There’s no better way to save for retirement than investing in a pension. As well as supporting you when you’re no longer working, pensions benefit from generous tax relief. But even if two people paid the same amount into their pension each month, one could retire with a significantly smaller pension pot if they paid higher pension charges.
What are pension charges?
Pension providers may charge for their service in lots of ways.
PensionBee has a simple charging structure. We charge a single annual management fee, with 50% off on the portion of your savings over £100,000. If you drawdown everything within 12 months, a full withdrawal fee of £150 will also be charged.
It’s simple enough that you could probably recite it back pretty easily.
But other providers may charge all sorts of pension fees, including:
- fund fees
- management fees
- service fees
- contribution fees
- investment fees
- platform fees
- inactivity fees
- exit fees
- admin fees
When there are multiple pension fees - and not always displayed as clearly as they should - it can be difficult to know exactly what your pension costs you each year (let alone over its lifetime).
How much do pension providers charge?
We weren’t able to find a reputable study comparing the total of all fees charged by pension providers in the UK. However, one report suggested that the average annual management charge was alone around 1.09%. The total cost would likely be higher, after other fees are priced in.
For context, PensionBee’s single annual fee is between 0.50% and 0.95%, depending on your plan.
Higher fees don’t guarantee higher returns
When it comes to regular purchases - like a car, for example - it’s common for a more expensive product to perform better than a less expensive one.
But when it comes to investments, a pension with higher fees won’t necessarily lead to performing investments.
How much could pension charges erode the value of your pension?
Let’s ignore fees for a moment and look at how pensions grow over time.
- You invest money into a pension fund
- The fund invests your money in the stock market (for example)
- If the value of those investments grows, so does your pension
- You retire with a pension that’s worth more than the money you invested
Now let’s add in pension charges.
- The value of your pension grows by 4.00% in a year (from £100,000 to £104,000)
- The fund charges a 1.00% fee (£1,040) on the value of your pension
- Overall, your pension (now £102,960) grew by just 2.96%
The impact of different pension charges
A difference of just 0.50% might not sound like much, but as you’ll see in the example below, it can reduce the pension value significantly.
Let’s imagine that four people paid £100 into their pensions every month from the age of 25, and their pensions grew an average of 4% per year until they retired at 65.
- With an annual charge of 0.50%, Person A would retire with £103,375
- With an annual charge of 1.00%, Person B would retire with £91,949
- With an annual charge of 1.50%, Person C would retire with £80,134
- With an annual charge of 2.00%, Person D would retire with £73,262
That seemingly small difference of 0.50% saw some of them lose out on thousands of pounds worth of pension growth. Person D saw their pension grow to be £30,113 (29%) less than Person A! (1)
What can you do?
To avoid high charges eroding the value of your pension, you’ll want to consider pensions that charge lower fees. But be weary. Pension charges aren’t the only consideration when choosing a pension for your needs.
Here are a few ways you can make sure you’re not paying over the odds.
1. Check your current pension
Depending on your provider, you’ll receive an annual pension statement at the very least. You may be able to check your statement online.
On it, you’ll want to identify which fees you’re paying. Many providers charge more than one fee, so read through it carefully.
Look out for exit fees. And if you’re unsure, call your provider to check.
Once you know what you’re currently paying, you’ll be able to compare it with alternatives.
2. Shop around
It’s easy to compare pension plans these days, as most are available online.
As well as comparing pension charges, you’ll want to consider:
- who the pension is designed for
- where it invests its money
- the pension plan’s risk level
- if there are contribution limits
- whether you can manage your account online
- the provider’s customer ratings
If you’re not sure how to choose a pension, read our guide.
Combine your old pensions into one
The average person works 11 jobs by the time they retire. So it’s likely you’ll have a few pensions from previous employers sitting dormant.
As it’s been a while since you set them up, check their charges and consider combining them into a new plan with lower pension charges.
PensionBee is a leading online pension provider. Our online service allows you to combine your old pensions into a single easy-to-manage plan.
We charge between 0.50% and 0.95% depending on your plan, with 50% off on the portion of your savings over £100,000. To avoid any doubt, we’ll even display the fee in your annual statements using pounds and pence.
Plus it’s also free to make withdrawals, unless you drawdown everything within 12 months in which case a full withdrawal fee of £150 will apply.
1) Calculated using Candid Money’s Fund Charges Impact Calculator
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.