At a glance
Like most products and services, pension plans come with charges. These charges range from the fantastically low to the ridiculously high and paying more than you should be will eat away at your savings. In most cases paying more doesn’t mean you’ll get a better service. Often the reverse is true, which means you are effectively paying money for nothing. That’s why it is so important to check your pension regularly, to make sure you are getting the best value for money possible.
What pension charges could I be paying?
Often called annual management charges, these cover the running costs of the system your pension lives on.
Fund / platform charges
These charges are typically low and cover trading fees and all the technology and systems that make trading possible.
Ongoing management charges
These are the charges you pay to a specialist, such as a financial adviser, to manage your pension for you. A 2017 report1 showed that people who invest in financial advice have, on average, over £27,000 more in their pension pots.
How could pension provider charges affect me?
Even small percentage differences in provider charges could have a significant impact on the size of your pot. For example…
Let’s say you are 45 with a pension worth £40,000. The chart below shows how much your pot could be worth after 20 years depending on how much you are paying annually in provider charges2:
|Provider charge:||0.5% per year||1.5% per year||2.5% per year|
|Size of pot after 20 years:||£98,218.65||£80,468.08||£65,914.56|
Paying just 1% more per year in provider charges could reduce the size of your pension by 18%. That figure rises to 33% for a provider charge of 2.5% per year. Typically, the providers we recommend charge 0.5% or less per year.
Why are some pension providers cheaper than others?
Annoyingly, higher pension provider charges do not normally mean a better level of service. Often, these higher charges come down to using old-fashioned systems and a lack of development.
Computers, the internet and digital administration are nothing new. And yet some providers still insist on a paper-based system. As you can imagine, this makes processes slower and more expensive. So, you end up paying more money for a worse service.
On top of this, some pension products have not been reviewed or updated for years. Providers have either forgotten or are hoping that you don’t notice the over-inflated charges you are paying.
Good, modern pension schemes use technology to make everything more efficient, which generally means a better service for less money.
How can I reduce my pension charges?
The best way to make sure you are not paying too much in pension charges is to have a chat with a regulated financial adviser. There are non-advice-based companies out there who offer to reduce charges by combining all your pensions into one scheme.
The problem with this option is that you cannot be sure they will reduce charges. This is because they do not review your current pensions for you, which means they don’t actually know how much you are currently paying. The result could be that you are no better off and you end up losing out.
A regulated financial adviser will analyse your current schemes, including how much you are paying in provider charges, and then compare them with the market to see if there is a better-suited scheme out there for you. It makes sense to be sure before making any final decisions.
What if I am not paying any pension charges?
A few years ago, with profits pensions were fairly popular. And if you have one of these pensions you may have been sold on the fact that there are no charges. Sound too good to be true?
While fees associated with these types of scheme are not transparent, you will definitely be paying somewhere along the line. And, in our opinion, there are a lot of other issues surrounding with profits pensions, so it is well worth taking the time to get them checked, if you have one.
Important Information, References and Links
1The Value of Financial Advice by ILC-UK (Jul 2017)
2 This assumes an annual investment return of 5% before any charges are applied
Size of pot after 20 years:
0.5% per year
1.5% per year
2.5% per year