Pension Academy video series

Episode 6: How much do pensions cost?

Key takeaways

You'll usually need to pay your provider an annual management fee to cover the cost of managing your pension.

The fee is often calculated as a percentage of the value of your pension. So if the fee was 1% and your pension was worth £10,000, you'd pay £100 a year.

Some providers, like PensionBee, only charge one fee – the annual management fee. However, other providers might also charge: fund fees, service fees, contribution fees, investment fees and transaction fees.

With some providers, there are also fees: if you withdraw from your pension within the first year or, if you stop paying into your pension for a long period of time.

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As we’ve seen, pensions are a great way to save for your retirement. Not only will the money you invest grow over time, but you can also receive government tax top ups and workplace contributions. It’s a pretty good way to save for the future! But there are some costs involved that you should be aware of.

Usually, you’ll need to pay your pension provider what’s called an Annual Management Fee. This covers the cost of them managing your pension. The fee will depend on the specific pension plan you choose and it’s usually calculated as a percentage of the value of your pension. So if the fee was 1% and your pension was worth £100 you’d pay £1 a year. If it was worth £10,000 you’d pay £100 a year, and so on.

At PensionBee, the Annual Management Fee is the only fee you have to pay for the day-to-day running of your plan. But some other providers can charge all sorts of fees in addition to this, including fund fees, service fees, contribution fees, investment fees, and more. And as I mentioned earlier, not all providers explain this as well as they should. So if you’re not sure how much you’re paying, contact your provider and ask them. You might be surprised!

Another type of fee that’s not often spoken about is the transaction fee. This fee is charged every time investments are bought or sold for you. But transaction fees are really small. At PensionBee, the average cost of all the transaction fees a customer typically pays over a year is around 0.03%. So if you had a £10,000 pension, you’d pay around £3 in transaction fees. In PensionBee’s case, the fee is charged by the money manager - like BlackRock or Legal & General, who make the investments - and it’s taken out of your pension balance as transactions are made, rather than on a monthly or annual basis.

And there are some fees you may come across that aren’t related to the usual daily running of your plan. For example, you may be charged a fee if you take all your money out within a year of opening a pension with a new provider. Or you may be charged a fee if you stop paying into your pension for a long time.

I’d love to tell you how much pension providers charge on average to manage their plans, but the data’s hard to come by - probably because it’s complex to figure out and compare all those fees! But to give you some idea, I can tell you that PensionBee charges 0.50% - 0.95% (halved on the portion of your pension that’s over £100,000), depending on your plan.

Now, it’s important to note that unlike buying something from the shops, when it comes to pensions, price doesn’t necessarily reflect the value of the product or service you receive. For example, you may find a pension plan with a really low fee. But it might not offer an app that lets you check in on your balance or easily make contributions when it’s convenient. Or it might not send you regular reports explaining why your pension’s up or down that month. So don’t assume the pension plan with the lowest fee is the best around. But equally, a pension with a really high fee might not offer those features either. So consider the fee, but remember, the fee isn’t everything.

Of course, fees are important for another reason. Because no matter how much they are, fees erode the value of your pension over time. In other words, they limit your pension’s growth. So if your pension’s investments grow 5% in a year but your fee is 1%, then it’ll actually grow by about 4%. And because pensions invest your money for such a long time, the difference between a pension with a 1% fee versus a 2% fee can be pretty stark by the time you reach retirement. In fact, PensionBee estimates that if two people paid £100 into their pensions every month from the age of 25, and those pensions grew 4% a year until they retired at 65, the one who paid a 1% fee could be over £18,000 better off than the one who paid a 2% fee.*

So, fees make a difference. And you certainly want to look around for a suitable pension plan with a competitive fee. But do be wary of choosing the lowest fee, and look out for hidden fees and additional costs so you’re not caught off guard.

*Assuming standardised assumptions in line with long-term pension returns. Past performance is not a guarantee of future returns.

This video was presented by Patricia Bright on behalf of PensionBee. Patricia Bright isn't a financial adviser and the views and opinions expressed in this informative video are those of Patricia alone and do not constitute financial advice.

The content of this video has been reviewed by the pension experts at PensionBee and was confirmed to be correct and in line with current HMRC guidelines and legislation based on their understanding of current tax legislation as of 4 August 2023.

Remember, as with all investments, your capital is at risk.

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