If you have a private pension plan in Ireland, your charges are most likely higher than they could be, no matter what type of contract you may have.
Most people focus on past investment performance as the biggest influencer in choosing their plan, but don’t pay enough attention to the underlying charges, or perhaps truly appreciate how these costs are going to affect their eventual retirement pot. The longer the term the greater the effect but studies show that the average private pension plan could lose up to 5% in its end value for every additional 0.25% in the AMC.
Remember private pensions make huge sense because of their great and numerous tax breaks, but paying a fair level of charges, and getting the right investment advice makes pension planning (both personal and company owner) much more effective.
Private Pension Plan Charges – Advisor Type
The charges that relate to a private pension plan are very much influenced by the type of Financial Advisor you choose, which may include;
(1) Retail Banking – Financial Advisor
(2) Private Banking – Client Manager
(3) Wealth Management – Portfolio Manager
(4) Insurance Company – Tied Agent
(5) Impartial Advisor – Financial Broker
A bank’s in-house Financial Advisor or Private Banking Client Manager is going to be limited in their pension plan offerings, just like direct insurance company agents.
A portfolio manager or wealth management firm may offer direct stocks, structured products, and ETFs, but can prove expensive in providing ongoing advice, especially where you operate a discretionary traded account to take the risk management piece off your own shoulders.
Whereas with execution-only and even advisory trading, no matter how investor savvy you may think you are, this approach can often lead to a lack of total portfolio diversification and proper strategic risk management.
A Financial Broker can offer mutual (unit-linked) funds, as well as self-directed investments, and most importantly , compares not only investment fund options and past performance, but the underlying costs, associated with each option as they might suit each individual investor.
Pension Plan Charges – Combined Costs
Pension charges combine both Financial Advisor and Fund Manager costs to form the AMC (annual management charge).
(1) Your chosen Financial Advisor 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. This should not only include alteration to your regular contributions and any lump sum injections but to annual investment reviews and portfolio rebalancing.
(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 returns.
(3) Where you opt for self-directed investment, the Stockbrokers or structured product providers will also take additional transactional fees.
Fund Manager Costs:
A Fund Management Charge: This covers the costs of managing the fund. It typically ranges between 0.75% and 1.00% (for regular contribution plans) levied annually against the value of your pension fund. This is the base FMC and should not be confused with the AMC which is a combined cost, to cover both the fund manager and financial advisor charges.
Product Provider Costs:
Policy Fees: A monthly fee is sometimes levied by a life assurance company to cover administration costs, typically of the order of €4.00 a month (except on PRSAs).
Early Exit Penalties: These charges may apply for an early exit from that particular plan provider, within the first 5 years of your plan’s inception. However, where you transfer your Executive Pension Plan to a Master Trust arrangement or take out a new Master Trust Executive Pension Plan these no longer exist.
Pensions Board Fee This is an annual fee that amounts to €12:00 PA but is not payable on PRSA’s.
Financial Adviser Costs
1. Initial Commission
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 directly affects and adds to the ongoing Annual Management Charge (AMC) levied against your accumulating pension pot.
2. Renewal Commission
Most advisers will take a renewal commission from the product provider which is reflected in your investment allocation rate i.e. the percentage of your money invested, each time you make a payment. This is best understood as a “contribution charge”. Renewal Commission is no longer permitted on Master Trust – Executive Pension Plans.
3. Support Commission
All financial advisers will charge a support commission for ongoing administration and investment advice. The need for this is essential, but make sure you’re not overcharged and it’s clearly defined.
Adviser support (trail) commission is typically taken at 0.5% per annum and it gets added to the Fund Manager FMC, e.g. 1.00% AMC + 0.5% trail = 1.50% AMC.
How to Reduce Private 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.
2. On regular Executive or Personal Pension contributions, place your main focus on reducing the AMC as this is levied against your accumulating pot.
3. If moving your existing fund across to a new plan, ensure that there are no early surrender penalties in doing so (they don’t normally exist if your plan is 4-5 years old or more).
4. With regular updates and advice from your financial advisor, insist that the AMC inclusive of the long-term support charge does not exceed 1.25% PA.
5. Choose your Advisor very carefully and not just because of a recommendation, the person making the referral may not realise that they too could be doing better with lower charges, with no loss of long-term support and investment advice.
6. Place an emphasis on the background of your advisor, ensuring that they are not limited in their offerings, properly qualified, fully transparent, and detailed in their investment market knowledge. (Tip – Check them out on LinkedIn)
Pension Plan Charges – Pension Bonds & Post Retirement Plans
This article so far relates to 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. 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 (dependent on age), you should be aiming for a total AMC of no more than 0.85% PA, inclusive of ongoing broker support.
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 0.50% – 0.75% PA (dependent on fund choices and complexity), inclusive of the ongoing annual advisory charge, with a 100% net investment allocation.
About the Author
I am the founder of One Quote Financial Brokers Limited and have a comprehensive background in pensions and investments spanning over 20 years of industry experience. I am 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 low-cost transparent Personal and Executive Pension arrangements, as well as low-cost ARF’s, my 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, SIA, Chartered Banker
OneQuote.ie | Smart Financial Protection
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