Making your pension contributions work for you.

Pensions really have received a lot of bad publicity in the past 3 years, with good reason for most investors. Charges on contributions, high management fees and poor investment performance all lead to poor value for the investor. To try and restore some confidence, I have put together this paper to give an honest and reliable guide to making pension contributions. This is broken down into a number of ‘golden rules’ .

• Don't take your advisor 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 advisors 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 advisor. The second charge is an annual management fee. This is also linked to commission for an advisor. Typical management fees are 1% although you can get lower with firms such as Axa Financial or by setting up a Small Self Administered Pension. Some advisors add a percentage to this for their advice. Ensure you know exactly what your advisor is getting paid and make sure it matches the service they are offering. Ideally you should agree a fixed amount in advance of completing application forms.
• Investment Decisions – Ensure the person offering advice has some experience in making investment decisions. Your overall ‘net worth’ should be considered and factored into any pension positions to make sure you are not too exposed to any one asset class. I also see a large number of existing pensions invested with 3 or 4 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 1% in most cases, with management fees at least 1%.
• 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.

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