There are various factors to take into consideration when trying to determine what your pension will be worth when you retire. For instance, the effect inflation will have on your savings. But one factor that few people take on board is pension charges. They can seriously reduce your pension so understanding how they work can help you maximise your returns on retirement.
It is good news that modern pension funds have less charges than older schemes. So it is definitely worth checking with your provider or a regulated financial adviser what rules apply to your fund and what charges you are actually paying.
Currently there are two types of pensions. The most popular is the defined contribution pension scheme (DCP). This is where final returns are fundamentally dependent upon how much you contribute. A defined benefit pension scheme ( DBP) are tending to go out of fashion now as employers often find them too expensive. Pay out will be dependent upon how long you worked for the company and how many years you have been there.
In a DCP, all workplace charges are paid by the employer but it could be that at time of retirement you will have some charges to pay so it is well worth checking this out.
You can find out how you are charged and what that figure is on your yearly reports or through your pension providers website.
A stakeholder pension is very much like a DCP but it is especially useful for individuals on low income or who are self-employed (i.e. may struggle to provide a set amount per month). Fees include management charges (these charges are capped at 1.5% for the first decade and at 1% after);
SIPP (self-invested personal pension)
This is for people who understand the world of investment and want to have the flexibility to invest where and when they want. Therefore, management charges are minimal and are more focussed on where funds are being invested.
All pension schemes are different but typically they are split into three areas: (1) an annual management charge; (2) a platform charge and (3) a fund charge.
The above titles probably explain themselves but just to be clear: the “management charge” is the cost paid to the pension provider for any admin which needs to take place for processing your pension. The charge can be a set amount or a percentage of your overall fund. The “platform charge” sounds a little more vague, but is basically the cost of the marketplace where shares are bought and sold. The “fund charge” is to do with the individual funds in which your money is invested. Each fund will have its own costs paid to the fund manager.
Other charges to look out for are “inactivity fees” (paid to a provider if you cease to contribute to your fund) and “exit fees”. Now hopefully you will not need to worry about the latter too much as they tend to be used with older schemes but make sure you know whether they are in place on your scheme, and the rate, in case you want to transfer out of the fund. There may also be “pension transfer fees” or a “policy fee”. No scheme contract will be the same so you need to understand where those little charges maybe hiding and when they become applicable.
According to telegraph.co.uk nearly half of pension savers in the UK have charges above 1%. This is considered expensive so if you believe your charges are too high, this maybe the time to look around at other funds or providers. Clearly, whether your employer pays them or not, higher charges will be taken away from your final pay out when you retire.
Unfortunately, yes. But then this is perhaps to be expected. Charges are fundamentally to cover administration.
The Pension Freedoms Act
In 2015, the conservative government updated pension laws to allow people to access their private retirement funds from the age of 55 (the Pension Freedoms Act). Following this change, pension drawdown has become a very popular way to access pension funds and continue to invest in your retirement funds. This method of accessing your pension is not right for everyone as it will leave you worse off in retirement. It is also true that some “old-style” pensions do not allow this provision.
However, wherever you are in your career, it is worth checking out when you can access your savings with your pension scheme and also what charges (and taxes) it may trigger.
Admin charges will include platform charges and fund charges as well as the cost of continuing investment and trading. The majority of providers will have a tier system where charges are dependent upon how much is taken out. The lower the amount taken out of your fund, the lower the charge.
You cannot always reduce charges directly but you can consider whether there may be alternative funds or providers where charges may be less invasive. As we have already said, higher charges are generally linked with older pensions (in 2015 a cap was placed on overall pension fees).
But transferring your savings to another fund or provider should not be done without a great deal of thought beforehand. Your pension may offer unique benefits such as great performance; destination schemes may also contain obstacles such as “exit fees” or “pension transfer fees”.
Also, which provider or fund will offer the best return depending on your unique life needs and goals? 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. Here at Pension Access we can offer you such consultations and you can rest assured that any adviser keeps to standards laid out by the Financial Conduct Authority (FCA).
Charges on pension schemes pay for processing, administration and quality of a specific fund. Each individual scheme will present with different charges so it is worth getting to know how your fund works to maximise retirement pay-out. Get to know the finer details of your pension pot by contacting your provider (or speaking to Human Resources if it is an occupational pension) or seek out the advice of a regulated financial adviser.
We are authorised and regulated by the Financial Conduct authority. This means we can help you to make the best possible decisions when it comes to your pension.