Anyone know what the above two charge figures represent in relation to pension funds? And how they relate to a figure called the "total management charge" on units?
Older type pension products have this charging structure. Effectively it works like this:
- The first two years contributions (and the first two years of any subsequent increase in contributions) are invested in "initial units".
- Year 3 contribution and onwards are invested in "accumulation units".
- Accumulation units will typically have an annual management charge of 0.75%
- Initial units though will typically have an annual management charge of circa 4.75%
The net result is that contributions invested in Initial Units will grow at a much slower pace than contributions invested in Accumulation units. It is through this mechanism that the pensions office recovers their up-front costs (commissions etc).
This is not a very transparent structure, but would be roughly equivalent to the first year's contribution going in charges.
Thanks Conan. So basically they whittle away most of the first two years contributions over the life span of the policy? If they are deducting an extra 4% (over and above the regular fund management charges) from the units built up in the first two years then it would seem that they'd recover about (assuming zero stock market growth) 70% of the first two years contributions over 30 years?
darag,
That's one way of looking at it. But its probably unreasonable to assume zero growth (why invest in such a fund). In reality if you assume a gross 6% p.a. growth (on average) over the term, then initial units will deliver 1.25% (6% less 4.75%) whilst accumulation units will deliver 5.25% (6% less 0.75%).
On this basis both values will grow, but the initial unit value will just grow much more slowly.