take) is a great motivation to structure our finances in a way that makes it as easy as possible for our beneficiaries to ‘get the money’.

Should I have a will?

In short, yes. If you do not, your money and property is distributed in accordance with the rules set out in the Succession Act. If you do have a will (which all of the following assumes) your estate will be divided according to your wishes by your executor (usually your next of kin or your solicitor). But that process can still be lengthy …

What is Probate?

On death (most) assets are frozen and a Grant of Probate is necessary to administer the estate. Taking out probate basically means having the Probate Office certify that the will is valid and that all legal, financial and tax matters are in order so that the executor can be allowed to get on with the job of distributing the estate.

How long does Probate take?

The process can be very lengthy (16 months on average!) and stressful so is best left to the solicitor. To get to the point of Grant Of Probate requires lots of forms, documents, interviews and of course a fee.

What then?

Once your solicitor gets the Grant Of Probate, distribution of assets begins, but only after payment of debts and taxes.

How can I make it easier?

The trick is to try to keep assets out of the Probate system. Married couples should hold joint current and deposit accounts (and joint investment accounts) as the surviving joint owner automatically owns the funds (on production of paperwork). Ensure all your insurance policies and pensions have correct next-of-kin information. Keep a copy of your will and a detailed statement of assets at home and at your solicitor’s office. And have a read of Money Matters After A Death from Citizens Information.

How To Spend

Reading media reports about Johnny Depp’s financial woes (he has allegedly come close to bankruptcy despite earning $650 million over the last decade or so thanks to a serious spending habit) it brings to mind a question we all ask, what’s the right way to spend money? Or to put it another way, What Would Johnny (Not) Do?

Have a budget

First up, be aware of your net monthly income and set monthly expenditure accordingly – which ideally means setting aside funds to invest for a rainy day (see How To Save). Johnny’s $2 million a month ‘allowance’ was clearly over budget (even for him).

Pay attention

Continually check your accounts to ensure you are keeping track of all outgoings. Set a spending limit and stick to it. Don’t expect someone else to tell you you’re spending too much (yes, I’m looking at you Johnny).

Be flexible

If your income varies then you must be ready to adjust spending habits. For most of us the income side of the equation is out of our control – at least Johnny can always do another Pirates of the Caribbean movie (‘Pirates 5’ out this Friday!).

Spend wisely (part 1)

Essential expenses are those necessary for basic living. Be conscious, perhaps ruthless, about what you consider ‘essential’. For example, for most of us one car is a necessity, but do we really need two cars, or forty-five (you know who)? Our home is undoubtedly a necessity, a second, or fourteenth (him again) is definitely non-essential.

Spend wisely (part 2)

Discretionary spending is everything non-essential – without doubt the area we can all ‘improve on’. For example, I would categorise a guitar, or seventy (uh-huh) as not essential. Did Johnny really need to spend $3 million blasting journalist Hunter S. Thompson’s ashes out of a cannon? I would say not.

Spend wisely (part 3)

And when it comes to discretionary spending, all the evidence suggests we get more happiness out of experiences rather than stuff (both before and after the purchase). So maybe don’t bother with the Hollywood memorabilia (for which Johnny needs 12 storage facilities) and instead enjoy a nice holiday.

 

Need help avoiding the temptation of splurging $30k a month on wine (like Johnny)?  You could call Money Smart on 01 276 0006 or email info@moneysmart.ie but maybe seek other help first!

 

All figures above are alleged in a lawsuit by Johnny Depp’s former business advisors.

My 4 Unbreakable Rules Of Investing

As we watch global stock markets once again hit all-time highs, a perennial question is, how can we become more successful investors?

My simple answer continues to be, stick with my 4 golden rules below.

1. Don’t Hoard Cash

Cash should be for very short term savings and nothing else. Hoarding money in deposit accounts is not an investment strategy. Investing means taking some risk to enjoy better returns – for me that means continuing, all through life, to invest surplus cash as soon as I have it.

2. Never Speculate

Ever. So don’t buy individual shares, never time markets, never speculate on whether a certain country or asset class will do better than others. Why? Because then you are a market trader and taking all the unnecessary extra risks that implies.

3. Diversify

So how should we invest? Simple. Diversify across geographies and asset classes using a multi-asset fund of funds. Irish investors over the age of 10 have no excuse if they haven’t learnt the big lesson from the crash.

4. Stay Invested

Finally, ignore all the politics (Trump, Brexit, Elections, etc) and ignore all the noise (experts, talking heads, market gurus, etc) and stay invested.

 

These 4 unbreakable rules of investing are the core of the Money Smart investment philosophy. If you want to know more or need help with your money call us now on 01 276 0006.

What’s Your Financial Personality?

We all have very different ideas about what money means to us and we have many different, often damaging, psychological biases that impact how we make money decisions. Knowing our financial personality is the first step to making better decisions. So which one are you?

The Saver

= Values the security of cash much more than the fear of investment loss.

+ Rarely gets into any financial trouble of any kind as not all income is spent and no risk is ever taken.

May not enjoy life to the full if money is always hoarded. And being too risk averse, such as keeping all your money in the bank, will never make you rich.

The Spender

= Prefers the thrill of spending to the security of saving.

+ Gets full value out of the joy of spending money and amassing ‘stuff’.

May not think of the future and end up living beyond their means and in debt.

The Gambler

= Happy to speculate with their money. “If you’re not in, you can’t win”.

+ Big risks can occasionally mean big investment wins.

Often driven more by optimism and gut feeling than by research and analysis. Can lose it all with if just one big bet goes sour.

The Procrastinator

= Would rather bury their head in the sand than organise their finances.

+ I’m afraid there is no positive to this one!

Not engaging with personal finances leads to anxiety and stress.

 

Need help making better money decisions? Just call Money Smart on 01 276 0006 or email info@moneysmart.ie.

5 Easy Resolutions For The New Year

FireworksJanuary is a great time to set some good financial goals. However, to ensure you have every chance of sticking to these resolutions you should set small realistic goals. Here are 5 we recommend…

A is for Advice

First up, decide if you want to get independent financial advice or whether you want to go the DIY route. If you are going it alone, read on…

B is for Budget

Budgeting is the most important thing you can do to start you on the road to financial success. Many people make quite a lot of money but never have much to show for it because they do not manage their money well. The key is to know where all your money is going and then consciously plan where all your money should be going.

C is for Contributions

Once you’ve established a monthly or annual spending budget, the next step is to set up a savings plan that mops up any excess income. The best way to save is to automate the process, in other words, set up a direct debit to a deposit or investment or pension account.

D is for Debt

With the exception of low cost tracker mortgages, you should put in place plans to repay all debt, starting with the most expensive (usually credit card debt). As with savings, automate these debt payments to ensure you stick with the plan – you may have to make sacrifices along the way but it will be well worth the effort.

E is for Educate

As personal finance is not really taught in schools, we all have a responsibility to get to grips with the often boring and/or complicated world of money. Knowledge is power, but it could also be argued that knowledge is wealth because avoiding bad money decisions undoubtedly makes us richer.

Good luck and Happy New Year!

Please like our Money Smart Ireland Facebook page for free regular tips on how to be money smart.

Our First Big Money Mistake

Our big financial errors vary by age but a recent Wall Street Journal article highlights a big money mistake than young people are making today – they are not taking enough risk.

The table below is taken from that article and shows that millennials are holding as much as 70% of investible assets in cash. Several studies, not just this one, show people in their 20s playing it very safe by holding lots of cash in bank accounts and making extremely conservative investments.

wsj

 

Reasons for this vary but usually revolve around a lack of financial literacy and a failure to grasp the power of long term investing.  Of course the recent memory of a huge financial crash can only exacerbate investment caution. And there will be some who are rightly playing it safe as they save for a new home deposit.

Now for those unsure why they should invest aggressively in these early adult years, it mostly comes down to a single indisputable fact – the power of compounding.

The young have plenty of that most cherished investing resource – time. Being able to put money away for a long time creates the freedom to absorb the ups and downs of a multi-decade stock market investment. And it allows investments to compound over time – meaning dividends and gains are not extracted but are automatically re-invested year after year. Money doubles every 12 years with net 5% annualised gains. Which means the investment portfolio of a millennial should look more like 70% equities rather than 70% cash.

Learning this lesson by starting investing in equities as early in your life as possible can help sow the seeds for a lifetime of unworried investing and ultimately a very comfortable retirement.

Budget 2017 : 5 Key Takeaways

BudgetBudget 2017 has gifted us a range of ‘small sweeties’ but sees no major changes to how the government runs its finances (or controls ours). Here are 5 key changes – and what you should do about them.

1. Keep contributing to a pension

The State Pension may have been increased by €5 a week (whoopie doo!) but let’s not plan that Mediterranean cruise just yet. Much more importantly, continued pension contribution tax relief remains. It’s one of the last few meaningful tax reliefs so now is not the time to stop thinking about saving for retirement.

2. Pay off debt / Save more

A reduction in USC (and a few other very minor tweaks to tax credits) will result in us all seeing a little bit more money in our pocket. This may provide an opportunity firstly, to begin to pay off expensive debt, and secondly to save more. The DIRT (tax on savings) reduction from 41% to 39% is pretty irrelevant with deposit rates so low so once you have an appropriate emergency cash reserve you really do need to consider a higher earning medium to long term investment strategy.

3. Buy your first home

The controversial Help to Buy Scheme offers first time buyers a tax refund of 5% of the value of  a new home worth up to €600,000 but with a maximum rebate (from income tax already paid) of €20,000. Money Smart is a strong believer that you should own your own home (see our blog on this here) so this new incentive will hopefully help.

4. Maximise the value of your home

The Home Renovation Incentive Scheme has been extended for two more years. This popular tax credit effectively gives you full relief against the 13.5% VAT rate on home repairs or improvements.  On top of that, the very practical Rent a Room (Tax) Relief rises to €14,000 per annum, although Airbnb is excluded.

5. Think about your next of kin

While the rise in the parent to child inheritance tax threshold to €310k is welcome, the continued inclusion of the family home in the taxable estate and the unchanged 33% inheritance tax rate ensures that the many of us will also be passing on a very large tax bill to our children. Thus the need for financial planning advice on how to minimise this liability remains as important as ever.

Talk to Money Smart about a post budget personal finance audit by calling 01 276 0006 or emailing info@moneysmart.ie.