Allocation Rate – What is it and why you should move if you are not getting 100%

What exactly does Allocation Rate mean on my annual pension statement?

You will often see an example given by the life companies when they are showing the benefits of saving for a pension – if you pay in €100 it only costs you €60 after the tax relief of 40% is applied.

What they never say is you pay in €100 we keep €5 and it only costs you €60. Isn’t it funny they never remember to mention this.

If you are not getting 100% Allocation this simply means that the life company is not investing 100% of your money. Either they are keeping it or the broker that set up the plan is getting paid it. This is your money and I believe you should have this money working for you.

If you have an existing pension or savings plan you should know what your Allocation Rate is and if it isn’t 100% you should consider moving it. It may not be that easy to find out, it could be hidden in the yearly letter or you may even have to phone up the company and ask them. Again is it strange they dont go out of their way to highlight they are not investing all your money. I phone these companies all the time and ask what Allocation rate is someone getting many times they have to look it up and get back to you….they don’t make it easy to find out.

Lets look at an example: You may think if you pay in €400 into your pension than the full €400 is paid into your pension. It does not always work like this. When you set up the plan you might have been given a rate say of 95% allocation.

What this means is that the life company keeps the 5% each and every month and invests only €380 of your €400 each and every month until retirement. Now without reliving leaving cert maths – if Mary says €400 per month for 40 years and Patrick saves €380 per month for 40 years. They invest in the same place at the same time who will have more money at the end……I really hope you are thinking Mary!!!

Now it doesn’t take much to follow that if you can improve the allocation rate to 100% then without doing too much you will have more in your pension at retirement or in the savings plan for your kids education, after all isn’t that what it is all about.

First Step is drop an email to Richard@ferrisfinancialplanning.ie I will get in touch and send you a letter to sign to allow me to contact the relevant companies for you. I will find out what rate you are getting, along with what fees you are paying. Next I will compare what is out there in the market and be back in touch to explain what you have and also to explain if there are better options available for you.

Thanks

R