Are you aware of what fees can be charged on your transferred pension? When you enlist the help of a financial adviser, you’ll pay ongoing fees that are based on the value of the total pension amount.
To make sure that you’re not paying too much in fees and that your pension continues to grow, it’s important that you understand what to expect and what constitutes reasonable fees.
Ongoing fees that are 1/3rd more expensive compared to funds that charge fees to transfer may mean that your pension will not grow as well as it should.
WHAT IS THE MANAGEMENT EXPENSE RATIO (MER) AND WHY DOES IT MATTER?
The Management Expense Ratio (MER), otherwise known as an Expense Ratio (ER) is a measure of how much of a fund’s assets are used for administrative or operational expenses. This matters because it impacts the overall value of the fund, and therefore your investment returns. Part of the MER are the fees that you pay to your investment advisor.
WHAT’S THE DIFFERENCE BETWEEN A UK MER AND A NEW ZEALAND MER?
It’s one thing to transfer your pension, but what happens next? In the UK, your pension was held and managed by a major pension provider. Most pension members paid little attention to how their funds were being managed. You had few options. You vaguely knew there were fees but accepted them. They were not a concern because you knew all pension providers charged similar fees.
If you had a SIPS (Self Invested Pension Scheme) you probably chose it because you wanted greater involvement with your retirement savings.
Now, in New Zealand it’s different. Your UK pension provider will convert your funds into a cash amount and send them to your chosen New Zealand QROPS (Qualifying Recognised Pension Scheme).
You now have a lot more choices.
LET’S EXPLORE FUNDS THAT DON’T CHARGE FEES TO TRANSFER. WHAT WILL YOUR ONGOING FEES LOOK LIKE?
There are four main areas to consider:
1. YOUR INVESTMENT ADVISER WILL ALWAYS CHARGE AN ON-GOING SERVICE FEE.
This fee is generally around 1% +/- 0.3%. The fee may vary based on the amount invested. Higher investments may incur lower fees.
2. NOT ALL MERS ARE CREATED EQUAL: DON’T BE TEMPTED BY FREE TRANSFERS
All fund managers charge MERs, whether or not they charge you for the initial transfer. Some are very high and others very low, and often this number is based on whether or not they have charged a transfer fee. For example, a firm that doesn’t charge entry fees might have MERs of 2.5% – 2.95% a year, while a typical fund that does charge transfer fees might only have MERs of 1.55%.
If an adviser offers a free transfer, be sure to compare their ongoing service fees with other advisers, and weigh up the benefits by looking at your transfer amount. The money you save in the short term could be easily eclipsed by the money you lose by paying a higher percentage on the MER.
Obviously, if you are paying an additional 1% more per year in fees just because the MER is uncompetitively high, you will not earn as much money on your investment. If returns are low, say 3%, a fund with a high MER of 1% more than a typical fund means you will only earn 2% a year. This means you are missing out on 1/3rd of your potential investment returns. That’s a lot in exchange for a free transfer.
If your adviser recommends Smart Beta funds you will have seemingly unbelievable diversification and a MER of less than 0.5%. How can this be? Your adviser who recommends those types of funds will explain them to you.
3. INVESTMENT PERFORMANCE OF THE FUNDS
What about the way the funds actually perform? Usually, the New Zealand pension transfer specialists who transfer pensions without charging initial fees are employed by large companies and are only permitted to recommend funds created by the firm that employed them. These funds often have very high MERs. Will the adviser remember to explain how the fund they have recommended is performing?
4. INVESTMENT INDUSTRY BIAS
What if the investment returns on those funds are consistently lower than alternative funds that cannot be recommended because the adviser is restricted to recommending only the poorly performing funds? What if you are losing 1-3% a year on the investment returns and paying 1% more a year on the higher MER? If your adviser is restricted in what they can recommend, this is a potential pitfall. An independent transfer specialist is not bound by industry biases, and is able to make decisions to increase your investment return based on industry-wide research.
Knowing this, do you still want to transfer your pension without paying fees?