Pension Charges

I’ve been meaning to write a blog on pension charges since I started blogging last year but I’ve been putting it off. Not because I have anything to hide. It’s just that it can get so complicated that it’s easy to get lost. So, if you don’t follow what I am saying, I apologise in advance.

I will now attempt to explain the major charges that you will find in any pension plan (or unit linked investment plan).

Allocation Rate

1. This is the actual amount of your money that is invested on your behalf.
2. The higher the amount you invest, the better the rate.
3. In some cases, especially for once off payments, the product provider will offer a bonus allocation e.g. for €50,000 once off contribution, the allocation rate will be 103%, which is a €1,500 bonus. In a lot of instances, this bonus may be taken as commission by the advisor, so you have 100% of your money invested and the advisor gets paid his fee.
4. You may get a higher allocation rate in exchange for paying a higher annual management charge. You receive a bonus allocation on the way in but this is recouped over the term of the policy by a higher annual management charge.

Annual Management Charge

1. There is a misconception out there that this covers the dealing costs. It does not, it covers the cost of running the insurance company, broker’s commission and profit.
2. The size of the annual management charge (AMC) can vary depending on the fund. If you pick a fund run by an external fund manager or a specialist fund, there is usually an higher AMC to the standard funds offered by the product provider.
3. In standard PRSA’s, the annual management charge is fixed at 1%.
4. As mentioned in the Allocation Rate section, you can take a higher allocation rate at outset but pay a higher AMC throughout the term of the policy.

Dealing Costs

1. The dealing costs are not disclosed.
2. When you invest in a unit linked fund, you buy units, which are valued on a daily basis.
3. When the unit value is declared each evening, the dealing costs has already been deducted.

 Policy Fee

1. This is a monthly monetary fee that is deducted from the policy each month.
2. It is typically €4 – €5 per month and it tends to increase in line with inflation.
3. It is nothing more than another charge.
4. If paying relatively small premiums, you need to be very aware of this charge. A €5 policy fee on a €100 premium is 5% being deducted from your contributions each month.
5. PRSA’s do not have policy fees as under PRSA’s all charges have to be given as percentages.

Example

The following is an comparison of the charging structures that may apply to a regular premium pension contract.

If you are paying your financial advisor by way of commission, under Option 1, your allocation rate is reduced by the amount of commission you are paying him.

Under the same commission structure for option 2,  the initial commission paid is built into the contract and is earned back by the insurance company over the years by a higher annual management charge. Any renewal commission earned from year 2 onwards will reduce the allocation rate.

I hope I managed to explain that clearly without confusing anyone.