How to choose a PRSA?

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Maybrick

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My partner and I would both like to start PRSAs this year. Can anybody advise us on what are the most important questions to ask pension providers when they are trying to sell you one of their products? We are not particularly financially literate so would like something low-risk and low-maintenance, but obviously don't want to get ripped off by excessive charges/commissions either.

Any advice much appreciated, thanks.
 
First of all, you should make sure that a PRSA is the most appropriate product for your needs.

Second, you should get a clear understanding of how pensions work in your situation, which you can do here.

Third, get a detailed breakdown of your allocation rate, your annual management charges and any other charges/fees applicable (If not a PRSA plan)

Fourth, ask what funds they are recommending and the reason why they are recommending them.

Fifth, ask about the ongoing service level you can expect in return for the charges you are paying.

Kevin
www.thepensionstore.ie
 
And, since you've said that you're 'not particularly financially literate', your advisor should also be able to challenge your preferences by balancing your stated desire for low risk investment options with the ultimate outcome you want to achieve.

For example, if you have a 20 year time horizon then you will need to be mindful of inflation (@2.5% p.a) which can erode the purchasing power a fund by 39% over 20 years.

Over 30 years it would be 52% which means that a low risk investment option may not be the best thing for you to do long term.

Kevin
www.thepensionstore.ie
 
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kevhenry said:
And, since you've said that you're 'not particularly financially literate', your advisor should also be able to challenge your preferences by balancing your stated desire for low risk investment options with the ultimate outcome you want to achieve.

For example, if you have a 20 year time horizon then you will need to be mindful of inflation (@2.5% p.a) which can erode the purchasing power a fund by 39% over 20 years.

Over 30 years it would be 52% which means that a low risk investment option may not be the best thing for you to do long term.

Kevin
www.thepensionstore.ie
Click to expand...

Thanks Kevin. We are fairly sure that a PRSA is right for us and we have a reasonable knowledge of how pensions work. We just don't know much about how to choose a fund or what kind of charges are reasonable to expect. That's why we'd like to know exactly what questions to ask before sitting down with someone who is going to try and sell us a product. Or, to put it another way, what are the most common mistakes that people make and don't realise until it's too late?
 
A PRSA is pretty straight forward. The maximum contribution charge is 5% e.g. you contribute €100 but €95 is invested. The other charge is the annual management fee which cannot be more than 1% on a standard PRSA. Non standard PRSA's can have a higher charge.

Personal pension plan can have much more flexible charging structures and you can pay less than 1% annual management fee. The contribution charge varies depending on the size of your contribution.

If you pay a fee instead of a commission, you can reduce the charges.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Maybrick said:
My partner and I would both like to start PRSAs this year. Can anybody advise us on what are the most important questions to ask pension providers when they are trying to sell you one of their products? We are not particularly financially literate so would like something low-risk and low-maintenance, but obviously don't want to get ripped off by excessive charges/commissions either.

Any advice much appreciated, thanks.
Click to expand...

What's the contribution charge?
What's the Annual Management Charge (AMC)?
(If it's a non-PRSA pension product - What are the exit charges?)

All the other 'stuff' (like online access, switching funds, reducing/increasing/stopping contributions etc. etc.) is secondary

If you improve your financial literacy through using this website and doing your own research, you can freely buy a PRSA with 1% AMC and 0% Contribution Charge on an execution only basis.

There are online Risk Profilers that you can use if you've a dilemma about matching Funds with your appetite for risk.
 
Most mistakes are the result of decisions being made in isolation rather than being directed from an overall strategy.

Having a ‘big picture’ is important because your overall plan will need to strike a balance between these three variables;

1. The Age You Want to Retire
2. The Amount of Income You Want to Have Each Month
3. The Cumulative Value of Your Retirement Assets at That Time

The extent of choice you have with variables #1 and #2 will fully depend on the outcome of variable #3 so this is where your focus should be.

There are many factors that will influence this but here are 3 'mistakes' that people tend to make when investing long-term;

Focussing on Charges Over Returns
There is no doubt that high charges can cause a significant drag on the performance of a fund. However, with higher annual management charges, you’re usually paying for the opportunity to outperform the market.

So, if you’re getting higher return potential for the higher cost then they’re probably worth paying. But if you’re just paying higher charges from being with an expensive distribution channel, then they’re not.

Under-Appreciating Risk Factors
The prospect of losing money isn’t nice but the potential for growth only comes with exposure to the possibility of loss.

Investment risk is but one of the many risk factors associated with pensions and they all need to be managed.

If you take on a lot of investment risk near retirement then there is a chance that you could lose a lot of money very suddenly and won’t have sufficient time to recover from it. Like what happened to many people in 2008.

If you take on too little risk when you're younger then there’s a good chance that you will lose money in real terms from inflation.

Risk is inherent with investing but having a clear outcome goal from the start will help you settle on the appropriate balance given your stage in life.

Decision Making
When people try to ’time’ the markets they typically get it wrong.

It’s well documented that most people who try to jump out of a falling market do so when it’s too late and then scramble back in when the recovery has already happened.

One bad decision, or a series of poorly timed ones, can cost more than a lifetime worth of charges.

Kevin
www.thepensionstore.ie
 
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Thanks for all those replies, they're very helpful. Just one question for GSheehy - what exactly does "execution only basis" in the context of getting a 0% contribution charge? I understood that 5% was quite standard, so reducing or even eliminating that would obviously be very attractive.
 
Execution Only is where you select the product provider/pension company, you select the type of pension product and you select the fund/s to be invested in. The intermediary or agent providing this service can't give you advice on these.

They can help with competing the application form, answering questions on the product features, provide information on, say, backdating contributions and claiming tax relief, or other technical questions like transfers from other schemes/PRSAs etc. etc.
 
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