Pension fees can leave you shortchanged
In the UK, commission has been banned since the start of this year, In Ireland, however disclosing commission payments is as far as it has gone, which means that conflicts of interest can remain.
“Your adviser will only get paid if he sells you a product, so he will be motivated to do so, even if paying off some debt might be better for you,“ cautions Westlake.
Kenny has some scare stories on the issue. One pension fund client was advised by his accountant to set up a pension scheme. After a few years, he noticed that commission was still being deducted from his fund. When he queried the charges, he discovered the commission was being paid not to the accountant but to his wife, who had her own financial services company.
In other cases, Kenny has been dubious about the reasons why people were sold longer than average term products, such as a pension that doesn’t kick in until the age of 70.
“I can’t avoid the suspicion that the commission rate is X per cent multiplied by the number of years to go in the policy,” he notes.
So should commission be abolished altogether? Or would such an approach mean that people simply wouldn’t avail of any financial advice if they had to pay an up-front fee for it?
“I certainly wouldn’t like to see the whole broker community driven out of business,” notes Kenny, while Delaney is uncertain about the market for a fee-paying service.
“I don’t know if there’ll be an appetite for people to pay for advice,” he says.
Many pension funds also typically impose fees should you leave the scheme early. If, for example, you’re invested in an equity fund, you will take a hit on the bid/offer differential – or the difference between the price to buy into the fund, and to sell out.
Where it gets more troublesome, however, is when it comes to other types of funds, such as with profits arrangements. The surrender value of these funds may be impacted by a market value adjustment to reflect the underlying value of assets.
“And it can be quite a heavy reduction,” notes Kenny.
Exit charges hit the headlines a few years ago when people found themselves locked into property funds. The property crash meant the value of the underlying assets had been slashed and funds imposed high exit charges on customers looking to get out in order to stop a run on certain funds.
The issue of exit charges particularly comes into play for personal pension holders who have belatedly realised that they’ve been sold a pup.
“They subsequently realise they’ve made a mistake, but it’s too late and they’re locked into a contract that’s very inflexible,“ says Westlake.
Indeed Delaney notes that some older- style personal pension policies might have trail commission of as much as 1 per cent a year, on top of management charges of 2 per cent, and allocation rates of as low as 92 per cent. If this sounds like your pension policy, it might be time to change.
“It’s hugely important. Whether you have two years to go to retirement or 20 years to go, it doesn’t matter. You should be reviewing them,” he says of pension funds, especially personal arrangements.
“You should be looking at new contracts. A new contract would be more transparent, with contributions made closer to a 100 per cent allocation rate.
“There may be the same management charges, but I’d say that anything over 1.5 per cent is astronomical.”
But while the incentive to move might be there, the cost of doing so might be prohibitive.
“The irony is it may be a case of damned if they do and damned if they don’t,” says Westlake. “The provider of the pension has costed it in a way that they’ll make money whether you stay or go.”
And as with the need to monitor charges in your current fund, it is also important to be assured of the value of moving. There is little point in switching one bad value investment for another.