There is no better way to save for retirement than by investing into a pension. It supports you when you are no longer working and pensions also benefit from generous tax relief. However, even if 2 people paid the exact same amount into their pension every month for the same amount of time, one of them could retire with a vastly smaller pension pot if they have paid higher pension charges.
The lowdown on pension charges
Pension providers tend to charge for their service in a variety of ways, these include:
- management fees
- investment fees
- platform fees
- exit fees
- service fees
- fund fees
- contribution fees
- platform fees
- inactivity fees
- admin fees
When there are a number of pension fees – not always displayed clearly – it can be very difficult to fully know what your pension is going to cost you every year, let alone the costs over its lifetime.
How much do pension providers charge?
There doesn’t appear to be a reputable study which compares the total of all the fees charged by pension providers in the UK. However, one report from a Financial advisor near me suggested that the average annual management charge was alone just over 1%. The total cost is likely to be higher, once other fees are factored in.
Caution, higher fees don’t guarantee higher returns
When it comes to standard purchases – like a new car, for example – it is quite common for a more expensive car to perform better than a cheaper one.
However, with investments, a pension that charges higher fees won’t necessarily lead to better performing investments.
How much can pension charges erode into the value of your pension?
Let us ignore fees, just for a moment and examine how pensions grow over time.
- You pay money into a pension fund
- The fund then invests your money in the stock market, in example
- Should the value of those investments grows, so does the value of your pension
- You later retire with a pension that is worth more than the money you originally invested
Now let’s add pension charges into the mix.
- The overall value of your pension grows by 4% in a single year i.e. from £100k to £104k
- The pension fund charges a fee of 1.00% – which equate to£1,040 from the value of your pension
- Overall, your pension is now worth £102,960 and grew by only 2.96%, as opposed to 4%
The real impact of different pension charges
A difference of only 0.5% may not sound like much, but as you will see in the example below, it can reduce the pension value dramatically.
Let us imagine that 4 people paid £100 into their pensions each month from age 25, and their pensions grew on average by 4% per year until their retirement at 65.
- 50% fee charged annually, Person 1 would retire with £103,375
- 00%fee charged annually, Person 2 would retire with £91,949
- 50%fee charged annually, Person 3 would retire with £80,134
- 00%fee charged annually, Person 4 would retire with £73,262
That difference of 0.5% that appeared to small at the start saw some of them lose out on thousands of pounds in pension growth. Person 4 saw their pension increase 29% less than Person 1, with a difference of £30,113!
Here’s what you can do
To help avoid high charges eroding the value of your pension, you should consider pensions with lower fees. But also remember to stay weary. Pension charges shouldn’t be the only factor when choosing a pension for your personal needs.
Here are a couple of ways you can make sure you are not paying too much.
- Check over your current pension
Dependent on your provider, you should receive an annual pension statement, at the very least. You may also be able to go online and check your statement.
On your statement, try to identify which fees you are paying. Many providers charge more than a single fee, so read it carefully.
Look for any exit fees and if you’re not sure, give your provider a call to check.
Once you fully know what fees you’re currently paying, you will be able to compare them with alternatives.
- Shop around for a better provider
It is very easy to compare pension plans today, as many are available online.
When comparing pension charges, you should also consider:
- are contribution limits?
- who the pension was designed for
- if you can manage your account online
- the risk level of pension plan
- where the money is invested
- the customer ratings of the provider
Combine all your old pensions into one
On average,people work a total of 11 different jobs by the time they retire. Therefore it is very likely you will have a number of pensions from previous employers that are just sitting there dormant.
Its likely been a while since you set them up, so check their charges and consider combining them into a new single plan with lower pension charges.