You never get a bill for pension fees, so it’s easy to pretend they’re not happening.
The cash just gets skimmed off your pot before you even see it, meaning your savings crawl along a bit slower than they should. A fraction of a percent doesn’t sound like much, but it can eat up tens of thousands of pounds by the time you stop working. Knowing what you’re paying and where to check your paperwork means you can sort it out before any more money disappears.
Pension fees seem small, but they really add up.
Take someone who saves £250 a month, including tax relief, from the age of 25 until they’re 66. If their investments grow by 5.5% a year, and they pay fees of 0.5%, they would end up with a pot of around £392,000. If the fees were 1% instead, the pot would be closer to £345,000, which is about £47,000 less.
The saving and the investment growth are the same in both cases, so the whole gap comes down to the charge. The pattern continues as fees rise. At 0.75%, the pot would be about £368,000, at 1.25% about £324,000, and at 1.5% about £305,000. These figures are an example rather than a promise, but they show how quickly a seemingly tiny percentage can bite.
Fees tend to slip under the radar for many savers.
Most people never see their pension charges in black and white. Because they’re deducted from the pot before you look at the balance, you only notice the end result. And because they’re a percentage, the pounds you pay grow as your savings grow, so the cost rises quietly in the background.
It’s tempting to think that a higher fee must buy better results, in the way a pricier car often performs better than a cheaper one. Pensions don’t work like that. The more you pay in charges, the less of your investment growth you get to keep, and a low-cost provider can leave you significantly better off over the long run.
What the caps mean for you
If you’re in a workplace pension through automatic enrolment, and you stay in the default fund, your charges are capped at 0.75% of the value of your pot. Stakeholder pensions have caps of 1% or 1.5%, depending on when they were set up. These limits give a useful safety net.
Not every pension is covered in the same way. Schemes that began before automatic enrolment launched in 2012 can charge more. Even within a modern workplace scheme, moving out of the default fund into another one could mean higher charges. Self-invested personal pensions, known as SIPPS, have no cap at all, although many give you access to funds that cost far less than the 0.75% limit.
What your charges consist of
Most modern pensions where the value depends on investment growth have two main running costs. The first is a platform or service fee, paid to your provider for looking after the paperwork and giving you access to your account. The second is a fund charge, paid to the investment managers who run the funds your money is in.
Added together, these make up your overall annual charge. If you also use a financial adviser, their ongoing fee can be added on top. Because these costs are usually percentages, the amount you lose to them is in proportion to the size of your pot.
Extra charges to look out for
Depending on the type of pension you hold, there may be other costs. Some plans charge a fixed yearly fee, typically between £20 and £120, in place of or alongside a percentage. Some older plans charge extra if you stop paying in or leave your employer, although these inactivity fees are banned in default workplace pensions. You might also face a fee for moving your money. These exit charges are banned for personal pensions started on or after 31 March 2017, and are capped at 1% for older personal pensions for savers aged 55 and over. Default workplace schemes can’t charge them at all.
If you manage your own investments in a SIPP, you may pay a dealing fee each time you buy or sell, and a foreign exchange fee when you buy overseas investments. One government-backed scheme charges 1.8% on money paid in, on top of a small management charge, though most providers don’t charge on contributions. Some funds add performance fees when they beat a target, and fund managers also pay behind-the-scenes trading costs, which providers must tell you about. Taking money out in retirement is usually free on modern platforms.
How much is too much?
There’s no single right figure, but there are useful rules of thumb. Percentage-based charges tend to suit smaller pots, while flat yearly fees are often cheaper for pots above about £50,000. When you add the platform and fund charges together, 0.45% or less is generally good value, 0.45 to 0.60% is a middle ground, and anything above 0.6% is starting to look expensive.
Use these as a guide rather than a strict test. Ask yourself whether you’re making use of what you pay for. If you simply want a straightforward, hands-off pension, there’s little point paying extra for a long menu of investment options that you will never touch.
The cheapest pension isn’t always the best.
Providers that keep their charges low often do so by keeping things simple, usually offering basic funds that track a market rather than a wide range of individual shares or actively managed options. That suits many savers well, but it won’t suit everyone. If you want a particular type of investment, the cheapest option might not offer it.
Think carefully before moving a pension just to save on fees. Transferring can carry investment risk, and some older pensions come with valuable benefits that you could lose. Do your research, compare charges and services, and consider free guidance or professional advice if you’re unsure.
How to find out what you’re paying
There are several ways to check your charges. If you have an online account, log in and look for the key features document, which usually lists the fees. Your yearly statements are another place to look, as are the longer information packs that providers send to members over 50. Many providers also publish details of their plans and fees on their websites, although they’re not always easy to spot.
If you can’t find the information, contact your provider directly and ask for a full breakdown of the charges on your pot. Anyone already taking money from their pension through drawdown should receive a yearly statement showing exactly how much they paid in charges, in pounds and pence rather than just percentages. Once you know the numbers, write them down, compare them with the guide above and decide whether a change makes sense.
