Money Talks - A seniority complex
05 September 2010
The Sunday Tribune
With senior citizens among those worst affected by the fall in bank shares, good advice is key
An elderly AIB shareholder at AIB's EGM in May last year When Anglo Irish Bank was nationalised and bank shares almost fell off the grid, one of the groups most significantly affected was senior citizens. Having been persuaded that the banks were a safe bet, many of them ploughed their life savings into Anglo, Bank of Ireland and AIB shares. Those who went with Anglo lost everything while anyone who invested in Bank of Ireland and AIB when prices were at their height will feel the sting in perpetuity.
To be fair, nobody complained when things were on the up and hindsight is always 20-20 but those who got stung serve as a salutary lesson going forward. If anything has been learned from this experience, it's that the older you get, the more conservative you need to be with your money. Investing in equities is no longer an option when you're relying on your savings to maintain your lifestyle over and above the basics covered by the state pension. The risk is too great given that the time to recover those loses is more limited, said Samantha McConnell, director with IFG Corporate Pensions.
"Time is a great healer and that is especially true when it comes to making good on investment losses. The longer you have, the more likely it is that your portfolio will recover. Conversely, if you have only a short time to make up those losses the chances are that your portfolio will not rebound in time. To protect yourself against the falls in investment markets you need to reduce your investment in equities as you approach retirement," she said.
In recent times the pensions industry has been heavily promoting the concept of "lifestyling" your funds. This effectively means that as you approach retirement, your pension fund starts moving increasingly into lower risk investments which, while they may not provide spectacular returns in the long term, do ensure that you are safeguarded against any financial earthquakes that might hit the equities market.
Lifestyling starts kicking in on pensions with about 10-15 years to go to retirement. If those who were caught out by the banking crisis had been lifestyling, the effect on their income would have been nowhere near as severe.
The lifestyling concept is one that those who have already retired and have money to invest would do well to follow even in cases where funds are substantial. It makes sense to play safe with your money given that we are now living far longer than ever before and the cost of maintaining a decent lifestyle remains so high. Financial adviser Liam Ferguson of Ferguson and Associates said that higher risk investments for older people should only be considered where a number of criteria have been met.
"They should be entirely satisfied that they understand fully the relationship between return and risk – if you want the potential for greater return, there is a consequently increased risk; that they understand fully the terms and conditions of the investment, especially the charges, risks, penalties for early exit, taxation and duration; and that they have already taken care of their future needs for accessible cash to cover emergency expenses, health care, nursing home care etc. In many cases, a simple deposit or post office account, perhaps with a short fixed term or notice period for better interest, is sufficient for an older person's needs," he said.
The Association of Certified Chartered Accountants (ACCA) has a number of golden rules for senior citizens with modest savings including a 20% limit on the amount of money being tied up for more than five years. They also advise those over 70 to leave all their money on deposit with the local bank, post office, credit union or building society having shopped around for the best rate; spread the risk by depositing with Irish and non-Irish institutions making sure to check the maximum amount covered by government guarantee; and in cases where you have sought advise and do not understand what the adviser is saying, walk away and put the money on deposit at your local bank.
Senior citizens can also be perceived as easy targets for unscrupulous operators who may pressure them into investing in a product that does not suit them or is much riskier than they would like.
Anyone seeking financial advice should be very careful about where they get their advice whether it is from a professional or a family member or friend, said Aidan Clifford, advisory services manager for the ACCA.
"Senior citizens need to be wary of free advice; often it is neither free nor advice. While there is redress available for those who identify that they received poor advice, some may not appreciate that they were poorly advised and may never have the opportunity to recoup their losses," says Clifford.
Indeed, if you are planning on taking financial advice from a professional, it is best to look for someone who does not work on commission and you should definitely not rely on the financial adviser at your local bank because the range of products at their disposal is going to be very limited. John Geraghty of LABrokers.ie recommends that you contact the Financial Regulator for a list of authorised advisers and then make an appointment to meet at least two.
"If you are looking for investment advice then a fee-based adviser should be able to strip out the uncertainty that a product is being recommended based on the commission received by the seller, rather than the best interests of the client. In Britain, the regulator is moving to remove commissions from investment products," he said.
It's also a good idea to have a family member or trusted adviser on hand when meeting with a financial adviser to offer a second opinion or, in cases where the sums involved are large, the family accountant or solicitor. As with any investment where a dispute arises, you are free to refer your complaint to the Financial Ombudsman.
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