Pension costs - 6% per year?

R

Rexel2

Registered User
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Hi all,
New to pensions, have a basic question on costs.
My employer is looking into setting up a pension arrangement with AIB for myself and the other employees. I see that there is a 1% annual charge as well as a 5% contribution charge (ie, 5% of each contribution is deducted).

I realise from reading other threads that this 5% charge is common but it sounds outrageous to me, ie, that one's fund would have to appreciate by 6% per annum for me to breakeven. Am I misinterpreting things? Is it really that bad?

I know that the stock market tends to rise by an average of 8% or so over the very long run (that figure might be incorrect but I know it is in or around that region). Yet, the fees seem to be eating up almost all of those gains? Of course, if the market returns, say, 4% or 5% per year (it's done a lot worse over the last decade) the returns could conceivably be negative.

I know that the big plus with pensions is the tax relief and the employer contributions. The fact that AAM members are not aghast with indignation regarding the 5% charges suggests to me that I am misinterpreting the figures - I'd appreciate if someone could clarify.

Finally, Quinn Life pensions appear to charge an annual fee of 1%, with no contribution deductions. Any catch? I Know that people opting to go via certain brokers can pay a one-off fee and avoid the 5% contributions but would it not be simpler to go via the Quinn options?

Thanks in advance
 
You can get a better deal on charges than 5% off each contribution and a 1% annual management fee - e.g. down to c. 0%/1%. However it's up to your employer to choose the option that suits them best. Whether or not you avail of it is your choice. However in some cases even with 5%/1% charges the possible benefits of matched contributions by your employer may offset the additional costs. But all the better if your employer can get a better deal than 5%/1% on the pension that they choose to offer to employees.
 
Oh - the pension costs are not actually 6% per year - they are 5% on each contribution but the 1% is calculated on the full value of the fund but usually deducted on a daily basis and reflected in the unit prices.
 
Your basic understanding is correct (5% of each contribution and 1% annual management fee on the total value of the fund), but this doesn't correspond to an annual 6% fee (run a spreadsheet of virtual contributions and go past year one and you'll see what I mean).
[post crossed with CM]

Most of us are tied in what options are available in order to retain our employers contributions (as mentioned by CM above), which can have a far greater benefit than availing of a lower cost pension without the employer contributions.

I know of a couple of schemes which have recently changed from 5%/1% to 1%/1%, although I'm not sure if this is a sign of the current market or if it's simply trustees fighting for a better deal and managing to pull it off.
 
Satanta said:
Most of us are tied in what options are available in order to retain our employers contributions (as mentioned by CM above), which can have a far greater benefit than availing of a lower cost pension without the employer contributions.
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If the charges on the employee offering are "too high" then just contribute to the extent that you need to avail of employer matched contributions (if any) and then open another PRSA or personal pension plan with lower charges for AVCs if possible? The drawback is that you need to claim tax and PRSI relief on the latter manually.
 
Thanks for replies. Will probably put in the minimum required so as to get employer contributions and put rest in pension of my choosing, as Clubman suggested.

Curious about the 5% contributions figure though - if it does not work out at 6% per year, how much does it work out at approx? (afraid am a dunce when it comes to spreadsheets so that's not an option for me).

All replies appreciated.
 
Well take a very simple example - say your fund is currently worth €5K. You contribute €100 p.m. for a year which is a total of €1.2K. Since 5% of each contribution is deducted the amount actually invested is €1,140. At the end of the year your fund is worth €5K + €1,140 = €6,140 assuming no growth. The annual management fee will be 1% of €6,140 (actually it won't be since it's calculated on a daily basis but this is just a simple example) = €61.40. So total charges for that year were €60 + €61.40 = €121.40. As a percentage of your year's contributions this is 10% or as a percentage of your end of year fund value it's c. 2%.
 
Rexel2 said:
Curious about the 5% contributions figure though - if it does not work out at 6% per year, how much does it work out at approx? (afraid am a dunce when it comes to spreadsheets so that's not an option for me).
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It's impossible to give even an approx annual figure in this manner, as it is dependent on the existing value of the fund.

If your fund is currently €1,000 and you make €1,000 worth of contributions in a given year, the 5% fee on each contribution would have a much greater impact on the (notional) % fee than if you had a fund worth €50,000 and made €1,000 worth of contributions.

You really are best just looking at these fees as seperate things. This page describes it fairly well, and details the different charges which can apply.

The charges you may have to pay include:
  • allocation rate - this is the percentage of your contribution that is invested in the pension fund. It typically ranges from 90% to 105% of your contributions. A 95% allocation means your pension provider invests 95% of your contribution and takes the other 5% as a charge
  • entry charges and bid/offer spreads - these typically range from 0% to 5% of your contributions. If the entry or bid/offer charge is 3%, it means you pay a charge of €3 on every €100 of your invested contribution. So the value of your investment is then €97
  • monthly policy fee - this is usually a fixed amount taken each month if your contributions are paid in monthly and typically ranges from €3 to €6 a month. It is taken either directly from your contributions or from the value of your fund
  • yearly fund management fee - this is a set percentage of the value of your pension fund that is taken each year to pay for fund management and sales costs. It usually ranges from 0.75% to 1.5% of your fund value. So, as your pension fund grows, the amount taken from your fund to pay this charge increases.
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