High pension fees could take £70k from your retirement pot – time to check what you’re paying

Most savers have no idea how much they are paying for their pension – but high fees could eat away as much as £70,000 from your pot, according to exclusive new analysis for MoneyWeek.

The vast majority of UK pension savers (83%) are in the dark about their pension fees, unaware in either pounds or percentage terms how much is leaving their pot and going into the provider’s pocket each year.

That is according to research by wealth platform Interactive Investor, which polled 5,000 UK adults to ask them if they knew what they were being charged.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

As a result, millions of savers could be unwittingly paying over the odds for their defined contribution pensions, instead of switching pension fund, leaving them worse off later in life.

Craig Rickman, pensions expert at interactive investor, said: “Every pound you pay in fees that doesn’t translate to a better outcome, is a pound less for you to enjoy in your golden years.

“The tricky part for savers is that, while portability of pensions means that you can switch to somewhere else that provides better value, many don’t know how much their current providers charge. They have no idea whether their existing pensions offer fair value.”

Cost of fees to your pension pot

Interactive Investor crunched the numbers for MoneyWeek to see the true cost of high fees to your pension pot.

With a £100,000 pension fund for example, the future baseline value – with no fees and assuming 5% annual investment growth – is as follows:

• After 10 years: £162,889
• After 20 years: £265,330
• After 30 years: £432,194

With low fees applied, of 0.5%, a saver could expect to lose £57,662 from their pension over the course of 30 years.

With moderate fees, 0.75% to 1%, the impact is £78,049 to £97,192 over the same time frame.

But with high fees of 1.5% applied for 30 years, the loss to a saver’s pension could be as much as £131,807 in total – more than £70,000 greater than with low fees.

Modern defined contribution workplace pension default fund charges are capped at 0.75%. But many older schemes, as well as some private pensions like Sipps, come with much higher fees.

Moving to a pension with lower fees is one way to give an instant boost to your pension. But switching a pension isn’t right for everyone, if, for example, your old scheme has valuable guarantees or benefits.

Camilla Esmund, senior manager at Interactive Investor, said: “Even though we can’t control the market, you can control how much you pay to invest.

“It can be disheartening to integrate good habits, stick to your investment strategy for the long-term and see the fruits of compounding take effect over time, only for your growing pot to be eaten away in these unnecessary fees.

“And these could be fees you didn’t even know you were paying until it’s too late, which is why it is worth checking now.”

How to check what you are paying in pension fees

If you have a defined contribution pension, investment growth has a big impact on how much you’ll have when you retire. Your pension provider pays fund managers to manage and invest your money, so they charge you to cover these costs.

The cost of pension plans varies widely – not just in size, but also in how they’re applied. From account fees and fund charges, to trading and exit fees, it can be difficult for consumers to understand the total cost.

Rickman said: “Account fees are typically charged as a percentage, based on the size of your savings, often tiered with larger savings attracting lower rates.

“This can be appealing if you’re at the start of your savings journey and your pot is relatively small, but as your fund grows over time, your fees follow suit, eating away at your eventual retirement pot.”

To find out what fees and charges you’re paying, you can check your annual pension statement. This should give you a full breakdown of every fee or charge you’re paying.

If you manage your pension online, visit your pension portal. You might have to search for details of what you’re paying but they should be there.

Alternatively, you can call or email your provider. They will be able to give you details of all the charges and fees you’re paying.

Most schemes have an annual management charge (AMC) to cover the cost of managing and investing your pension.

You might also pay an ongoing charge figure – to cover the costs of your provider running an investment fund – and platform, policy, service or administration charges, to cover the admin costs of running your scheme, like an app so you can choose your own investments.

Once you know what you’re paying for each pension you can more easily compare your costs to the charges of other providers, to work out whether it would be a good idea to switch or consolidate your pots.