How can I minimise charges on my personal pension?
Q I have seen in various media reports in recent weeks that charges on my personal pension may be excessive. What are these charges likely to be and how can I reduce the cost of such charges?
AI have been aware for many years now of the excessive and unjustified charging structure on some pension contracts. Indeed, reducing such charges for my clients is one of the main reasons I became interested in the pensions industry over the past decade.
Depending on the studies or reports you read, various estimates have been put forward as to the level of charges your Pension fund faces over its lifetime. For example, the most recent report* from the Department of Social Protection suggests an individual with a pension fund of €400,000 on retirement could be subject to as much as €60,000 in charges over the lifetime of the Pension.
Aside from 'industry' charges, the pension levy introduced by Government in recent years further imposed a 0.6% charge on most pension funds.
What can be done to reduce charges in a defined contribution personal pension plan arrangement?
There are many ways of reducing the impact of these charges. Two of the most obvious examples are:
1. Many pensions have a deduction or charge on your contribution before your money is invested in your pension fund. This charge can be as high as 5% and it is possible to reduce this charge to 0% through negotiation with some providers. So for example, if you are paying €500 per month into your pension over 20 years with a 5% contribution charge, negotiating this charge to 0% can save you €6,000* over 20 years.
2) There are also annual fund management charges placed on a pension. This is the annual charge the life company or pension fund managers place on the assets invested in your fund. This rate can vary, but a range of 1% to 2% would not be uncommon. The lower the annual management charge the better for your pocket. Again it is possible to get better deals. A 1% or 2% saving may not seem like a means for making big savings, but if you had a pension fund valued at €200,000, a 1% annual fund management charge saving is a saving of €2,000 in one year alone. If you multiply that out over 20 years you can achieve a potential €40,000* saving.
There are opportunities for you to address some of the cost and structural flaws in your pension set-up, which if proper corrective action is taken could lead you to discover valuable savings and thus boost your pension fund on retirement.
*Report on Pension Charges in Ireland 2012 – Department of Social Protection
*Indexation and inflation have not been factored in. For basic illustration purposes only
*Indexation, investment growth and inflation have not been factored in. For basic illustration purposes only