I met a broker in the early 1990s who told me he needed to move his clients pensions every 5 years so that they could get the “benefit” of the extra allocations that the life companies “give away”
I was horrified. Did he really believe that this was free money? He did and to this day so do many people.
It’s not.
Increased allocation rates are just one of the ways in which commissions are concealed to make the pill of an upfront commission payment easier to sell to an investor.
3% initial commission and 103% allocation “seems” like the insurance company is paying the commission.
This simply isn’t the case. The investor pays all the fees.
As I have pointed out before.
The annual management charge isn’t the real charge it’s the disclosed charge. The real charge is higher.
Nobody knows the real cost because it’s not properly disclosed but our estimate is in the range of 2%pa for a typical pension or ARF in Ireland today. Obviously you could get a lower cost with no advice but seriously who would take their life savings and DIY through retirement?
These hidden costs show up when you compare an insurance “mirror” index fund with the index it is tracking. Like this
There was a detailed study of life Company mirror funds in the U.K. a few years ago
So how does increased allocation really work?
You pay in 100 and you get 102% allocation. Then your unit allocation day 1 is now 102. The life co protects themselves by applying early surrender penalties for, typically, the next 5 years so that the initial commission is "clawed back" if you move. Increasingly this clawback is from the broker rather than the investor which should eventually kill off this practice.
The life co then applies the ongoing costs to the unit price so if you are paying 1%pa your charge in year one is 1% of 102 which is 1.02 and not the 1 you were expecting.
Over time the insurance company recovers the extra allocation to such an extent that you are unlikely to really benefit.
What should you do instead?
Firstly and most important. Get an annuity quote. A competent advisor will set out the annuity that you can currently buy and compare with an ARF. For many people current annuity rates are the right answer and for almost everyone its the right answer for some of a pension during retirement.
See example here
https://www.askaboutmoney.com/threads/the-fallacy-of-lifestyling.230742/post-1816238
Always insist on a "clean contract" no smoke and mirrors.
Always insist on a reduction in yield illustration of the fees and an investment forecast based on the proposed investment. Examples attached
Marc Westlake CFP, TEP, APFS, QFA, EFP
Chartered, Certified and European Financial Planner
Registered Trust & Estate Practitioner
Everlake