I work as a teacher and I recently took out an AVC, as I won’t have completed the full 40 years of service by 2035 when I expect to retire.
My financial adviser is charging a 5 per cent fee, which seems high to me. What are the standard fee charges for AVCs, is the fee split between the adviser and the investment company and it is 5 per cent of what, the return or the gross amount?
Mr P.C.
AVCs – additional voluntary contributions – are a pension product well worth considering for people who will not have “maxed out” the tax relief on pension savings or whom, like you, for one reason or another will not have served enough time in a workplace to maximise their pension.
But they are also an example of what is wrong with the pensions landscape in Ireland – most particularly in the area of transparency.
Financial service providers regularly bemoan the lack of financial literacy among their client base – the rest of the working population – even as they highlight their efforts to make pensions and other financial products more easily understandable to a general reader.
The trouble for them is that they can be selective in this accessibility to information. And, from my perspective, this is even less understandable when it comes to AVCs.
One of the first things anyone looking to take out an AVC – or any financial product – will want to know is the cost, and how that compares with other similar products. This is the case even though you can take out AVCs only as an adjunct to your existing company scheme. If your scheme does not offer AVCs, you cannot use the structure, although your employer will have to provide access to what is called a standard PRSA.
As a result, you really have a take it or leave it option. But that doesn’t mean you should be working blind. And your case shows why.
You work as a teacher, you say, and thinking forward have decided to make additional pension contributions via AVCs as you won’t have enough service by the time you retire to get a full teacher’s pension.
You say your financial adviser is charging a 5 per cent fee on this AVC and, depending what this is, it certainly does sound high.
Essentially there are two basic charges you are likely to encounter with AVCs – an annual management charge and a charge on each monthly or lump-sum contribution.
You should be expecting to pay management charges of about 1 per cent or less. You might also pay commission on each contribution to the fund. What you want to know is how much of each €100 you invest is actually going into the investment and what, if any, portion is going to the fund manager or adviser.
In an ideal world, 100 per cent of your contributions you make are actively forming part of your investment and, hopefully, growing over time. More likely it will be somewhere between 95 per cent and 98 per cent. If 100 per cent of contributions are going into your AVC, it is likely you will be paying a slightly higher management charge.
Cornmarket is one of the brokers dealing in the AVC market and it specialises in the public service. I use them as an example as they do also provide information on the fees and charges of various Irish Life AVC scheme that they work with on their website, unlike many others – although you do have to get to page 39 of their member guide to AVCs and public-sector PRSAs before you find the link. The company is part of the Irish Life group.
Also, more relevant to you, Irish Life, through Cornmarket, offers AVC schemes to members of the secondary teachers’ unions – TUI and ASTI – and to the primary teachers’ union, the INTO.
* According to their website, they charge an initial €595 spread across the first year and deducted monthly. But that aside, there is no charge on each monthly contribution, although you will pay 4 per cent if you are making lump-sum contributions.
You also pay a 1 per cent annual management charge, although this comes down to 0.75 per cent on any sum of between €40,000 and €140,000 in your fund, and to 0.5 per cent on any portion of your fund above the €140,000 threshold.
Critically, for you, those figures seem to be a fair distance away from the amount you are being charged, so you would certainly want some clarity as to why you would be paying your adviser what appears to be such a hefty commission on an ongoing basis.
Worse still, in your case, despite having availed of the services of an “adviser”, you actually have no real idea of what this fee they are charging is, as in what it covers and how it is deducted. I’m not saying this to make you feel bad but rather to suggest you were unfortunate in your adviser. The whole point of the fee/commission he or she earns is that you buy into a financial product with your eyes open, knowing exactly what all the charges will be, who gets what and if it is a percentage figure, as is likely the case, what is it a percentage of.
I think you need to go back to your adviser and look for some answers in clear English as to what you are getting for your 5 per cent, how much of that goes to them and how much is charged by your AVC fund, and confirmation that there are no other charges looming via the fund.
Don’t be fobbed off with financial jargon and don’t be intimidated by a fear of sounding silly to the adviser. Sometimes, because they deal with this stuff all the time, they slip into industry jargon that seems obvious to them but might mean nothing to an ordinary punter like you. We all have this habit of slipping into jargon and acronyms that are relevant to our jobs without thinking whether they are clear to those working in other areas. And sometimes, of course, they do it precisely to deter you from seeking clear answers because they know that human nature means none of us likes to look like a fool in front of other people.
There’s nothing foolish in getting straight answers in simple language, After all, it’s your hard-earned money they’re playing with.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
* This article was edited on Sunday, May 14th, 2023
