PRSA Management Fees - Help on the Mathematics

Hello All,

I'm trying to figure out how the management fees work with PRSAs but I'm getting a little confused.

I recently enquired about my PRSA and they have a .75% management fees. I would then like to figure out how much I pay to these guys over the life of a 20 year contribution but this .75% suddenly translates into a huge figure and I'm wondering where I went wrong (or are these firms earning loads of money for nothing). I put it in a cash fund which basically makes nothing per year.

Lets take the following
10K contribution over 20 years with a .75% per annum mgt. fee.
Does this mean that this .75% charge translate into 7.88% of the fund value over the lifetime of my contributions. That seems like a hugh amount. Basically over the lifetime of the contribution in the above example I'm paying 788 euro per year just for them to hold my money.

Please let me know if I've done something wrong here?

I wish I could just put the money in the bank and get interest with having to go through brokers.......



ContributionMgt. Contribution Mgt. Fee (First entry is the contribution and the second is the management fee)
10000 75
20000 150
30000 225
40000 300
50000 375
60000 450
70000 525
80000 600
90000 675
100000 750
110000 825
120000 900
130000 975
140000 1050
150000 1125
160000 1200
170000 1275
180000 1350
190000 1425
200000 1500
Total management fee 15750
% mgt fee 7.88% over lifetime of fund (200,000/15750)

You are assuming that the 200,000 fund value is your base valuation. But your fund almost never has 200k in it.

Perhaps a better way to do the calculation is a reduction in yield figure.

Assume two return series with an assumed growth rate of say 5%pa

The first series gets 5%paso compound up your contributions using the Future value function in excel.

Pv=0
N=20
I=5
Pmt=10000
This will give you the future projected value of the pension.

Secondly recalculate using an interest rate of 4.25%pa

The difference in the final fund values is the total impact of the annual charge over the term.

However your biggest problem isn't paying 0.75%pa for a pension it's that cash is not an appropriate investment strategy over a 20 year term.

5% is pretty optimistic

Not sure who you are investing with but I've had money in pension for since 1998 and to date my contributions have always exceeded the fund value (That's the reason I gave up and put it all in CASH).

To be honest I've never bought the line given by pensions providers that one would expect a 3% growth over the lifetime of a pension. This might have been the case in the 80s or early 90s but with the fees they charge and the way they manage their funds is quite frankly poor.

Like I said before I'd love to get my secure 3% return in a bank.

I've never claimed on my life assurance either. I guess it's a really bad product I mean I pay the premiums every month but I never see a cent back. I think it's just a scam I think I'll cancel it and use the money I save to go on a sightseeing holiday in Somalia.

Don't confuse process and outcome.

Well I'd tend to agree with the poster, cash has turned out to be about the best fund to be in for the last decade or more. One problem would be when the decision to exit equities was made, several years ago would be good, the last 12 months or so would be not so good.

Fine equities, long run, outperform etc. etc., in reality anyone whose pension contains the last 10+ years has a serious problem, the next 20+ years needs spectacular growth to correct that non performance. They might even have a shorter period to make it up as they're advised to start moving to cash 10 years from retirement anyway.

Funding a pension via larger pension contributions to cash funds, rather than smaller contributions to non-cash funds is a logical choice if someone is in the position they can afford to do that. At least you know where you stand and where you're likely to end up.

I think it's very odd that it costs more to keep a pension cash fund due to pension company charges than what the government will extract via DIRT in a normal deposit account. I really don't think there should be anything but a nominal charge for cash in a pension fund.

For example DIRT on 100k at 3% is 30% so around 1k per year and you end up with 102k.
Charges on a cash pension fund where you might only get 1-2%, is 0.75 so you end up with maybe 101.5k.
[Also for the next three years there's the pension levy of 0.6%, you might do well to end up with 101k as the deductions are close to 1.5%]

There are a number of reasons why pension cash funds pay less than what you can get on deposit: -

• Many pension funds keep their cash funds in non-Irish banks with stronger credit ratings than the Irish banks. Stronger bank = lower interest rate.
• Because of what a cash fund is generally used for, it must be kept in a demand deposit at all times, which generally pays less than a fixed-term deposit.

Should a cash fund have a lower charge than, say, an equity fund? Probably, although contrary to popular opinion, most larger cash funds do have active fund managers to continually research best corporate deposits out there and move parts of the fund as and when required to chase the best combination of rate vs security.

If you're happy enough to have your fund in just one bank, there are a variety of fixed-rate and variable rate deposit funds out there for pensions which place your money on deposit with just the one bank. You can get >5% AER fixed for 5 years at present, less the charge to the pension company (say 0.75% to 1% per year) for issuing and administering your policy.

Liam D. Ferguson