Bankers, politicians and tax relief – a few of the many reasons why pensions seem to have been in the news continuously over the past couple of months. The Department of Social Protection (DSP) also got in on the act recently when they issued their report on pension charging structures. The report suggests that up to 31% – almost one third – of a regular savers pension pot could be eaten up by charges over a 30 year period. These numbers grabbed the media headlines but what is the real story with pension charges?
All schemes have charges
The first thing to say is that there is no such thing as a charge free pension scheme. Schemes have to be setup, managed and administered, advice given, investments bought and sold; therefore all schemes incur costs which must be paid for. With group schemes some of the cost may be borne directly by the employer, but all schemes have costs.
The headlines on the DSP report are therefore slightly misleading because they effectively compare the scheme which has the highest charges surveyed to a scheme which has no charges – and the latter simply does not exist.
Also, the annual charges over the term of the scheme have been rolled up into a single lump sum with a notional interest rate which again gives an illusion of higher charges. To suggest these charges could be avoided and the money invested to produce a larger fund is simply not correct – all funds incur charges.
Value is the key
Charges, however, are only one part of the equation. Lower charges do not guarantee better value. It is the investment performance, not the charges, which makes the biggest impact on your pension fund in the long run.
The Professional Insurance Brokers Association (PIBA) recently carried out a study on pensions which identified that for each 1% per year loss of investment performance from an assumed 6%, there is a significant reduction in a retirement fund after 25 years. A 3% loss of performance can typically shave 30% off a projected retirement fund.
Pensions are like every other product – some are well managed and perform well, some have high charges, some low. Charges are undoubtedly a factor, and they should be transparent and explained in detail to you (see summary below). However, the following factors will ultimately have the biggest impact on the final outcome of your fund:
• the product type,
• choice of pension provider,
• range and performance of their investment funds,
• investment choice,
• ongoing regular reviews.
Good advice is the key. We recommend that you should always seek independent professional advice when entering into or changing your pension. A Financial Broker will provide independent advice across the market – by contrast, remember that all main banks are tied to one insurer.
Types of charges on pension funds:
- Initial Charges – to set up your plan:
This is the percentage of your money (contributions) that is used to buy units in a pension fund. For example, an allocation rate of 97% means that for every €100 you invest, €97 is actually used to buy units. So in effect you pay €3 (or 3%) as a charge.
This is investment charge. It refers to the difference between the buying and selling price of a unit in an investment or pension fund. For example: a typical bid-offer spread would be 5%. Therefore, if you invest €100 in a pension fund, its value would become €95 (€100 less 5%) if you withdrew the money immediately. The buying and selling price of the units in a fund depends on the value of the assets in the fund.
This is a charge for the initial setting up of your pension plan or investment.
- Ongoing charges to manage your pension plan:
This is a regular fee you pay on some investment and pension policies. A policy fee is usually a fixed amount, for example €3.50 per month.
Fund management charge
This is an annual charge you have to pay to get a fund manager to manage your investment. A typical fund management charge would be 1% per annum for the funds under management but this can vary widely.
Fund Switching Charges
A charge levied for switching your investment from one investment fund to another. Some providers allow a number of free switches per year.
Some investment funds apply exit charges if you withdraw your investment within a specified period.
MLMG Financial Advisors, St Helens, St Oran’s Road Buncrana, Co. Donegal. Tel +353 (0)74 9321420 / Fax +353 (0)74 9321421/or email: email@example.com
McLaughlin McGonigle t/a MLMG Financial Advisors is authorised to undertake investment business in Ireland by the Association of Chartered Certified Accountants