How to Reduce your Pension Plan Charges
st Oct 2018 |
If you have a private pension in Ireland your pension plan charges are most likely higher than they should be. Most people mainly 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 charges 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 and eventual retirement benefits. 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 them even better!
Pension Plan Charges – Full Breakdown
The overall charges that relate to a private pension plan albeit a Personal or Executive Plan are very much influenced by (1) the type of Financial Adviser you choose (2) both the contribution level and the annual fund management charge.
Choosing a direct agent or your bank’s own financial adviser will not only limit your choice of investment funds, but they will always take an initial commission for setting up your pension and may also receive an ongoing charge against your regular contributions known as renewal commission. On top of these charges an ongoing fee, taken against your accumulating pension pot, known as trail commission may also apply.
An independent pensions adviser will offer the most investment choice, but may also receive both initial and renewal commission payments or charge a direct fee in lieu of some or all commission.
In addition to your chosen adviser charges, the firm that actually invests your pensions money will charge an annual investment charge known as the FMC or fund manager charge.
With all individual private pension plans, there is also a standard annual pension authority fee of €8.00 PA and some executive plans have very 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 FMC and (2) the entry charge or allocation rate each time you make a payment dictated by renewal commission.
So, let’s look at these key pension plan charges in more detail by breaking them down.
Pension Plan Charges – Financial Adviser Payments
When first getting pensions advice, you may choose to go directly to the pension product provider (through a tied agent), use your bank’s financial adviser or opt yo use an independent adviser. All 3 will receive an initial payment for introducing the business to the Pension Plan provider and possibly a renewal commission once you maintain your pension plan payments.
1. Initial Commission – Set-up fee
The initial commission or set up advisory cost is a once off payment that can be as high as 20% of your first year’s regular pension payments. The actual 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 (FMC) which the plan provider receives. For lump sum payments you might make in addition to your regular contributions, your adviser can also take an initial commission of up to 5%.
2. Renewal Commission – On regular 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 a payment.
Renewal commission may be up to 5% of your contribution amount, so in effect, you could be paying your adviser directly each time you make a further pension contribution. This may also be referred to as an entry charge or even wrongly as a bid-offer spread by your adviser.
3. Trail Commission – On the 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 year.
Pension Plan Charges – Fund Manager Charge
Unless your pension plan is set-up on a nil commission basis, the Fund Managers must recoup the initial commission paid to your adviser and account for any ongoing payments to them in the form of trail commission.
Also, if the product providers are offering additional external fund managers then they too will take a charge. So, for example, if you choose Irish Life and their own base FMC 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 pay particular attention to the FMC on the funds you choose.
How to reduce your pension plan charges
1. Go to an independent pensions broker or financial adviser 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 commission on-going regular contributions 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, 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% investment allocation, so that no renewal commissions exist.
5. On regular PRSA (Private Retirement Saving Accounts) contributions, 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 FMC inclusive of trail commission does not exceed 1.25% regardless of the fund managers you choose.
Pension Plan Charges – Pension Bonds & Post Retirement Plans
This article relates to insured individual pension arrangements 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 plan. Single payment pension plans, retirement bonds and postretirement 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 a total FMC of between 0.65% – 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 and executive 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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