If you have a pension, you are paying pension charges, there is no way to avoid them completely. But if you understand the different charges, you can minimise them and the better chance you have of building a larger pot. Here we explain all the different fees and charges associated with pensions.
What are pension charges?
Pension charges are any fees that are levied on your pension. All pension providers charge for their services, but they all do so differently. There are a range of pension charges that you need to be aware of as they can make a significant difference to the eventual value of your pot.
Annual management charge
This is the charge you pay to your pension provider to cover the cost of running your pension. This means paying administrative costs such as preparing statements and investing your pension contributions.
The annual management charge on a pension can be a flat fee or a percentage of your overall pot. The average annual charge is 1.09%, according to pension adviser Profile Pensions, but this is still quite high with anything over 1% classed as expensive by the firm. It is possible to get an annual management charge of under 0.5%.
Some providers may charge you a platform fee for managing your pension investments. This is similar to an annual management fee and is often levied by online pension providers.
Underlying fund fees
Within your pension you are exposed to at least one investment fund. These come with their own fees which are paid to the fund manager.
If you self-select your funds then your underlying fund fees could be higher.
You can reduce your underlying fund fees by opting for tracker funds rather than actively managed funds as these tend to have lower charges.
If you joined your workplace pension after 2015 then there is a charge cap of 0.75% in place so long as you use the default fund.
Occasionally a pension provider will charge you a fee if you stop making contributions to your pension. This can be called an inactivity fee or be spun as discounts for active members.
Make sure you check any old pensions you have to ensure you aren’t being charged an inactivity fee, or your fees haven’t gone up because you stopped contributing. If they have, you may want to consider transferring your pension either to wherever you are currently making contributions or to a provider who doesn’t charge this fee.
If you decide to transfer or withdraw your savings from your pension your current provider may hit you with an exit fee.
Following the introduction of the pension freedoms in 2015, the Financial Conduct Authority expressed concern that exit fees (which could be as high as 10%) were preventing over 55s from accessing their pensions.
As a result, it banned these fees for new pensions started after 31 March 2017 and capped charges at 1% for those that opened their pension before this date.
If you want to transfer your pension to a new provider, you may face a transfer charge, akin to an exit fee, but not all pension firms have transfer fees so don’t let this put you off.
What does pension advice cost?
Ensuring you have enough money to survive, and hopefully thrive, in retirement is incredibly important. For this reason, it may be wise to get independent financial advice (IFA) at several stages in your lifetime – when you are setting up a pension, when you are approaching retirement and when you are due to retire, for example.
Fees vary between IFAs, but according to Unbiased.co.uk the average cost of advice for setting up a £200-£300 a month contribution to a pension is £500. For help transferring a £100,000 pension an average charge would be around £2,500. There will usually also be an ongoing fee applied every year for managing your pension.
Once you are 55 or over you are entitled to a free consultation with the government’s PensionWise service. Appointments last between 45 and 60 minutes and will give you guidance on the main retirement income options.
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Dive even deeper
A pension statement is an annual summary of your pension pot. It shows how much you have built up so far and gives you a projected retirement income. Your state pension forecast is different and highlights whether you have paid enough national insurance to get the full weekly payment.
Pension contributions are the payments that you, your employer, and the government make into a pension, but there are caps and other considerations to bear in mind.