The impact of pension fees and charges on a potential final pension fund value should not be underestimated. Over 30 years or more of saving into a pension scheme a high level of charges could reduce the potential pension fund at retirement by tens of thousands of pounds.
When evaluating any pension scheme there are three key issues to assess:
- Any valuable guarantees or options.
- The investment profile of the fund and investment growth.
- Fees and charges.
An appropriate investment profile should, over the long term, deliver the highest possible pension fund value at retirement. It is important to ensure that fund value is not compromised by high fees and charges.
The Pension Fee Issue
A Office of Fair Trading’s report (in 2013) found that ‘£30 billion of savers funds in defined contributions (DC) workplace pensions were at risk of delivering poor value for money’ The report recommended that by the end of 2015 plans should be in place to reduce fees and charges to provide ‘better value for money’
In 2016 Profile Financial’s analysis of fees paid by its customers found 45-year-old savers were paying 1.47 per cent of the fund’s value each year on average and 55-year-olds were paying 1.85 per cent on average. A Which report (Oct 2016) analysed more than 17,000 pension funds and found that over five percent of them listed annual charges of two percent.
In late 2016 the FCA announced that as a result of the work of the Independent Project Board (IPB) ‘Pension providers have made significant progress towards reducing cost and charges.
The Profile Financial analysis showed those in newer pension funds were paying 0.34 per cent on average. The main problem with fees appears to be with pension funds started before 2001 that have not been merged with newer schemes.
The Impact Of Pension Fees
A Which report (see above) shows the impact of fees on the value of a typical pension fund at age 65. It compares how a fee free pension fund created by a 25 year old may fare compared to pension funds with various fee structures. It shows an approximate £75,000 difference in fund value at age 65 between a fund attracting one percent fees and one attracting fees at two percent per annum.
The impact can, therefore, be significant but it is important to appreciate some level of fees are necessary and that the cheapest is rarely the best. For pension scheme administrators there is a valid cost associated with the administration of the scheme and (crucially) investment management. Where pension administrators can often be criticised (particularly on older pension schemes) is in making fees more transparent and easy to evaluate/compare.
It is important to first establish what you want from your pension fund. Do you just want to lower costs? Or do you want more control/flexibility over where fund invested? Would a different type of pension fund (perhaps a SIPP) be more appropriate for your needs?
Before making any decisions about transferring a pension to a different scheme it is important to:
- Establish the current level of fees.
- Check if the existing pension contract offers any valuable guarantees
- Check if any penalties apply should you decide to move the fund to a different scheme.
- Decide if you wish to take professional financial advice.
It should be possible to establish what fees apply from the pension paperwork although on some older contracts fees may be hidden in the small print. If the pension paperwork is not available or if anything is not clear it may be possible to obtain an answer by calling the provider. At this point, you may decide the level of fees is acceptable and no further work is required.
If fees are an issue it is vital to check if there are any valuable guarantees offered by the pension policy which would make moving the pension a mistake. If a pension transfer remains the best option it is important to establish if penalties apply to move your pension fund elsewhere.
It may be worth considering taking financial advice both to check your assumptions on fees, guarantees and penalties are correct and to help you navigate the array of alternative pension schemes if you do wish to transfer. Of course, the cost of advice vs the potential benefit should be a key concern. It may be on smaller funds the cost of advice cannot be justified.
There is little doubt progress has been made on establishing a fair band of pension fees but problems remain on older policies. It is important to at least check the situation and take appropriate action if necessary rather than receive a nasty surprise when nearing retirement.
The information in this article does not constitute financial or other professional advice. You should not take action on the basis of this article without seeking regulated independent financial advice that addresses your specific circumstances.