AVCs – some basic questions

I was looking for some advice about AVC, really trying to understand some of the basics.

Cornmarket have a set up fee of around €600 and then there is either 100% allocation, or around 95% to 97% depending on lump sum or regular contributions.

Other brokers do not have a set up fee, but there is only an allocation of around 85% in Year 1 and then 95% approx. in following years.

My questions may be very basic. Why do some brokers have a reduced allocation in Year 1 instead of a set up fee? Is there a reason for this and is it important when considering an AVC.

The reduced allocation in Year 1 is for the set up cost, the same as Cornmarket’s €600, I expect.

What is the reduced allocation intended to pay for in following years? When would somebody get 100% allocation.

In this case, the contribution would be around €500 per month and probably increasing in a couple of years.

The insurance companies – Zurich, New Ireland etc get around .75% of my contribution for fund management, which seems consistent for most of these companies.

Are you obliged to go via Cornmarket for some reason?
If not then you should be able to get 100% allocation and 0.75% annual management fee elsewhere (on an execution only basis - i.e. no substantive advice).
E.g. from some or all of the following:

• www.prsa.ie
• www.labrokers.ie
• www.ferga.com

Why do some intermediarites charge higher fees? Because they can.
Or, being generous, because they offer full advice and not just execution only services?

Limestone said:

Cornmarket have a set up fee of around €600 and then there is either 100% allocation, or around 95% to 97% depending on lump sum or regular contributions.

Other brokers do not have a set up fee, but there is only an allocation of around 85% in Year 1 and then 95% approx. in following years.

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And other brokers (e.g. see above - and there may be others out there) don't charge either and give 100% allocation plus a management fee of c. 0.75%.

Limestone said:

Why do some brokers have a reduced allocation in Year 1 instead of a set up fee? Is there a reason for this and is it important when considering an AVC.

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These are typically Occupational Pension Scheme AVCs that don't have any disclosure requirements (like Master Trust Executive Pensions or regular Occupational Pension Schemes) and the reduced allocation (or/and set up fee) pay for the execution of the transaction and the advice you are (will be) getting for the duration of the contract. They're upfront payments (in the main) that are needed by advisors to maintain their business model, or that of their employer.

PRSA AVCs do have a disclosure requirement and the advisory product can have a contribution charge of (up to 5%) and AMCs of circa 0.75% to 1.25%, depending on which one (Standard / Non-Standard) you buy and the service you want/need. A PRSA AVC provider could pay an advisor 20% (of annual contribution) upfront and recoup it from the 5% contribution charge over a number of years.

No matter what type of advisor/intermediary you are, you're going to have annual overheads that have to be paid, before you pay yourself.

PRSA AVCs are more individual contracts as oppose to 'group' contracts (that can have economies of scale of part of a large scheme (but sometimes don't) eg. an occupational pension scheme that has a group AVC attached to it.


Gerard

www.prsa.ie

85% allocation to me sounds extortionate, bordering on criminal. You'd need to have 18% growth in the fund to not lose money, ie the total of your contributions equalling the fund value. Are you sure you have that right?

David_Dublin said:

85% allocation to me sounds extortionate, bordering on criminal. You'd need to have 18% growth in the fund to not lose money, ie the total of your contributions equalling the fund value. Are you sure you have that right?

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Limestone said:

85% in Year 1 and then 95% approx. in following years.

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Still can be bettered easily but not as bad as 85% every year. Looks like commission of €900 in year 1 and €300 per year thereafter. Given the previous posts, the advice at the start and the ongoing advice and service would need to justify the additional cost. I'd be inclined to ask exactly what you're getting for the additional fees.

Thanks for your replies. They are very helpful.

ClubMan said:

Are you obliged to go via Cornmarket for some reason?
If not then you should be able to get 100% allocation and 0.75% annual management fee elsewhere (on an execution only basis - i.e. no substantive advice).

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The person is a civil servant so not obliged to go to Cornmarket.

David_Dublin said:

85% allocation to me sounds extortionate, bordering on criminal. You'd need to have 18% growth in the fund to not lose money, ie the total of your contributions equalling the fund value. Are you sure you have that right?

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I think so

LDFerguson said:

Looks like commission of €900 in year 1 and €300 per year thereafter. Given the previous posts, the advice at the start and the ongoing advice and service would need to justify the additional cost. I'd be inclined to ask exactly what you're getting for the additional fees.

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€900 in year 1 to Cornmarket is close to what would be withheld on 85% allocation, with a €600 monthly contribution.
So they are reasonably comparable.
But, yes, it is important to understand, what the deduction is for in subsequent years.

GSheehy said:

the reduced allocation (or/and set up fee) pay for the execution of the transaction and the advice you are (will be) getting for the duration of the contract.

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The reduced allocation after Year 1 is to pay for ongoing advice. This is important. What would be the type of advice could somebody (civil servant) expect each year for that deduction.

I think a lot of people contribute and then increase as they can afford while ensuring that they are getting tax relief. They probably need advice in the years coming up to retirement but less so before that.