Understanding Pension Charges
Most of us find pensions confusing enough on their own — understanding how they are managed is a whole other level of confusion.
But think of your pension fund as a fancy car — you need to look under the bonnet every now and again to make sure it runs efficiently.
And when it comes to how much you’re being charged, it’s best to be in the driving seat. The difference, for example, between paying a contribution charge and a 1.5% annual management fee compared to no contribution charge and a 1% fee could be as much as €200,000 extra in your pot across a 35 year span.
According the Pensions Authority, a 1% annual management charge has the impact of reducing a pension fund built up over 20 years by over 10%.
That’s why it’s so important to read the small print. We’ve put together a simple guide to help you figure out commissions, fees and charges.
Defined Benefit v Defined Contribution/PRSAs
If you’re in a DB pension scheme, all fees and charges are generally paid for by the employer. If you have a DC or PRSA pension, fees are generally taken directly from your account.
Your employer may have negotiated lower annual management charges with the provider. This will not be possible for those of you with a private pension (PRSA).
You should be notified of the effect of all charges on your pension each time you receive a Statement of Reasonable Projection. This should be posted out to you once a year.
Higher Fees Justified?
Actively managed funds attract higher management fees than passively managed ones. But if the active fund managers outperform the market, then your investment return could also be higher.
This is why a more expensive fund manager — if they deliver above-average returns and boost your pension pot accordingly — could justify their fees. A financial advisor can analyse this for you in more detail.
Fund Management Charge
The annual FMC (Fund Management Charge) also known as an AMC (Annual Management Charge) is the fee you pay to the provider of a pension fund to manage and invest your contributions.
This typically varies from 0.75% to 2% of the fund per annum. In standard PRSAs, the FMC is fixed at 1%.
As discussed earlier, FMCs are higher for actively managed funds than for passively managed funds.
Also known as entry fees, allocation rates determine how much of your money is actually invested, with the remainder going to the provider as fees. Choose a fund that offers as close to a 100% net allocation rate as possible. Discuss with your advisor solutions that will allow you to get up to this.
Ask your broker how they are being paid. It can save you money in the long-term by agreeing a set-up fee instead of a continuing commission charge. This ongoing fee, known as a “commission trail”, is where a charge is added on to the AMC (typically between 0.3% and 0.5%) to pay for financial advice. However, your broker should be committing to a service in order to justify these fees.
The total expense ratio (TER) is a measure of the costs of managing an investment fund. In an actively managed fund, the TER only discloses administration costs and not operational costs such as transaction fees etc. A more comprehensive overview of the fee structure is an OCF (Ongoing Charges Figure) — a pensions advisor can help track down this data for you.
There are several other costs associated with your pension fund. These include pension authority fees (around €8 per annum), switching charges, incentive fees, policy fees etc. The best way to keep pension fees to a minimum is to ask your financial broker to compare all charges between the various providers and not just base your decision on past investment performance.