Pensions are a confusing subject for many, but having some level of understanding about how they work is vital: many of us will ultimately be reliant on pension income later in our lives. Making sure you have the right pension in place, one that is ultimately aligned to your retirement ambitions, is really important.
The differences between the best and worst pension plans can be significant and have quite an impact on your income in retirement.
One of the most important factors influencing the size of your pension fund at retirement is charges. A recent article from the Telegraph highlighted the issue of high charges, which often make the headlines and can severely impact your pension income.
The good news is that in recent years pension charges have reduced considerably. The problem is that this reduction often only applies to new pension plans. If you have an arrangement that is a number of years old there is a chance that high charges will still apply and will therefore be damaging your retirement prospects, eroding your pension savings.
So, what sort of charges should you be looking out for? In the sections below, we have summarised the types of charges that may apply to your plan, all or some of which may play their part in reducing the pension fund you will have available at retirement.
Annual management charge (AMC)
A charge usually applied as a percentage of the fund. This may vary considerably and usually is between 0.2% and 2.5%. The higher the AMC, the higher the charge.
This is usually a set monetary amount deducted each month. If you see a policy fee applied to your plan you should take action. Such fees are usually only applied to older, outdated arrangements.
An investment charge. It is applied to the difference between the buying and selling price of a unit, in a unit-linked fund, which most often happens when switching your pension investments. Typically a bid/offer spread would be 5%.
Modern plans do not apply a bid/offer spread.
For some older pensions, the pension company may not invest all of your contributions. They may use only a proportion to buy units and may keep the rest as a fee. The proportion invested is usually known as the allocation rate.
Most providers have increased the amount that they allocate so that most allocation rates are now closer to 100 per cent.
Just to confuse the matter, pension companies who don’t reduce allocation rates may charge you by using different types of units. You can check if this applies to you by looking at your annual statement which will provide details on how many of each type of unit you have.
If you have a mix of different types of units take a closer look and review your plan. You could possibly get a better deal.
Transferring your pension plan
Be careful: transferring your pension plan can incur charges! We would recommend that you always seek professional advice before transferring your pension fund. There are a range of charges that may apply such as transfer penalties and Market Value Adjustments (MVAs).
Don’t transfer your pension unless you are 100% sure it is the right thing to do, as once you give the OK on a transfer, there is no going back.
Should you have any questions on the above simply complete the contact box and we will email you an answer.
Note: This is not an exhaustive list but does cover the main charges often applied to older policies. If you’re concerned about the charges applying to your plan then check your last annual pension statement and if you have any questions about the details you find there then feel free to drop us a line.