Opinions on new Davys Self-Directed PRSA product

[pbyrne]

Hi,

I saw mention on this in the Sunday Business Post yesterday and thought it looked interesting:

http://www.davy.ie/TopLevel?page=davydirectpension

It is a PRSA where you can control the funds that are purchased and it looks like it allows you access index based funds and ETFs for a lower cost (that is the bit I am wondering about).

To keep the numbers simple, am I on the right track in the following:

'standard' executive pension, through Aviva for example, annual management charge = 1%, but then we have the hidden charges (that I am just getting a handle on through other readings here), combining to give a total expense ratio of say 2.75% (this is just a guesstimate).

With the Davy's product it says they have an annual management charge of 0.75%. You also pay one-off transaction charges: (0.75% for first 50k, 0.5% after that) http://www.davy.ie/Generic?page=selfdirectedcommissionsandcharges

If you were interested in buying an ETF and leaving it for the long term you would also incur an annual management charge on the ETF of 0.5% (quick example http://uk.ishares.com/en/rc/funds/IWRD).

So in terms of costs you are saving 1.5% annually if you did a buy-and-hold long term? (on the basis that the TER for actively managed funds is 2.75% - nobody seems to know for sure!)

Until now I was under the impression that self-drected funds cost a relatively high amount annual (2-4k I have seen mentioned in other threads) in pensioneer trustee costs but this Davy's solution would look to be a reasonable middle ground?

I have aAbsolutely no connection to Davy's by the way in case anybody thinks this is trying to promote the product.

Just trying to get a handle on how it compares to a 'self directed fund' that would have required the pensioneer trustee and also how it compares to traditional actively managed pension products.

 

[LDFerguson]

There have been a number of new developments in the whole area of self-directed pensions of recent times. Standard Life launched their PRSA product today, which allows you to mix between their funds, deposits & shares (not ETFs) of your own choosing.

Standard Life have had the same choices (and ETFs) on other pension products for around five years (Personal Pensions, Directors' Pensions, Buy Out Bonds etc.)

Irish Life recently introduced online trading (in conjunction with TD Waterhouse) on their pension range, again allowing you to mix self-directed decisions with their fund range. Charge is €15 per trade.

To get a full picture, you'd need to evaluate and compare all three in terms of charges per contribution, annual charge and charges per trading transaction. If looking at an ETF, remember that the ETF will itself have a small annual charge also, which needs to be taken into account.

It's made a bit more complex by the fact that the charges on the Irish Life and Standard Life products can be varied depending on the intermediary channel. Some brokers can and will offer better deals on charges than others.

These options do bring control of pension funds within reach of the smaller fund, although I would caution that such functionality is best suited to experienced investors. Make sure that you're going into self-direction with your eyes open, e.g. do you understand about the benefits of diversification and the risks of having insufficient diversification?

Liam D. Ferguson

 

[pbyrne]

Hi Liam,

Thanks for the reply, I was aware of Standard Life's products but I didn't like the fact that you could buy only a limited set of funds which all typically (at a casual look) had a management charge of at least 1% (even for trackers).

However, after taking a fresh look, I think I was missing a piece of the puzzle which is the ability to buy shares through StockTrade - I am guessing that I could buy an ETF or Tracker through them for a nice low TER. Although am I right in thinking though that they apply a 1% charge on self-directed even if you are going through stocktrade, if so this is higher than the 0.75% from Davys (correct?)

Happy on the diversification risks - am on my second read of the excellent Tim Hale 'Smarter Investor' book - should be mandatory reading for all with a pension!

 

[LDFerguson]

Yes had a look at the Davy product brochure and it seems that their product has a 0.75% annual management charge, which is good for this type of product. It's lower than Standard Life and the same as Irish Life, although Irish Life's online trading is currently only available through Personal & Executive Pensions.

After that, the charges are the cost of trading transactions which will only hit you each time you actually make a trade and the annual charge within the ETF you're buying.

 

[Raskolnikov]

0.75% for the annual management of a self-directed pension seems a little high, even if the fee is the lowest in Ireland. For example, Hargreaves Lansdown offer the equivalent to a self-directed PRSA in the UK for a fee of only 0.5%. You might chide me for quibbling over 0.25%, but if you're dealing with a pension of €100,000, you're paying out an extra €250 every year for the duration of your pension contributions. Overall, the service looks good, but the fees have a little way to go to become fair.

By the way - does anyone know if this allows you to trade OTC markets?

 

[LDFerguson]

0.75% for the annual management of a self-directed pension seems a little high, even if the fee is the lowest in Ireland. For example, Hargreaves Lansdown offer the equivalent to a self-directed PRSA in the UK for a fee of only 0.5%. You might chide me for quibbling over 0.25%, but if you're dealing with a pension of €100,000, you're paying out an extra €250 every year for the duration of your pension contributions. Overall, the service looks good, but the fees have a little way to go to become fair.

By the way - does anyone know if this allows you to trade OTC markets?

Hi Raskolnikov,

I agree that 0.5% AMC would be better; lower would be better still.

But in fairness to Davys, I understand that the application process alone to get a PRSA approved by the Pensions Board costs a five figure sum. Then there's the bi-annual reporting requirements. And the fact that they cannot refuse someone who wants the functionality and is willing to invest €50 per month. Then there's the relative population size of UK vs Ireland AND the fact that self-directed pension funding is still very much a niche area here, not mass-market so the potential customer base is vastly smaller here than there. Personally, I think they're taking a bit of a gamble at 0.75%, although they could have made it a bit more competitive by offering a lower AMC at a higher fund level.

I've no connection with Davys by the way - if anything, as a broker, they're my competition, although I doubt if they're losing too much sleep over the threat posed by little ol' me.

 

[SPC100]

Thanks a lot for this thread. Very interesting. I might be moving towards this route with my own PRSA. My current PRSA provider will not provide a TER for index tracking funds, so it is hard to compare.

.75% is a very good rate for AMC (in Ireland only...)
I think you should be able to get ETFs for lower than .5%

I noticed the Davys AMC is calculate twice yearly. (as opposed to daily and included in the unit pricing in a typical prsa), I wonder if you have no "cash" in the account, do they bill you, or force sell some of your holdings. Or maybe they insist on a cash buffer

 

[LDFerguson]

I noticed the Davys AMC is calculate twice yearly. (as opposed to daily and included in the unit pricing in a typical prsa), I wonder if you have no "cash" in the account, do they bill you, or force sell some of your holdings. Or maybe they insist on a cash buffer

I know with Standard Life self-directed, they force you to hold a percentage in cash to cover their AMC for a period. If/when the cash runs out, they write to you in advance and give you the choice of either making another contribution or cashing in part of your investment. If you don't reply, they'll go ahead and cash in part of the investment.

I'd imagine Davys would operate a similar system.