How to Reduce Pension Plan Charges
th Dec 2019 |
If you have a private pension plan in Ireland, your charges are most likely higher than they could be! Most people only focus on past investment performance when setting up their pension plan, but don’t pay enough attention to the underlying charges, nor how these costs are going to affect their eventual retirement income.
However, the fact is the core underlying charges can have a huge impact on your accumulating pension pot. Remember private pensions make huge sense, because of the great tax breaks on contributions, investment growth and on the benefits come retirement, but paying a fair level of charges makes private pension planning even better!
Pension Plan Charges & Choice of Adviser
The charges that relate to a private pension plan albeit a Personal Pension a PRSA, an Executive Plan or even a Group Occupational Scheme are very much influenced by the type of Financial Advice you choose to receive, whilst options can inculde;
(1) Bank’s Financial Adviser, Private Client Manager or Portfolio Manager
(2) Insurance Company Tied Agent
(3) Financial Broker
A bank’s in-house Financial Adviser or Private Client Manager is going to be limited in their product offering, just like direct insurance company agents, which is why a “Financial Broker” who compares the market not only to offer fund choice but also costs is usually the best choice!
Pension Plan Charges – Advisors & Fund Managers
Pension charges include both Financial Adviser costs and Fund Manager costs:
(1) Your chosen Financial Adviser will need to get paid for their initial advice and plan set-up, but also for their ongoing advice and for assisting with any changes will wish to make to your plan over the course of your journey to retirement.
(2) The Provider or fund managers must get paid for investing and managing your pension fund, so it produces the desired returns in line with your chosen level of investment risk.
Pension Adviser costs may include:
(A) A set up charge paid as initial commission by the plan provider.
(B) An ongoing advisory charge paid as trail commission by the provider.
(C) A contribution or allocation charge paid as renewal commission by the provider.
Fund Manager costs may include:
An Annual Management Charge: This covers the costs of managing the fund. It typically ranges between 0.75 and 1.00% of the value of the fund.
Policy fees: A monthly or annual fee levied by a life assurance company to cover administration costs, typically of the order of about €3.00 a month.
Exit penalties: These fees apply for an early exit from the plan, within the first 5 years.
So, let’s look at possible financial advisor charges in more detail by breaking them down.
Adviser Charges in Detail
1. Initial Commission – Affecting your AMC
The initial commission is a once-off payment made to the financial adviser by the product provider (such as Zurich, New Ireland, Standard Life, Irish Life, etc). The level of initial commission taken cannot only affect your pension plan value in the first year but in the long term, as it may add to the ongoing Annual Fund Management Charge (AMC) which the plan provider receives.
2. Renewal Commission – On your regular pension payments
Not all advisers will take a renewal commission from the product provider, but if taken it will be reflected in your investment allocation rate i.e. the percentage of your money invested, each time you make payment. So it is this in effect creates the contribution charge which I earlier highlighted!
3. Trail Commission – On your accumulating pension pot
Most financial advisers including bank agents and independent brokers will charge a trail commission for ongoing pensions advice. The need for ongoing investment advice and support over the course of your pension plan is essential, but make sure you’re not overcharged.
This charge unlike the renewal commission described above is not charged against your pension contributions as they are paid, but on your accumulated pension fund as it grows. Trial commissions can be up to 0.5% per annum, but this is usually added to the base Fund Manager AMC, e.g 1% AMC + 0.5% trail = 1.5% total AMC.
Getting Reduced Pension Plan Charging
1. Go to a Fnancial Broker and ask for a detailed provider comparison comparing all charges not just past investment performance.
2. When first setting up or moving your pension plan, ask that the initial adviser commission, be kept to a minimum, so as to avoid any contribution charges and to lower the AMC.
3. If moving your existing fund across to your new plan, ensure that there are no early surrender penalties in doing so (they don’t normally exist if your plan is 5 years old or more). Also, ensure that no adviser charges exist that will result in less than 100% of your monies being invested.
4. On regular Executive pension contributions, insist on 100% net investment allocation, so that no renewal commissions exist.
5. On regular PRSA (Private Retirement Saving Accounts) contributions or Personal Pensions, consider paying a once-off direct fee to financial broker with a view to achieving 100% investment allocation on all contributions you make.
6. If you wish to receive regular updates and advice from your chosen adviser, insist that the total AMC inclusive of any trail commission does not exceed 1.00% PA.
Pension Plan Charges – Pension Bonds & Post Retirement Plans
This article so far relates to insured individual pension arrangements and group pension schemes available in the Republic of Ireland and outlines all charges relating to regular payment pension plans as well as ah-hoc single lump sum payments, into a regular payment pension contracts. Single payment pension plans, retirement bonds and post-retirement plans, known as ARF contracts also exist and will have different charging structures which are dealt with below:
Retirement Bonds – PRB’s
Once off lump sum retirement bonds undergo charges similar to those that apply to single premium payments made into a monthly pension plan i.e. both an initial commission of up to 3%, as well as a going trail commission of up to 0.5% of the accumulating fund may apply.
There is no renewal commission, but of course, Fund Manager Charges apply, with the level of trail commission payable to your financial adviser being added to the AMC. The bigger your lump-sum pension payment the better value you can negotiate, but generally speaking, you should be aiming for a total AMC of no more than 1% inclusive of ongoing broker support and with 100% investment allocation.
Approved Retirement Funds
Approved Retirement Funds are again once-off lump sum investments but tend to be large amounts as they represent an accumulated pension pot at retirement. The bigger your pension pot for ARF investment, the better value you can negotiate, but generally speaking you should be aiming for an AMC of between 0.75% – 1.00% PA, inclusive of the ongoing annual advisory fee, with a minimum 100% net investment allocation or a bonus allocation for larger funds.
About the Author
Ken O’Gorman is the founder of One Quote Financial Brokers and has a comprehensive background in pensions and investments spanning over 20 years of industry experience. He is a strong advocate for transparency and consumer protection and for the simplification of the often over-complicated high-level private pension charges in Ireland.
Together with offering independent low cost transparent personal, executive and group pension arrangements, as well as low-cost AMRF/ARF’s, his financial broker firm, One Quote Financial Brokers offers a choice of 25 different fund managers with multi-asset, active and passive investment management to suit all investors.
Ken O’Gorman – QFA
OneQuote.ie | Smart Financial Protection
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