How to Reduce Pension Plan Charges
st Oct 2018 |
If you have a private pension in Ireland your pension plan charges are most likely higher than they could be! Most people focus on past investment performance when originally 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 benefits, but paying a fair level of charges makes pensions even better!
Pension Plan Charges – Full Breakdown
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:
(A) The type of Financial Adviser you choose;
(B) The contribution level;
(C) The need for ongoing investment advice.
Tied Agents & Bank Advisers
Choosing a direct agent or your bank’s in-house financial adviser will not only limit your choice of investment funds but you will most likely hit with a Contribution Charge on your money as it’s invested plus a Trail Commission for ongoing advice.
Financial Brokers & Independent Advisers
An independent pensions advisor or financial broker will offer the most investment choice but, may charge a separate fee for their advice. They are more likely to be able to remove any contribution charges but will also take a trail commission.
In addition to your financial adviser charges, the firm that actually invests your pensions money will charge an annual investment charge known as the AMC for investing and managing your pensions money.
Also, with all pension plans, there is a standard annual pension authority fee of €8.00 PA and some Executive and Personal plans have small monthly policy fee’s of circa €3.00 pm, but remember the core charges that really impact your pension are:
(1) The annual fund manager charge or AMC.
(2) The contribution charge or allocation rate.
So, let’s look at all these pension plan charges in more detail by breaking them down.
Pension Plan Charges – Financial Advisor Payments
1. Initial Commission – Affecting your AMC
The initial commission is a once-off payment made to the financial adviser by the product provider (like Zurich or Irish Life). 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.
Also, on individual pension plans for any lump-sum payments you might make in addition to your regular contributions, your adviser can also receive an initial commission.
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 annual reviews is dependent on the individual pension plan owner and like all other charges you should insist on full transparency.
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 on top of the AMC in your plan documentation you might not be aware of this being an ongoing adviser as opposed to a fund management charge.
Pension Plan Charges – Fund Manager Charge
The product providers fund managers are the investment experts that manage the funds in which you have invested on an ongoing basis, so they must get paid to do this, so they take an annual charge against your accumulating fund called the AMC.
Whereas, if your product provider is offering additional external fund managers on top of their own, then they too will take a charge. So, for example, if you choose Irish Life and their own base AMC is 1%, choosing an external fund manager through them such as Fidelity, or Davy will add further cost as will the level of trail commission taken, so always pay particular attention to the AMC on the funds you choose.
How to reduce your pension plan charges
1. Go to afinancial 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 or that you pay an alternative set-up fee directly to your adviser.
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 an independent adviser 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 where the product providers’ own funds and fund managers are used.
Pension Plan Charges – Pension Bonds & Post Retirement Plans
This article so fare 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 lumps 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:
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 FMC, The bigger your lump-sum pension payment the better value you can negotiate, but generally speaking you should be aiming for a total FMC of 1.00% with 100% net 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 FMC of between 0.75% – 1.00% PA, inclusive of any ongoing advisory fee, with a minimum 100% net investment allocation and 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, 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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