Revealed: How fees could be eroding your pension by thousands of pounds

The fees payable on your pension can mean the difference between retiring in comfort and having to keep on working. Being aware of the charges is one of the most crucial aspects of pension investments

Most of us know the key ingredients of good retirement planning: paying in what you can, a generous serving of tax relief, and saving for as many years as possible.

However, one of the most important components is often overlooked: fees.

The difference to retirement of even just one percent in fees can cost more than £100,000 over a working life. That could be the difference in retirement of holidaying in tents or on cruise ships, of being able to retire when you want or having to work when you’d sooner put your feet up.

However, savers can’t take all the blame for this blind spot. Fees can be hard to decipher, difficult to compare between pension providers, and subject to different rules depending on the type of pension.

Furthermore, the types of fees change over time. There are a series of fees that are charged during the 'accumulation' or saving phase. These are then replaced with a whole new set of costs when a saver retires and starts to draw on their pension – known as the 'decumulation' phase.

There are pensions calculators online to help you to estimate the impact of some fees. However, none can calculate the total impact – through both accumulation and decumulation.

That is why Moneywise asked Hymans Robertson, a pension consultancy, to run the numbers for the whole lifetime of pension savings. The findings are stark.

The highest fees in our worked examples stripped a massive £170,000 from the value of a personal pension at retirement. For workplace pension schemes, the impact of high fees could be even worse, eroding as much as £280,000 from the value of a pension and costing nearly £400,000 in fees over a lifetime. 

Baroness Ros Altmann, a former pensions minister, says: “Being careful about charges is one of the most important aspects of long-term investing, especially in the current ultra-low rate environment.

"Paying a 1% charge can eat away returns over the years.”

How much is my personal pension costing me?

For our analysis we have used someone with a starting pot of £50,000 who is saving £1,000 a month into a personal pension for 30 years, before drawing down 5% of their accumulated pot over a 22-year period.

As per the table below, an individual paying mid-range charges of 0.5% in the accumulation phase could save a pot of £759,000 and would pay around £75,000 in charges. With further charges of 0.5% in the decumulation phase, they would then pay a further £81,200 in average fees as they drawdown, bringing total costs to £156,600.

Halve or double these fees to take into account the wide range of charges for pensions, however, and the difference is stark.

If the saver ends up paying 1.5% in charges while they build up their pension and 1.75% when they draw on it, their nest egg at retirement

falls to £631,000, with £203,500 eaten up in fees while they were saving, and total charges after 52 years jump to £333,700.

Alternatively, if the saver gets a better deal with a cheaper pension charging 0.25% while accruing, their pot at retirement could be as much as £796,000.

Charges during the saving period would be £38,800, and with 38% factored in for fees when they start to take an income, total costs would be a significantly lower £84,400.

Halving the average (mid-range) pension fee means an individual could save an extra £37,000 over 30 years. This would result in them being able to take home more

in drawdown – an additional £1,800 in their first year, increasing to £2,900 a year after 22 years. They would also pay £84,400 less in charges over their 52-year lifetime of saving.

Personal pension schemes (lower range)

Personal pension savings of £1,000 monthly and total fees. Source: Hymans Robertson.

How much is my workplace pension costing me?

Take the same assumptions as above; someone with a starting pot of £50,000, saving into a personal pension for 30 years, and drawing 5% from their accumulated pot over 22 years.

But in this case we assume monthly contributions of £2,000, which is £1,000 from the employee and £1,000 from their employer. In fact, the figures show a similar story; securing a cheaper pension can have a dramatic effect on lifetime savings.

Workplace pension rules mean charges are supposed to be capped at 0.75%. Taking this average fee range first, 0.5% while saving and 0.75% while drawing down, the pot at retirement is £1.38m, at a cost in charges of £128,900, and total fees over the saver’s lifetime of £276,300.

However, critics point out the charge cap fails to include other fees such as those paid for buying and selling assets, which can bump up costs for savers. Raising the charges to 1.5% during the saving phase and 1.75% in retirement would mean a much smaller pot at retirement of £1.16million, after fees of £349,700 while saving, and total lifetime charges of £588,500.

Save with a workplace scheme at the lower end of the cost range, and the picture is much more favourable. The starting pot of £50,000 turns into £1.44m at retirement after charges of £66,200, and total fees after 50 years of £148,900.

Making slightly different assumptions – that is, a starting pot of £100,000 and savings of £1,000 a month – reveals a similar pattern as above.

Pension charges have come under fire in recent months, with watchdogs keen to stop them eating into savers’ pots.

Frank Field, chair of the work and pension committee, has said providers of employee schemes were “misinforming, mischarging, overcharging and making a fat living off the hard-earned savings of pensioners”.

The committee wants the government to legislate for mandatory costs disclosure to a set format for both defined contribution and defined benefit schemes.

At the same time, City watchdog, the Financial Conduct Authority (FCA), is cracking down on charges for personal retirement savings plans, including self-invested personal pensions (Sipps). It found savers can be paying as much as 2% a year, and estimated an extra charge of just 0.1% can take a £2,500 slice from the final size of an average pension.

Half of the consumers in the FCA’s research believed they were not paying any fees at all.

Low levels of switching mean that they can remain in expensive schemes for years. Baroness Altmann adds: “The vital thing is to have transparency so that people can see what they are paying and decide whether they are comfortable with the fees, and to help with comparison.

"This is just basic information that all customers need. Otherwise, like in a supermarket, how can you decide what product to buy without any prices?”

Workplace pension schemes (lower range)

Workplace pension savings of £2,000 monthly and total fees. Source: Hymans Robertson

Workplace pension schemes (higher range)

Workplace pension savings of £1,000 monthly and total fees. Source: Hymans Robertson

How can I find out the cost of my pensions?

Virtually all agencies looking into the area of pension charges agree it is nearly impossible to get a complete grasp of how much an individual saver is paying, if they were ever to ask.

Simon Harrington of the Personal Investment Management and Financial Advice Association, says: “In the vast majority of cases, lay consumers will be disengaged with their savings and, as a result, completely reliant on those who run their schemes.

“Savers who do look at the various charges should be presented with an easily understandable overview of exactly what they are paying.”

Under FCA and work and pension committee plans, consumers would be told explicitly the impact of charges on their pots, and pension companies would report their charging data to the FCA, which would publish it so that consumers can compare costs more easily.

In the meantime, how can ordinary savers make sure they are getting the best deal?

Knowing which charges to ask about is half the battle. Smaller retirement pots and those in older-style pensions in particular tend to attract higher charges that can 'materially affect' savers’ pensions, the FCA found, but all can have layers of unseen costs. 

Understanding pension charges

The Pension Advisory Service has highlighted at least eight types of charges that savers should demand to know how much they are paying:

Annual management charge (AMC)

Due every year to pay for running your pension scheme and investing your contributions. Charges have been falling in the past decade so if you have an older plan, review it. Group personal pension charges are typically lower than Sipps.

Policy fees

Another type of admin fee usually in the AMC, but older pensions may add this as a separate cost.

Bid/offer spread

The difference between the buying and selling price of a fund unit, which depends on the value of the fund’s assets. Triggered when switching investments, it is typically 5%.

Fund switches

The price for moving your savings from one investment to another. Your provider may let you make some free switches each year.

Allocation rates

A feature of older pensions; the provider keeps back as much as 50% of your contribution as a way of being paid for looking after the pot. The proportion invested is known as the allocation rate. After a crackdown, most providers now allocate much closer to 100%.

Initial units, capital units and accumulation units

Again used in older pensions. Check your annual pension statement, which should show how many of each type of unit you have. Early contributions will be in initial or capital units, which have higher AMCs, before switching to lower-charging accumulation units with fees of around 1% a year.

Stopping contributions

Older pension plans can charge you if you stop paying into them.

Transferring your pension

The value of your pot may be higher than your transfer value (the amount you move to another scheme); the difference is the remaining charges due on the old scheme.

In a with-profits policy an extra charge known as a market value adjustment or market value reduction may apply, which can be substantial.