How to Reduce Pension Plan Charges
th Dec 2020 |
If you have a private pension plan in Ireland, your charges are most likely higher than they could be! Many people focus mostly on past investment performance when setting up their pension plan, but don’t pay enough attention to the underlying charges, or perhaps appreciate how these costs are going to affect their eventual retirement income.
However, the core underlying pension plan charges can have a huge impact on your accumulating pension pot. Remember private pensions make huge sense, because of the great and numerous tax breaks but paying a fair level of charges makes private pension planning even more effective.
Pension Plan Charges & Choice of Adviser
The charges that relate to a private pension plan albeit a Personal Pension, PRSA or Executive Plan are very much influenced by the type of Financial Advisor you choose, which may inculde;
(1) Retail Banking Financial Adviser
(2) Private Banking Client Manager
(3) Wealth Management Portfolio Manager
(4) Insurance Company Tied Agent
(5) Financial Broker
A bank’s in-house Financial Adviser or Private Banking Client Manager is going to be limited in their pension plan offerings, just like direct insurance company agents. A portfolio manager from a stockbroker or wealth management firm may offer direct stocks, structured products, and ETF’s but will prove expensive if you want ongoing advice, which is why a “Financial Broker” is the best option for most people.
A financial broker can offer mutual funds as well as self-directed investments and most importantly compares not only investment fund options and performance but, the underlying costs associated with each option as they might suit each individual investor.
Pension Plan Charges – Advisors & Fund Managers
Pension charges can include both Financial Adviser costs and Fund Manager/Stockbroking 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 that you wish to make to your plan over the course of your journey to retirement. They should provide annual performance updates and also advise you as to any changes in pensions law or taxation rules.
(2) The product provider and 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 and return.
(3) The stockbrokers or structured product providers must also take transactional fees in the case of self-directed funds for the advanced investor (these charges are fixed).
Fund Manager costs may include:
An Annual Management Charge: This covers the costs of managing the fund. It typically ranges between 0.65 and 1.00% levied annually against the value of your pension fund. This is the base AMC.
Additions to the AMC. Some funds carry small additional charges dependent on the nature of the assets in which they invest. These charges are not always transparent and relate to the costs associated with the running of a fund, e.g. Audit fees, Legal Fees, Custody fees, etc. They are technically known as CIV charges and can typically add from 0.10% to up 0.25% to some funds AMC’s.
Product Provider costs may include:
Policy Fees: A monthly fee sometimes levied by a life assurance company to cover administration costs, typically of the order of €3.00 a month.
Early Exit Penalties: These fees may apply for an early exit from that particular plan provider, within the first 5 years of your plan’s inception.
Financial Adviser charges may include
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 directing effects and adds to the ongoing Annual Fund Management Charge (AMC) levied against your accumulating pension pot.
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. This is expressed as a contribution charge//entry cost.
3. Trail Commission – On your accumulating pension pot
Most financial advisers including bank agents and independent brokers will charge a trail commission for ongoing pension 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 and it’s clearly defined.
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. Trail commissions is typically taken at 0.5% per annum and this is added to the base Fund Manager AMC, e.g 0.75% AMC + 0.5% trail = 1.25% total AMC.
How to reduce Pension Plan Charges
1. Go to a Financial Broker and ask for a detailed provider comparison comparing all charges, not just the past investment performance, of the recommended fund offerings. Ask for the TER charge which is the absolute or real AMC charge.
2. When first setting up or moving your pension plan, insist on the ongoing support
(trail)commission being no more than 0.25% PA.
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).
4. On regular Executive or Personal pension contributions, insist on 100% net investment allocation, so that no renewal commissions exist.
5. On a regular PRSA (Private Retirement Saving Account) consider paying a once-off direct fee to a financial broker with a view to achieving 100% investment allocation on all the 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 currently made available in the Republic of Ireland and outlines all charges relating to regular payment pension plans as well as variable single lump sum payments, into 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 0.90% 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 funds exceeding €500,000.
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 and Executive 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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