Pensions really have received a lot of bad publicity in the past three to four years, with mostly good reason for most investors. Charges on contributions, high management fees and poor investment performance all lead to poor value for the investor. All the previous sound assets such as Property and Financials have betrayed our blind faith in them.
With the benefit of hindsight (in 20/20 vision) we can see that our investment choices were very narrow. We put all our eggs into one big Irish basket, namely Irish Property and Irish Financials. To try and restore some confidence (and God knows we all need some), I have put together this guide to give an honest and transparent look at making pension contributions. Below are the “golden rules” one should always consider before making any final decisions.
- Don’t take your adviser or accountants’ word for it when considering where to invest your pension contribution this year. Make sure they have research and data to back up their recommendation. Any bank sales staff or tied agents will obviously only recommend their own product, but even independent advisers will often favour one particular firm partly for commission reasons and partly because they haven’t researched the full market.
- Charges – You can be charged in two ways with your pension. The first is an entry charge which is a percentage of your contribution. The percentage of contribution which actually gets invested on your behalf is called allocation. Any reduction in allocation usually represents commission paid to the adviser. The second charge is an annual management fee. This is also linked to commission for an adviser. Typical management fees are 1pc although you can get lower depending on your fund choice or by setting up a Small Self Administered Pension Scheme (SSAP). Some advisers can add a percentage to this for their advice. Ensure you know exactly what your adviser is getting paid and make sure it matches the service they are offering. Ideally, you should agree to a fixed amount in advance of completing application forms. There is no such thing as a free lunch and believe me, free advice can be very costly.
- Investment decisions – Ensure the person offering advice has some experience in making investment decisions and is a Qualified Financial Adviser (QFA). Your overall financial standing and goals should be considered and factored into any pension positions to make sure you are not too exposed to any one asset class. I have also seen a large number of existing pensions invested with three or four different managed funds. As Irish-managed funds all do pretty much the same thing, this doesn’t offer any real diversification. A well-diversified, low-cost range of investments is preferable. Avoid cash funds where possible, as they offer bad value. Life Assurance company cash fund returns are less than 1pc in most cases, with management fees at least 1pc. Does this seem like a good return to you? Where is the next growth area? Is gold a bubble waiting to crash? Is alternative energy the way forward? Is China going to take over as the world’s leading economy? What about the emerging markets, such as Brazil? Have you been offered these options? If not, why not?
- Tax – Only make a pension contribution if you have an income tax liability to offset. There is no point making pension contributions with after tax income or going over the personal limits. As you pay tax when you draw down the pension in retirement, you would be better off setting up a personal savings account, rather than a pension, if you are not getting tax relief.
Pension Contribution Summary Checklist
- Any recommendation is backed up with market-wide, independent research, including fund performance comparisons.
- All charges are clearly illustrated and explained.
- Broker/accountant/intermediary commission is disclosed.
- Are you been charged a fee?
- Existing investments and pensions considered to ensure you are not over exposed to any one asset.
If you have any queries about pensions or any area of financial advice, contact Colm Power at 1890 467 467 or colmpower@hmpfinance.iewww.hmpfinance.ie
HMP Financial Services are multi-agency intermediary and are authorised by the Financial Regulator. © Colm Power & HMP Financial Services
Tuesday 9th November 2010, 3:55 pm
By Colm Power
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