The fear sales tool

A retired client told me at our annual financial planning meeting that the first advisor she talked to told her she would run out of money if she didn't invest her savings into an investment bond.

She has been a client of mine for 6 years now, she has her ARF, her State pension, some small investments and a lots of money in State Savings. Guess what? She can't spend the money quick enough. She wants for nothing and she flies business class on any long trips so she can have that extra bit of comfort. She doesn't need to take large risks with her money. She is aware of inflation and she is also aware of investment risk (she does have an ARF afterall).

From talking to clients, there is a sense that fear is used as a sales tool to generate commissions. The fear of running out of money in the instance above but the fear of dying early is the one used the most. And by the way, I am aware there is an element of irony here after my article the other week about starting pensions too late!

Fear of dying too early

Retiree's being told that they'll die early and the insurance company will keep all their money so they shouldn't purchase an annuity. According to the Irish Life tables, a male who gets to age 65 has an expected 18.28 years and a woman has an expected 20.97 years before they die.

So while there are people who die not long after retiring, it is below the average. If you die within the first 5 years of purchasing an annuity, the remainder of the 5 year term is paid out. You can even get a guaranteed period of 10 years. And if you have a spouse's pension it will be paid out for the remainder of the spouse's life.

That is not to say an annuity or an ARF are the best options for a retiree, but both should be explained to them and not just the higher commission paying ARF!

Dying before retirement

Another one I come across a lot is where members of pension schemes have move jobs and they have accrued pension benefits with their old employer. This is called a preserved benefit. They are told if they die before retirement, the pay out is limited to 4 times salary and the remainder has to be used to purchase an annuity*. But if you transfer to a buy out bond, the full amount is payable to the estate. This is not correct. Leaving the benefits in the old employer is also a preserved benefit and the full amount is payable to the estate.

I have even heard of providers telling employees to move large pension funds accrued to Buy Out Bonds while they are still in employment to ring fence their pensions. Just in case they die, the full amount of their accrued pension is paid to their estate. But transferring pension benefits to a retirement bond for a person who has not left employment but their future service is pensionable in the same employment, does not create a preserved benefit. So the little trick that is being sold for high commissions won't actually work if the person died before retirement.

*The option of investing in an ARF with the remainder is now also available.

People do die early and families should protect against that. That is what life cover is for. People can also be smart in having their pensions in the correct type of plan to work for them. But dying too young is the exception and not the rule. And certainly shouldn't be used as a sales tool.

Steven Barrett

23 October 2023