Accounting for bonus units for a switch cost comparison

Hi All,

Was wondering what your approach was for comparing costs where bonus units are involved.

E.G. A pension has an ongoing charge of 1% but has bonus units equivalent to 0.52% p.a which are added to the plan on a monthly basis.

Would you say that the charge is effectively 0.48% net or would you say that the plan has a charge of 1% and the bonus units are a guarantee that the client will be giving up?

Thanks in advance :smile:

Comments

  • Like a discount you mean yeah? I'd go for 0.48% per annum.

  • I guess it's not strictly a discount as they're adding units back into the plan instead of reducing the charge.

    The overall charge is still 1% but they add extra units to the plan each month, similar to a guaranteed growth rate I guess?

  • JonaJona Member

    Is net position of the "bonus" a reduction in charges to 0.48% though.

    If the 1% isn't taken then the "bonus" isn't added - so it effectively a refund of charges.

  • benjaminfabibenjaminfabi Moderator

    This is a common practice for discounting charges when there is a single fund class with a flat AMC for all investors. Bonus units effectively replace 0.52% of the 1% charge.

    This is how Royal London's Pension Portfolio operates, although it doesn't use the same terminology.

    I'd say that the effective cost of the plan is 0.48%. But check that the bonus units are permanent and fixed, otherwise it'll need more calculations.

    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
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