How excessive fees can fleece pension savers
Pension savers could be paying tens of thousands of pounds in unnecessary charges over the course of a lifetime.
Pension savers could be paying tens of thousands of pounds in unnecessary charges over the course of a lifetime. New research suggests that life insurers, which have traditionally dominated the market for private pension plans, charge over the odds.
The study from Interactive Investor, the online investment platform, says pensions offered by online providers offer a better deal: a 38-year-old saver with a £100,000 pension plan today and investing £10,000 a year for the next 30 years could lose almost £100,000 owing to excess charges.
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The data is based on the charges levied by pension providers for access to the same funds. Traditional life insurers fare very badly in such comparisons as they tend to have percentage-based administration fees; as the savers’ funds appreciate, these become very costly. Flat fees, by contrast, are often much more affordable.
As a result, the saver above making use of Standard Life’s self-invested personal pension (Sipp) would see their final pension fund value reduced by £94,800 compared with Interactive Investor’s own Sipp, the platform says. At Aviva, the saver would be £43,300 worse off. At Scottish Widows the equivalent figure is £33,400.
In practice, the exact figures will vary, not least because administration costs are not the only variable. Savers will also pay dealing charges when changing the investments in their pensions and may need to take into account income-drawdown charges later in life.
Broadly, however, Interactive Investor’s criticism of the life insurers that account for a large part of the pension-fund market is accurate. Percentage-based fees do penalise savers with larger funds and even leaving this structural issue aside, several insurers charge uncompetitive percentages. Savers will need to consider their own circumstances, including the size of their pension funds and how often they might trade. The price-comparison service Moneysavingexpert recently picked the platform run by stockbroker AJ Bell as the most affordable option for funds worth less than £50,000; although it charges percentage-based administration fees, these are competitive and do not work out more expensively than flat fees on smaller funds. Moneysavingexpert’s pick for larger funds was Interactive Investor.
These comparisons apply only to individual pensions. Those saving through a workplace scheme will be charged differently, depending on the deal their employer has negotiated, and will also benefit from their employer’s contribution.