Pensions are one of the smartest ways to save for retirement. Not only do they help fund your future once you stop working, but they also come with valuable tax relief that can boost your savings.
But not all pensions are equal. High charges can eat into your pot so you could end up retiring with less, even if you’ve contributed the same as someone else.
What are pension charges?
At PensionBee, we have a simple fee structure and we’ll halve the fee on the portion of your savings over £100,000. Our one simple annual management fee is between 0.50% and 0.95%, depending on your plan.
However, other pension providers may charge for their service in lots of ways. And when there are multiple pension fees, it can be difficult to know exactly what your pension costs you each year (let alone over its lifetime). Providers could be charging all sorts of different pension fees, including:
- fund fees;
- management fees;
- service fees;
- contribution fees;
- investment fees;
- platform fees;
- inactivity fees;
- *exit fees; and
- admin fees.
*If your pension has been with us for less than a year and you wish to withdraw in full, then a full withdrawal fee of £150 will be applied. This includes if the value of your account is less than £150 at the point of withdrawal.
How much do pension providers charge?
To find out what fees you’re paying on your pension check your annual statement, online account, or the fund factsheet from your provider. If it’s not clear, you can contact your provider directly and ask for a breakdown.
We weren’t able to find a reputable study comparing the total of all fees charged by pension providers in the UK. But you can find out more about PensionBee plan charges on our dedicated fees page.
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 better 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, combined with tax relief and compound interest, so does your pension; and
- you could 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 5% in a year (from £100,000 to £105,000);
- the fund charges a 1% fee (£1,050) on the value of your pension; and
- overall, your pension (now £103,950) grew by just 3.95%.
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 5% per year until they retired at 65.
- With an annual charge of 0.50% - person A would retire with £134,115
- With an annual charge of 1.00% - person B would retire with £118,196
- With an annual charge of 1.50% - person C would retire with £104,466
- With an annual charge of 2.00% - person D would retire with £73,443
Calculated using the Regular Investment Calculator at thecalculatorsite.com
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 fees 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. If you’re in a workplace pension you can also speak to the HR team at your current or previous employer for more information.
Once you know what you’re currently paying, you’ll be able to compare it against other providers.
If you’re a PensionBee customer, you can find your annual statement(s) in your online account - your ‘BeeHive’ - under ‘Account’ and ‘Resources’.
2. Choose the right pension for you
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’s invested ;
- the pension plan’s risk level;
- whether you can manage your account online; and
- the provider’s customer ratings.
If you’re not sure how to choose a pension, read our guide.
3. Combine your old pensions into one
Research by the Centre for Economics and Business Research, on behalf of PensionBee showed that nearly one-in-five UK adults feel certain they have lost or probably lost a pension pot. That’s around 8.8 million people missing out on savings or working longer to achieve a comfortable retirement.
It might’ve been a while since you set some of your old pensions up - maybe you’ve had a few different jobs for example. Check their charges and consider combining them into a new plan with lower pension charges.
With PensionBee, you can combine your old pensions into a single easy-to-manage plan in a few steps.
Risk warning
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.
