Tax treatment depends on your circumstances and is subject to change
Navigating the world of pensions without a professional guide can be daunting. When trying to determine the right scheme for your retirement needs, it is important to know all of your options. While exploring these options you need to keep potential hidden fees in mind. Costs deducted throughout the life of your investment can play an enormous part in your final retirement pot.
This guide will explain what hidden pension fees are and how they may be impacting your pension.
Being aware of these fees before you begin paying into a new pension can help to make sure you have chosen the best pension option for you and to minimise unnecessary expenses.
In many cases, pensions come with associated fees and charges. These charges are sometimes hidden in the small print or footnotes of your contract. For that reason, you may be paying fees that you are unaware of which could be reducing the size of your pension pot.
These fees differ depending on the pension provider and scheme you have; it is important to be aware of them because, in most cases, no matter how your pension investments are performing, you will still be expected to pay the associated fees.
They tend to be numerous, diverse, and may only come into play in specific situations (i.e., exit costs). Some of these fees include policy fees, administration fees, annual management fees, etc.
Over the last decade or so, the government has tightened rules regarding pension fees. While this is good news for many with newer pensions, it is likely that the older your pension fund, the higher your fees are likely to be. For instance, in 2015 the government set a cap on the annual amount that can be charged on default arrangements within defined contribution pension schemes used for auto-enrolment. This is capped at 0.75%. However, this rule only applies to pensions started after 2015. Older schemes could be hit by a much higher percentage.
If it seems difficult deciphering the small print, you can approach the provider themselves or seek the guidance of a regulated financial adviser. There are a lot of different types of fees, not all will apply to your pension. For this reason, it can be difficult to track which is important for you to know. To make this easier, we have categorised the different types of fees below.
All pension schemes are different, but typically, you will see three fundamental fees:
(1) An annual management fee: this is the fee paid to the pension provider in exchange for the management, maintenance, and administration of your pension. It also includes the fee for investing your contributions in the marketplace. This is paid annually as either a stated amount or a percentage of your overall fund. Policy fees are usually included in your annual management fee, but some older pensions might be charged a policy fee separately.
(2) A platform fee: the cost of investing your money in the marketplace. It is separate from the annual management fee as different investment platforms will attract specific costs.
(3) A fund fee: this fee pays the money managers who manage your investment funds.
Other charges to look out for:
Please note that our opinion on fees and charges are subject to current legislation, which may be liable to change. You should check with your provider regarding their specific fees.
If you are aware of hidden costs in your pension you may consider transferring your money to another fund or provider. But be aware, changing pensions is about balancing penalties and benefits. For instance, another scheme may have more favourable costs but will your investment performance be as good?
Transferring your savings to another fund or provider should not be done without a great deal of thought beforehand. It is important to consider your individual circumstances and financial needs before transferring pensions. The guidance of a regulated financial adviser is highly recommended to navigate the world of pensions and allow you to move your money safely and to your best advantage.
Pension Access is authorised and regulated by the Financial Conduct Authority (FCA). Discover more about how we could help you.
If you are looking at the number and rate of costs then you also need to be aware of passive and active funding.
Basically, with passive funding, your money is left to fall or grow as the market dictates. With active funding, a fund manager determines how much of your money will be invested on a specific platform and for how long. Passive funds have lower management fees – it is worth considering which type of funding is best for your individual circumstances.
A study carried out over a decade by the Bayes Business School found that, on average, the latter approach did not necessarily lead to better outcomes for clients. Investments did not necessarily thrive substantially and any profits to the fund were offset by costs paid to the fund managers.
Consulting with a regulated financial adviser can help you to make sure your money is invested in the best way for you.
All pension schemes have costs to do with administration. Unfortunately, these costs tend to be invisible as they are often taken out of your money indirectly. Since 2015 in the UK, boundaries have been put around these costs to show fairer and clearer fees. Changes can be made once you are aware of these fees (through fund transfer for instance), but as the pension world can be confusing, it is always worth seeking out the guidance of a regulated financial adviser to help you navigate your options.
https://www.pensionbee.com/pensions-explained/pension-basics/what-pension-charges-will-i-pay
https://www.theguardian.com/money/2022/nov/05/pension-fees-save-thousands
https://www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics/pension-scheme-charges
We can help you to make the best possible decisions when it comes to your pension.
Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.
