Exposed: dearest pension funds
Published 23/10/2011 | 05:00
Choosing the wrong pension will cost you an arm and a leg in fees and charges -- as much as €250,000 more than if you picked a different pension.
About 800,000 Irish people have private pensions -- and most of these are getting fleeced by Irish pension companies.
We asked top pension experts to identify some of the worst value pensions out there.
We found that some pensions could cost you hundreds of thousands of euro in extra charges, while others could gobble up as much as a third of what you're paying into it.
Charges could reduce the size of a €1.8m pension pot by €254,000
Among the pensions offered by Aviva, which last week announced that almost 1,000 of its Irish workers could lose their jobs over the next two years, are a range of pensions called Horizon Plan Options.
If you choose the wrong Horizon Plan Options pension, charges could erode the value of your pension by up to €254,000 by retirement.
With Horizon Plan Options B for example, you're hit with 20 per cent commission on the money you pay in in the first year -- as well as up to 4 per commission on every contribution you pay in after that. On top of this, you pay an annual fund management charge of 1.25 per cent.
There is, however, another Horizon pension available from Aviva which charges no commission and has a lower annual fund management charge of 1 per cent. If you choose this nil commission pension over Horizon Plan Options B, you'd save a fortune in fees.
Let's say you're a 30-year-old male paying €1,000 a month into your pension and you plan to retire at 65. Your pension has been adjusted to protect you against annual inflation of 3 per cent. The investment growth on your pension fund is about 6 per cent a year.
By the time you retire, your pension would be worth about €1.83m if you chose the Horizon nil commission pension, according to one adviser. But if you chose Horizon Plan Options B, your pension would only be worth about €1.57m on retirement -- €254,000 less.
Almost €1,000 in charges on €3,240 paid into a pension
If you've got an Advantage pension with Canada Life, almost a third of what you pay into your pension in the first year could be gobbled up in costs.
This is because the allocation rate (the amount of your money invested in the pension after all charges and commission come out) is between 70 and 75 per cent in the first year.
If you're paying less than €300 a month into this pension, 30 per cent of your first year's contributions will be lost to costs. So if you pay €270 a month into Advantage in the first year, you'll pay a total of €3,240 in the first year -- but you'd lose €972 to commission and costs and that's before you pay the annual management charge.
A spokeswoman for Canada Life said: "The charges relating to retirement plans should really be evaluated over the term of the pension plan and not just the first year."
Another expensive retirement fund offered by Canada Life is its SEI Emerging Markets Equity Fund. This fund -- which can be invested in through Canada Life's Advantage Plus Plan -- has an annual management charge of 2.15 per cent.
A spokeswoman for Canada Life said you could earn a bonus of up to 6 per cent of the total value of this fund when you retire, "hence the slightly higher annual management charge".
One of the highest annual management charges -- for a fund that has dropped by almost a third in value
If you have a Navigator pension with Irish Life, one of the funds you could invest in is the Fidelity European Growth Fund. At 2.25 per cent, this fund has one of the highest annual management charges around -- and the fund's performance certainly doesn't justify such a fee. The fund has lost about 28 per cent of its value over the last five years.
Charging twice as much as it should for an average job
One pension expert said that consensus funds offer particularly bad value for money because their only aim is to achieve returns that match the average on the market, rather than beat returns of their competitors.
Consensus funds shouldn't have annual management charges of more than 0.3 per cent, according to Fionan O'Sullivan, director of corporate pensions with IFG.
The Friends First Consensus Fund, however, has an annual management charge of 0.7 per cent. Furthermore, this fund made a loss of 0.33 per cent a year in the five years ending June 30, 2011.
A spokeswoman for Friends First said the 0.7 per cent management charge was "consistent with standard industry charges".
Friends First isn't the only pension company charging an annual management fee of more than 0.3 per cent for its consensus fund -- so if your pension money is going into a consensus fund, chances are you're paying an annual fee which doesn't justify the performance.
Sunday Indo Business