Wednesday 13 December 2017

Picking a pension is like walking a minefield

Picking the right pension can be tough
Picking the right pension can be tough

Michael Keyes

Two of the biggest mistakes I see families make with their pension is either not taking the time to consider how they will survive in retirement, or going it alone when putting a pension in place.

It can be difficult for people who don't know anything about pensions to make the right decisions without getting some advice from those in the know.

Picking the right type of pension and investment strategy will have the biggest impact on retirement income. After that, you need to pay attention to fees attached to each type of pension product. When buying a house, most of us are comfortable to deal with the price head on -- often preferring to discuss a potential deal even before viewing it. Pension fees and charges should be treated in the same way.

Fund charges can be hugely confusing because they are defined differently by different companies. Terms such as initial allocation rate, bid/offer spread, and policy fees are difficult for most people to understand. When used in combination, they become impenetrable.

It is important that pension savers understand the consequences of choosing one pension over another because fees and charges will have a big impact on their final pension pot. If you could cut your overall fund management fees by 0.5 per cent (such as from 2 to 1.5 per cent), this could boost the value of your final pension fund by as much as a fifth.

Some pensions cost four times as much as others, depending on the type of pension and the pension provider you select.

In October 2012, Social Protection Minister Joan Burton published a report which showed just how dramatically pension charges can vary. It had been hoped that she would introduce a simple measurement like an APR (Annual Percentage Rate -- a unit used by the banks to measure the cost of a loan) to help people understand how much pensions costs. Unfortunately that has not happened.

Here are six steps you can take to make sure you have a good pension.

1. Get independent advice. Pensions can be confusing so it's much easier to seek an expert's help. Then consider the administration, trusteeship and investment management of the pension scheme -- if you take the first step, the adviser will assist you on the rest.

2. Review your pension frequently. Once a year, if possible. During these reviews, you should assess how the investment returns and ongoing charges are impacting your pension fund -- and make changes if necessary.

3. If you hire an adviser, ask questions until you have all the knowledge you need to make an informed decision about the pension, the investment strategy and the costs associated with its establishment and maintenance.

4. Be careful if you're switching to a new employer or type of employment -- and considering transferring your existing pension benefits to your new employer's pension scheme. This can carry huge implications -- particularly if you're coming from a defined benefit scheme, where the value of your pension is usually linked to your final salary. Up until recently, people were reluctant to transfer a pension benefit out of a defined benefit scheme. However, with the concerns over the solvency of some schemes, that decision is far from clear cut.

5. Look at the projected retirement fund under your existing contract -- this should be in your annual pension statement. Then look at the benefits and drawbacks of transferring to a new potentially lower cost structure for the remainder of your working life. Contrast the numbers and see if the like-for-like projections are better if you transfer to the lower cost structure.

6. Make sure that the services and returns your pension fund yields justify the fees you pay. If you're comfortable making all of the investment decisions, then maybe a self-directed pension, which typically carries lower management charges, might suit.

Michael Keyes is a director of the Dublin pension firm, the Independent Trustee Company

Irish Independent

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