High charges can reduce the average pension by €100,000
FEES and charges can eat away up to €100,000 from the pension of an average worker, a new study has revealed.
High charges and the massive impact they have on pension performance have become a bigger issue as more and more people are now in smaller pension schemes where the charges are higher.
Larger company-defined benefit and company-defined contribution schemes tend to have lower charges as they benefit from economies of scale.
However, defined benefit schemes are almost all closed off to new members.
Now more people tend to have individual defined contribution or PRSAs (personal retirement savings accounts) where fees are higher.
Director of corporate pensions at IFG Fionan O'Sullivan found that private sector workers are losing thousands of euro due to elevated fees and charges.
"The study found that pension charges can significantly impact pension performance," Mr O'Sullivan said.
The pensions expert looked at the case of an employee on €50,000 who wants to retire on two-thirds of his salary, or €37,500.
A typical annual management charge of 1pc imposed on the entire value of the fund will wipe out €100,000 of the fund's final value.
But if this annual management charge was cut in half to 0.5pc, the fund would have an extra €100,000 in it to take the total fund to €700,000.
This would provide a retirement income of €37,500 a year, Mr O'Sullivan said.
"The key for pension scheme members is to establish what they are paying and what exactly they are getting in return, Mr O'Sullivan said.
"Concepts such as bid/offer spreads, fund management fees, encashment value and allocation rates are often used, preventing pension holders from knowing exactly what they are paying out in fees and charges," he added.
Mr O'Sullivan said pension funds recouped some of the 2008 losses during 2009, but they still have a long way to go to recover.
"To put the dynamics of pension performance into perspective, when you lose 33pc of your fund, you need 50pc positive performance to get to your original position.
"Any savings that can be made on fees and charges will boost the fund in the long run."
A recent study by the left-leaning think tank TASC found that defined contribution and PRSA pensions have some of the highest charges.
A standard PRSA has a 1pc annual management charge and 5pc imposed on every contribution -- considered high by many pensions experts.
Mr O' Sullivan added: "In the case of smaller employee and self-employed pension funds, all charges are invariably borne by the individual."
He added that when considering how to reduce these charges, pension savers need to weigh up the benefits between passive and active funds and the significant differential in the costs associated with each. Active funds attract a much heftier fee, he said.