Pension fees of 1% instead of 0.5% could cost savers £47,000, analysis finds
Research cited by Which? shows doubling annual pension charges from 0.5% to 1% can shrink a retirement pot by tens of thousands of pounds.
£47,000 difference from doubling fees
Pension savers could end up £47,000 worse off at retirement simply because of higher annual charges, according to analysis from investments firm Vanguard reported by Which?.
The research modelled someone paying £250 a month, including tax relief, into a pension from age 25 to 66, a period of more than 40 years, with an assumed annual investment return of 5.5%. With fees of 0.5% a year, the pot would be worth around £392,000 at retirement. If fees rose to 1% a year, with everything else unchanged, the same saver would end up with around £345,000, a shortfall of roughly £47,000.
Because the monthly contributions and investment growth are identical in both scenarios, the entire £47,000 gap is down to the difference in charges.
Why fees are easy to miss
Pension fees are deducted directly from the pot rather than billed separately, which Which? says means they can go unnoticed even though they take a significant chunk out of long-term savings.
Workplace pensions under auto-enrolment, which launched in 2012, have fees capped at 0.75% of the pension’s value if the saver stays in the default fund. Stakeholder pensions are capped at either 1% or 1.5%, depending on when the scheme was set up. Savers with pension schemes that predate auto-enrolment can be charged more, and even within modern auto-enrolment schemes, switching out of the default fund can mean higher charges apply.
James Norton, head of retirement and investments at Vanguard Europe, said: “When buying a car, it’s common for a more expensive vehicle to perform better than a cheaper one. So, you may think that higher fees should lead to better investment outcomes. But the higher the fees you pay, the less returns you get to keep for yourself. Our analysis shows that if you keep your pension pot with a low-cost provider, in the long term you could keep significantly more of your returns and significantly improve your retirement.”
Norton also noted that moving a pension carries investment risk.
What charges can include
Modern defined contribution pensions typically involve two main ongoing costs: a platform or service fee paid to the provider for administration and account access, and a fund charge paid to investment managers for running the portfolio. Depending on the type of pension held, savers may also face additional charges such as service or policy fees, inactivity fees, exit or transfer fees, dealing or transaction fees, foreign exchange fees, contribution charges, performance fees, portfolio transaction costs, or drawdown and withdrawal fees.
What happens next
Savers can check what they are being charged by logging into their online pension portal, checking annual statements, visiting their provider’s website or contacting the provider directly. Anyone already taking money through drawdown must by law be told each year, in pounds and pence rather than just percentages, exactly how much they have paid in charges.