Blog » Hidden pension fees: An introduction

Hidden pension fees: An introduction

November 13, 2023
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.

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.

What are hidden pension fees?

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.

Keeping within the rules

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.

What are the most common pension fees?

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

Other charges to look out for:

  1. Inactivity fees: this is paid to a provider if you stop contributing to your pension. To avoid inactivity fees, you should check with old pensions you may have, for example from previous jobs. Consulting with a regulated financial adviser can offer advice on what to do if you are being charged inactivity fees, such as transferring your pension funds to your current provider.
  • Exit fees: you may be charged an exit fee if you transfer your pension or withdraw your savings. These kinds of fees tend to be used with older schemes since they were banned for pensions started after 31 March 2017. If your pension is older than this, early exit fees are capped at 1% of the value of the member’s benefits.
  • Pension transfer fees or a policy fee: there are often fees associated with buying and selling your pension investments which generally occur if you are transferring to a new pension scheme. Policy fees are sometimes added on top of management fees. You should check with your specific provider to see if this fee is applicable to you.

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.

Should I transfer?

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.

One last thing: Passive and active funding

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.

Conclusion

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.oxfordshire.gov.uk/business/oxfordshire-pension-fund/pension-fund-employers/leaving-and-retirement/hidden-costs-retirement#:~:text=The%20hidden%20cost%20%28sometimes%20known%20as%20the%20capital,to%20bring%20a%20member%E2%80%99s%20pension%20into%20payment%20early.

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.gov.uk/government/news/government-requires-providers-to-disclose-all-hidden-pension-charges

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics/pension-scheme-charges

https://www.gov.uk/government/publications/occupational-pensions-capping-early-exit-charges/implementing-a-cap-on-early-exit-charges-for-members-of-occupational-pension-schemes#:~:text=early%20exit%20charges%20in%20existing,after%20these%20rules%20take%20effect

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