PENSION FEES & CHARGES – ARE YOU BEING RIPPED OFF?
The looming tax deadline presents the final opportunity to offset a pension contribution against tax for 2010. Relief is granted at the taxpayer’s marginal rate of income tax subject to an overall earnings cap and a sliding-scale of contributions determined by age.
“For example, those under 30 can claim relief on pension contributions of up to 15% of their salary, subject to the current income cap of €115,000. Once you are over 60, you can claim relief on up to 40% of your salary but the same overall income cap still applies,” The Sunday Business Post says, which also notes pension contributions are no longer subject to relief from PRSI.
But if you are thinking of using a pension as a way to offset tax, a piece in The Sunday Independent makes very sobering reading.
“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,” the newspaper says, having conducted a survey among experts on pension fund set-up costs and management fees.
For example, a Horizon Plan Options B from Aviva charges 20% commission on payments into the fund during the first year and 4% on every contribution thereafter. There is also an annual fund management charge of 1.25%. However, another Horizon pension from the same company charges no commission and an annual management charge of 1%.
The difference can be huge. As an example, the newspaper says a 30-year-old male who plans to retire at 65 and is paying €1,000 a month into a pension could lose €254,000 by opting for a Horizon Plan Options B over the similarly named fund from the same company with no commission charges.
Based on annual inflation of 3% and investment returns of 6% a year, a pension pot of €1.83m would be worth only €1.57m.
In the case of Canada Life, if you choose an Advantage pension you could expect to see almost a third of your first-year’s contributions “gobbled up in costs”. So, if you pay in€3,240, you would incur charges of almost €1,000 – and that’s before payment of the annual management charge.
A spokeswoman for Canada Life told the newspaper: “The charges relating to retirement plans should really be evaluated over the term of the pension plan and not just the first year.”
Another Canada Life plan also came under fire – the SEI Emerging Markets Equity Fund has an annual management charge of 2.15%.
Defending the size of the fee, the Canada Life spokeswoman said it would be possible to earn a bonus of up to 6% of the total value of the fund on retirement “hence the slightly higher annual management charge”.
Similarly, the Navigator pension with Irish Life appears to have lost its bearings with regard to its investment in the Fidelity European Growth Fund.
“At 2.25%, this fund has one of the highest annual management charges around – and the fund’s performance certainly doesn’t justify such a fee,” the newspaper points out. “The fund has lost about 28% of its value over the last five years.”
And the consensus when it comes to consensus funds appears to be “best avoided”.
Fionan O’Sullivan, director of corporate pensions with IFG, says consensus funds shouldn’t have annual management charges of more than 0.3% because they are designed merely to match the market average rather than to optimise returns on investment.
However, the Friends First Consensus Fund has an annual management charge of 0.7% despite making a loss of 0.33% a year in the five years ending June 30, 2011.
A spokeswoman for Friends First described the 0.7% management charge as “consistent with standard industry charges”.
The newspaper advises: “Friends First isn’t the only pension company charging an annual management fee of more than 0.3% 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.”