Contributing to a pension as a 20% taxpayer, PRSA & PRB charges

[Kelloggs]

Hi,

I am reviewing my pension arrangements at the moment and have a number of queries and concerns I’m hoping some of you might share your thoughts on.

1) Is it worth contributing to a pension if you’re in the 20% tax bracket? I’m self-employed and my income varies, but I fell into the 20% bracket in my recent tax return. I have now suspended my contributions as I don’t feel the 20% relief is attractive enough to justify locking away my savings for the long-term, particularly given the uncertainty surrounding the tax treatment of pensions into the future.

2) I have a non-standard PRSA with a well-known life insurance company. Their online system, customer service and choice of funds are excellent, but I am concerned about the costs of the policy. The charging structure is as follows: 3.5% entry charge and 1.35% fund management charge on regular premiums, and 5% entry charge and 1% fund management charge on lump-sum contributions.
These management fees & charges are offset by a bonus scheme, whereby a bonus is added to the fund built up by regular premiums after 10 years, and every 5 years after that. The bonus is calculated as follows: 1% if the fund is at least EUR 100k, 2% if the fund is at least EUR 200k, and 3% if the fund is at least EUR 300k. This makes my PRSA somewhat restrictive, in that it forces me into regular premiums to get the benefit of the bonus, when a year-end lump-sum contribution might suit me better.
According to my “Statement of Reasonable Projection” from when I opened this policy, “...the total effect of these charges on the benefits at maturity...is equivalent to a single charge of 1.40% per annum of the assets held under contract”.

3) I also hold a PRB with the same company. This is from an occupational pension scheme with my previous employer. I am being charged a 1.5% annual management fee on this.

Bearing in mind that I am self-employed and don’t enjoy the economies of scale of a large occupational pension scheme, are the above charges reasonable or should I shop around? Should I consider an execution-only arrangement, and are there any downsides or particular risks involved with this? Should I meet with a pensions adviser and if so, who would you recommend in Dublin?

Looking forward to hearing your thoughts.

 

[Squaremile]

Hi Kelloggs,

In response to your queries:

1) Is it worth contributing to a pension if you’re in the 20% tax bracket?

This depends on what tax and USC you are likely to pay when you draw down your benefits. Depending on your pension arrangements you are likely to draw down some of the benefits tax free and the remainder will be taxed at your marginal rate which could range from 0% (if below income threshold) up to 41%.

2) The key question in relation to the annual management charge (AMC) is does the fund performance justify the higher charges? If you are in standard managed funds then yes your AMC is high. Depending on your age a good adviser will be able to structure a deal whereby you get a 101% allocation rate (i.e. an additional 1% on your contributions rather than having to pay an entry charge) with a 1% AMC. For single premiums you will get a minimum of 100% allocation (i.e. no entry charge) and a 1% AMC. So yes it pays to shop around and get good advice.

I had a client in a similar situation to your recently whereby even forsaking future bonuses and an exit penalty, by restructuring his pension arrangements (with the same company!) his projected benefits (all things being equal) were much improved.

3) Again is the fund performance justifying the higher charge, or more likely is a trail commission being applied to your fund (which is justifiable if you are receiving a decent standard of ongoing advice from the initial adviser)? A typical charge for a PRB would be 0.75% per annum so you are paying well above the odds and this will impact significantly on the growth of your fund.

Execution only is fine if you are confident in what you are doing but its always pays to sit down with someone who has expertise, it could save you a fortune in the long run.

Feel free to get in touch if you want to discuss your own situation, I have excellent software that will show you the effect of different charges on your fund growth.

Regards,
Andrew
[email protected]

 

[Kelloggs]

Many thanks for the detailed reply Andrew.

2) No, I do not feel the fund performance justifies the higher charges. As of today my PRSA is worth 19% less than my contributions to date. Admittedly I opened my PRSA at the peak of the market in 2007, and have remained fully invested in equities, so maybe I'm not doing too badly considering the high risk profile of my chosen funds. However, weighing up the certainty of my current high charges against the uncertainty of fund performance, I definitely intend to shop around like you suggest.

I have tried to negotiate directly with the pension company to see if they could do anything for me to reduce the FMC, but to no avail.

3) Regarding my PRB fund performance, this has been very poor and I am down 26% - but again, since I transferred my funds to the PRB in July 2007, this is probably just down to bad timing. I am receiving no ongoing advice on my PRB other than an annual fund statement. However, I have just rung the company and apparently my FMC is only 0.65%, which is a relief as I was convinced it was higher. I can't find any reference to the management charges in my PRB documents so I have asked them to confirm this in writing.

 

[Kelloggs]

I have now met with an independent authorised adviser for an initial consultation. He has made a number of proposals in relation to my finances. He made a good impression, is well-qualified and he and his business partner can offer a wide range of financial advice. However, I’d appreciate any views readers may have in relation to the following questions before making a decision:

1) PRSA. He’s offering to move me from my non-standard PRSA to a standard PRSA with a 98% allocation rate and 1% FMC. He would meet with me every 6 months to review my portfolio. Should I settle for a less-than-100% allocation rate in return for regular financial and investment advice? I am inclined to think yes, and it would be a much better arrangement than what I have at present (higher charges and no advice). However, Squaremile seems to suggest up to 101% allocation rates are available on the market – presumably this is execution-only?
2) PRB. The FMC on this is 0.65%, which the adviser thinks is about as good as I’m going to get. Are there even better deals on PRBs out there?
3) Investments. I am down about 25%-33% on various managed unit-linked investments with around a 1.5% FMC. The adviser is proposing I cash these in and invest the money with him into a more diversified long-term savings plan with a lower 1% FMC. Again he would review the performance with me every 6 months. This seems to make sense, however: can the capital losses on these investments be offset against any future capital gains on the new portfolio?
4) Life insurance. I am married with one child and currently have no life insurance, other than mortgage protection. The adviser is strongly encouraging me to get cover. If I do decide to take out life insurance cover, can I then cancel my mortgage protection policy, and how can I be confident I’m getting the best deal through this adviser? And if I can find a cheaper quote elsewhere, presumably I’m free to arrange this myself?

Finally: the adviser would prefer to work on a commission basis rather than a fee basis. Should I insist on disclosure of these commissions?

 

[ryaner]

1) However, Squaremile seems to suggest up to 101% allocation rates are available on the market – presumably this is execution-only?

I too would be interested in seeing any funds offering this

Finally: the adviser would prefer to work on a commission basis rather than a fee basis. Should I insist on disclosure of these commissions?

If the commission basis is done right, then yes operating on commission gives them an incentive to make you money. However most commission based agents want X percent of contributions meaning they could simply be burning your money and they'll still get the same as if they actually tried to make you money.