How to fix pension charges

A couple of weeks ago, I wrote a response to an article that claimed that investors were paying 3% in pension charges. We showed that this was not true, but a valid point was raised, pension charges are opaque and need to be more transparent for investors.

Get rid of allocation rates

Allocation rates are the actual amount of your money that is invested. It can be less than you paid or it can be more. It is the more bit that causes issues. It gives the impression that you are getting free money. Or what usually happens is that the advisor takes this extra money as commission and tells you that there is no charge for the work they are doing.

But it is not free. The higher the allocation rate, the higher the annual management charge as the life company has to recoup the money they have paid out. And these higher management fees are on your contract for the lifetime of your policy, so it is likely that you will more than pay for the cost of this “free money” through higher ongoing fees.

Split up the annual management charge

The main charge of any pension plan, the annual management charge (amc). Where the allocation rate is on each individual contribution made, the amc is deducted on the total value of your fund. What we do know is that it is split into 3 parts:

  1. Broker commission
  2. Life company costs
  3. Fund costs

Broker commission 

As I said above, the “free” money has to be repaid somehow. Or if you are paying a monthly premium, you may have 100% of your money invested, but the life company is paying the broker a commission. This is paid back by part of the amc.

Life company costs

Life companies don’t work for free and have staff cost, building, IT costs etc to pay for. A bit of profit also has to be added in there somewhere. If you are paying €100 a month into a pension, they aren’t making much money off you and it will probably take a number of years for a life company to start making profit from a pension. But wouldn’t it be great to know how much is being taken from your fund to pay for the ongoing administration of your policy.

Fund costs

If you have a pension, your money is going somewhere and there is a cost to running a fund. Part of this is cost is incorporated in the ongoing management fee. How much of it? Life companies don’t like to disclose this as they can negotiate fees with fund managers given the large amounts of money that they can send their way.

But if you are getting a good deal from a fund manager, you should be confident in letting people know what you can offer. And life companies in Ireland have consolidated, so there is just 5 life companies doing pension business in Ireland at present.


The starting point for this is to ban allocation rates and commissions but there does not seem to be much of an appetite from the Central Bank, so it may be a while before we see some change.


Steven Barrett

10 May 2021