Knowing how much you’re paying for your pension is important, as even small charges can make a big difference to the size of your retirement pot.
Pension fees vary widely depending on your provider and the type of plan you have. These fees typically cover management, administration, and investment costs. You may also pay a fee for transferring your pension to another plan, and other costs.
Pension savers transferring their pensions without knowing the fees involved could be more than £70,000 worse off in retirement, according to analysis by pensions provider People’s Partnership. Nearly three-quarters (72%) of people who recently transferred their pension were unaware of their old pension’s charges or the charges for their new one.
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Here's our rundown of the different pension fees you might pay.
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Pension fees
If you have a defined contribution, also known as a money purchase pension, you’ll pay fees to your provider. Fees for defined benefit or final salary schemes (which provide a guaranteed income in retirement) are typically covered by employers. This type of scheme is increasingly uncommon due to high costs for employers.
Although pension fees have decreased substantially over the past decade, it’s still important to check that you’re not paying more than necessary. High charges can erode your savings, ultimately affecting how much income you have in retirement.
Annual management charge
The annual management charge is often the biggest fee you’ll pay on your pension pot. It covers costs like statements and investment management. The government capped this charge in April 2015 at 0.75% per year for employer defined contribution pensions, but older schemes may have higher charges.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, says: “It’s always worth reviewing any older schemes you still hold to ensure the charges you’re paying are competitive.
“While the cost of running a workplace pension is often paid by the employer rather than the employee, this can change when someone leaves their workplace scheme so it may be worth checking when you leave the company if you are now liable for the fees.”
Fund charges
You may also pay fees for investing in certain funds in your pension. These might be included in the annual management charge, particularly if you have a workplace pension, but they may also be separate.
You might be able to slash these fees by investing in passive funds, which typically come with charges as low as 0.1% and track a particular market such as the FTSE 100. Actively managed funds, which rely on a fund manager’s expertise to choose stocks, usually come with higher fees, often above 1%.
Platform charge
If you have a personal pension or self-invested personal pension (SIPP) managed through an online investment website, you’ll pay a platform charge. Most providers charge a percentage, but some charge a fixed fee.
Haine says: “A flat fee might work out cheaper in some instances and not in others as it depends on what type of trader you are and your provider’s charging structure, as some platforms charge lower percentage fees on large portfolios.”
“Simply picking the cheapest platform is not the solution either as it may have a limited investment range or fail to offer any value-added services to support savers on your investment journey.”
Other potential fees
Policy/service fees: These fees are often included in your annual management fee, but some older pension plans may have these fees separate.
Fees for buying and selling funds: If you move money between different funds or shares, you might pay extra charges. Some providers allow a few free fund switches every year, but check your specific plan for details.
Contribution charges: Some older pension plans may charge a fee for each contribution, but these fees aren’t common and usually included in your annual management fees.
Inactivity fee: Some older providers might charge an inactivity fee if you stop contributing to your pension. This fee could mean you’re paying more just to keep your pension pot intact, even if you’re no longer contributing to it.
Pension transfer/exit charges: If you move your pension to a different provider, you might pay an exit fee, particularly with older pension plans. The Financial Conduct Authority (FCA) has capped exit fees at 1% for savers over 55 and banned them on new plans since 2017, but older plans may still include these fees.
How to check what pension fees you’re paying
- Most pension providers detail their charges on their website, and you can typically view fee information when logged into your online pension account.
- Check the documents you received when setting up your pension or your annual statements for charges as well.
- If you can’t find the information you need, contact your provider and ask for a fee breakdown. Bear in mind that fees are often calculated as a percentage of your pension's value, so they vary from saver to saver even for those with the same plan.
What can you do if you think you’re paying too much?
If you think you’re paying too much, you could consider moving to a pension with lower charges. But check for any exit or transfer fees and that you won’t lose out on valuable benefits. If you have a defined benefit pension worth more than £30,000, you must seek financial advice before transferring.
You could consolidate several pension pots into a single plan with a cheaper provider to cut costs. If you want a wide range of investment options, a SIPP usually offers more choice.
For workplace pensions, you might be able to switch to a cheaper fund. Many workplace schemes these days are relatively cheap. For example, the National Employment Savings Trust (Nest) – the workplace pension scheme set up by the government – offers a low-cost workplace pension with an annual management charge of 0.3% and focuses on low-cost, passive investments.
However, Ian Millward, director of Candid Financial Advice, says: “Nest is a decent offering but expensive for new contributions. If you are making additional contributions that will not be matched by your employer, it might be better to open a new pension.”
If you’re unsure about transferring or consolidating your pensions, professional financial advice can help. Millward says: “Older pensions sometimes still carry exit penalties or offer benefits such as enhanced tax-free cash beyond the normal 25%, or guaranteed annuity rates so it’s important to always check before moving.”
