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High pension fees could quietly knock thousands of pounds off your retirement pot, according to recent analysis.
Research from investments firm Vanguard shows that letting your annual fees creep from 0.5% to 1% can shrink a pension that would have been worth £392,000 at retirement down to £345,000, leaving you £47,000 worse off.
As both scenarios assume the exact same monthly savings and investment growth, that £47,000 gap comes down purely to higher management charges.
Since pension fees are taken directly out of your pot rather than sent as a bill, they often slip under the radar – despite taking a huge bite out of your savings.
Here, Which? explains why taking an interest in your pension fees matters, what charges you could see, and how to find them.
If you have a workplace pension through auto-enrolment, your fees are capped at 0.75% of the value of your pension if you stay in the default fund.
Stakeholder pensions are capped at 1% or 1.5%, depending on when they were set up.
Those who have pension schemes that predate auto-enrolment – which launched in 2012 – can be charged extra.
Even within modern auto-enrolment schemes, if you switch to another fund, the charges could be higher.
There's no cap on the fees charged by self-invested personal pensions (Sipps). However, one of the main attractions of a Sipp is giving you access to a much wider range of investments, including funds with charges far below the cap of 0.75%.
There are two main types of pensions, Defined Benefit (DB) and Defined Contribution (DC). With DC pensions, investment growth directly impacts how much money you will have in retirement, and your provider charges fees to cover the costs of managing and investing your money.
These fees are taken directly out of your pension and, as fees are often taken as percentages, the amount you lose to them is proportionate to the amount you have saved in your pension.
Vanguard analysed how fees affect a pension pot where someone pays in £250 a month (including tax relief) for more than 40 years, from age 25 to 66.
The higher the fees you pay, the less returns you get to keep for yourself
Assuming an annual investment return of 5.5%, it found that paying 0.5% a year in fees results in a pension pot of around £392,000. However, if fees double to 1%, the pot grows to around £345,000 – a difference of approximately £47,000.
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.'
However, Norton noted that moving your pension carries investment risk, so before taking any steps you need to do your research.
| Annual charge | Retirement pot at age 66 |
|---|---|
| 0.5% | £392,000 |
| 0.75% | £368,000 |
| 1.0% | £345,000 |
| 1.25% | £324,000 |
| 1.5% | £305,000 |
Source: Vanguard. This hypothetical scenario is for illustrative purposes only and doesn’t represent a particular investment or its expected returns. Assumes an annual return of 5.5% and monthly contributions of £250 (including tax relief) from age 25 to age 66.
Whether you’re unsure if you have enough to retire, or are already accessing your savings, our money guidance service can talk you through your options. Which? Money members get unlimited access to them via phone.
Find out morePension charging structures vary between providers, however, modern DC pensions typically involve two main ongoing costs.
These are a platform (or service) fee paid to your provider for administration and account access, and a fund charge paid to investment managers for running your portfolio.
Together, these form your overall annual provider charge. If you use a financial adviser, their ongoing advice fee can also be added to this overall fee.
There may be extra charges, depending on what sort of pension you hold:
Find out more: What can I do with my pension pot?
Which? pensions expert Paul Davies says:
A rule of thumb is that percentage-based fees are generally cheaper for smaller pots, while flat annual fees are often more cost-effective for larger pots over £50,000.
When it comes to percentage fees, combined platform and fund charges of 0.45% or less tend to be more cost-effective, while 0.45% to 0.60% is more of a middle ground. Anything above 0.6% is starting to get a little pricey.
Sometimes the pensions with the lowest fees might not be the right option for you
However, pension providers with lower fees tend to keep their rates down by keeping things simple – focusing on basic passive index trackers rather than offering huge, expensive menus of individual shares or active funds. So, sometimes the pensions with the lowest fees might not be the right option for you and your retirement savings plan.
To figure out if a pot works for you, take a deep dive into your scheme to find the fees you're paying, then ask yourself if you're actually using what you're paying for. If you just want a straightforward 'set and forget' pension, there's no point paying a premium for fancy investment extras you'll never touch.
You can typically find how much your pension is charging you in fees a few different ways. You can:
If you are already in drawdown, providers are legally required to inform you each year of the exact amount paid in charges, presented in pounds and pence rather than percentages alone.
Find out more: Isas vs pensions
Select the option that best describes your current situation.
