Understanding your pension fees and charges is crucial when it comes to getting the most out of your savings. One thing is certain, you can’t control the investment market returns but you can control costs. Especially when it comes to defined contribution or money purchase pensions (not final salary).
The financial services regulator, the Financial Conduct Authority (FCA) has done a lot of work in this area over the last few years to make charges as transparent as possible. One of the best new rules was the banning of commission paid to Financial Advisers. You see people have always paid for financial advice even if your adviser never used to charge you anything. They were most likely being paid commission by the pension provider and you in turn were paying higher pension fees and charges.
Whilst today’s modern style pensions are a lot cleaner and clearer when it comes to pension fees and charges, you may still have an older style pension from years back which can have more complex charging.
The main pension fees and charges
If you were to set up a new pension today then you would most likely have the following pension fees and charges deducted from your retirement savings.
Investment Fund Manager Charge
- Also know as an Annual Management Charge (AMC).
- Expressed in percentage terms and paid to each investment management company of the investment funds you choose to invest with.
- You don’t usually see this as a deduction from your pension, the charge is usually reflected in the price of the units of the individual investment fund.
Pension provider or platform charge
- A charge made by the pension provider for administering your pension.
- Can be expressed in percentage terms, a fixed fee or both.
- You will usually see this deducted from your pension account.
Adviser charge
- If you are using the services of a Financial Adviser then if they have agreed with you, they may take their fee from your pension account.
- This could be expressed as a percentage or a fixed fee.
- You will see this deducted.
If you have an older style pension then you may also come across some other types of pension fees and charges such as:
- Initial fee – a fee taken from each pension contribution you make.
- Bid/offer spread – the difference in the price it costs to buy units in an investment fund and the price it costs to sell units.
- Exit penalty – a fee applied if you decide to take early retirement or transfer your pension before a set deadline.
What you need to do about pension fees and charges
The way to increase the size of your pension fund is to reduce pension fees and charges and increase investment performance.
Now there is no guarantee any investment strategy is going to work but there are certainly ways to give you a better chance of your investments performing. For now though, this article is going to continue to focus on charges as this is a guaranteed way to improve overall performance.
When adding up the 3 main costs above and working the overall figure out as a percentage of your pension fund you should hopefully find it is less than 1% per year. Anything higher and you are probably paying too much.
Tips to reduce cost
- Know where you stand regarding all types of charges.
- If there is an exit fee consider whether it is still worth taking the hit in the long run by transferring to a cheaper pension.
- If you work with a Financial Adviser ask them to clarify their fee and what you get in return for service, is it good value?
- Ask your Financial Adviser to consider a fixed fee rather than a percentage based fee. This will be much cheaper in the long run.
- If you have chosen to invest with active fund managers are they beating the general market? If not then why are you paying them for their ‘expertise’, consider low cost market passive funds instead.
As Independent Financial Advisers we have access to the whole market when it comes to knowing pension fees and charges. We are able to work out the lowest cost platform for your individual circumstances. If you would like us to work out the pension fees and charges you are paying, we would be happy to analyse this for you at our own expense. Just give us a call to arrange.
Don’t let your pension savings go towards paying for the retirement of others. Keep more of it for you!
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
