How to Reduce Pension Plan Charges

How to Reduce Pension Plan Charges

If you have a private pension plan in Ireland, your charges are most likely higher than they could be! Most people focus on past investment performance, but don’t pay enough attention to the underlying charges, or perhaps truly appreciate how these costs are going to affect their eventual retirement income.

However, the fact is that that your 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.

Private Pension Plan Charges – Your Choice of Advisor

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 Advisor
(2) Private Banking – Client Manager
(3) Wealth Management – Portfolio Manager
(4) Insurance Company – Tied Agent
(5) Independent – 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 from a stockbroker or wealth management firm may offer direct stocks, structured products, and ETF’s but will prove expensive in providing 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 past performance, but the underlying costs, associated with each option as they might suit each individual investor.

Pension Plan Charges – Advisors & Fund Managers

Pension charges combine both Financial Advisor costs and Fund Manager costs:

(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. They should provide market updates and annual performance reviews but 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) Where you opt for self-directed investment, the Stockbrokers or structured product providers will also take additional transactional fees.

What Fund Manager costs may include:

A Fund Management Charge: This covers the costs of managing the fund. It typically ranges between 0.70% and 1.00% 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 fund manager and financial advisor charges.

Additions to the base FMC. Some funds carry very small additional charges dependent on the nature of the assets in which they invest. Where applicable these charges don’t appear on policy schedules, but in the small print 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 0.05% to up 0.25% to some funds AMC’s.

What Product Provider costs may also include:

Policy Fees: A monthly fee is sometimes levied by a life assurance company to cover administration costs, typically of the order of €4.50 a month (except on PRSA’s).

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. This does mean, however, that you can’t switch funds under your chosen provider’s fund range.

Pensions Board Fee This an annual fee which amounts to €8:00 PA, but not payable on PRSA’s.

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 directly affects and adds to the ongoing Annual Management Charge (AMC) levied against your accumulating pension pot.

2. Renewal Commission – On your regular pension payments
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 payment. This is best understood as a “contribution charge”.

3. Trail Commission – On your accumulating pension pot
All financial advisers will charge a trail commission for ongoing administration support and investment 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 Fund Manager FMC, e.g. 0.75% AMC + 0.5% trail = 1.25% AMC.

4. Direct Fees – At set-up and annually
Where an advisor and most often a financial broker says that they don’t take commission they mean that they don’t take an introductory initial commission for the product provider nor renewal commission, but will actually most typically take trail commission of 0.50% PA levied against your fund value and charge you a direct fee at set up and annually in addition.

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.

2. On regular Executive or Personal Pension contributions, insist on 100% net investment allocation, so that no renewal commissions exist.

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 a regular PRSA (Private Retirement Saving Account) consider paying direct fees to a financial broker on an execution-only basis, with a view to achieving 100% investment allocation on all the contributions you make. Or if you wish to retain the broker’s services seek a reduction in the standard 5% contribution charge.

5. With regular updates and advice from your chosen financial adviser, insist that the AMC inclusive of the long term support support charge does not exceed 1.00% PA or less for default investment strategies.

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.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 1%, inclusive of ongoing broker support and with bonus allocation for sums over €100,000.

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 (dependent on fund choices and complexity), inclusive of the ongoing annual advisory fee, with a minimum 100% net investment allocation or a bonus allocation for funds exceeding €350,000.

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 AMRF/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 | Smart Financial Protection

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