One in two people have no idea that they are paying annual fees on their pension schemes.
It highlights a worrying blind spot that could have huge implications for how much money people have during their retirement.
According to research from digital wealth manager Moneyfarm, 50% of Brits are unaware that they are paying charges on their pension schemes and, even those who are aware, half say they have no idea how much they are paying.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
The firm says costs deducted throughout the life of an investment “can play an enormous part in the final retirement pot”. It adds that the findings highlight a “critical gap in financial literacy”.
Latest Videos FromMoneyWeek
Carina Chambers, pensions technical expert at Moneyfarm, says: “A seemingly small amount in fees can lead to significant shortfalls over the long term.
"The difference between 2.5% and 1% doesn’t seem much, but when it comes to pensions, we are talking about a large amount of money which is invested over a long period of time. That apparently small percentage difference therefore compounds, so the losses we are talking about can be very significant.”
The findings went on to reveal that savers in the UK are, on average, paying annual charges of 2.5%, which according to Moneyfarm is way over what would be considered a reasonable amount, yet worryingly, 53% of people think their fees are competitive and only 23% have ever thought to shop around and switch providers to benefit from lower costs for the same service.
Hidden pension costs
The company says: “These so-called ‘hidden costs’ reveal that the fees paid on pension schemes are a financial blind spot for the majority of people.”
Chambers uses the example of a 40-year-old with a pension pot of £40,000 to illustrate the impact of higher fees. She says: “If they aim to retire and draw from their pension at the age of 67, with 5% annual growth and a 2.5% annual pension management charge, their pension pot could be worth £78,000 without paying in anything else. Exactly the same pension pot with a 1% annual management charge could be worth £115,000. That small 1.5% difference could mean an extra £37,000.”
In the majority of cases, pensions come with three main associated costs: fund fees, platform fees and management fees.
“Frustratingly, these charges are often hidden in the small print or in footnotes of the contract," says Chambers. “For that reason, you may be paying fees that you are unaware of which could be reducing the size of your pension pot.”
Is it worth switching your pension fund?
There are several explanations for the poor performance of many funds. Some of the largest and most long-standing pension funds do little more than track the market closely, but charge very high fees for doing so, says AJ Bell, with underperformance then an automatic result.
Indeed, expensive charges are at the root of many issues – even stakeholder pension plans, subject to a regulatory cap on charges, are often several times more expensive than the cheapest trackers. Another problem is that many of the largest and worst-performing pension funds in the UK are now closed to new savers. Managers and pension providers have little incentive to do better since they’re not trying to win new business. They rely on savers’ inertia to keep hold of their cash.
For savers, this research is a stark reminder to keep track of the progress of your retirement planning. It makes sense to review your existing arrangements once a year.
Pension providers are expected to publish detailed data on their fund performance, including comparisons with relevant benchmarks, which enables you to assess how well they are doing. If you’re not happy with how much information you’re receiving, ask for more.
Charges are a crucial part of the picture. Make sure you understand exactly how much you’re paying your pension provider each year, including fund costs and administration fees such as the charges made by investment platforms. The cheapest tracker funds now cost as little as 0.3% a year, including platform costs, while actively managed funds typically demand around 1% a year.
If you’re unhappy with your current funds, transfer to more attractive alternatives. Check whether doing so means giving up any valuable perks: some older pension plans offered guaranteed rates of income in retirement, which will be difficult to match. But that won’t apply to the majority of people.
Switching your pension fund doesn’t necessarily mean changing pension provider. Your existing plan provider may have better options – and, in any case, it may be tricky to switch providers if you’re saving through a workplace plan.
Equally, don’t be daunted by a full-scale change of pension provider, if that’s what’s necessary. Take independent financial advice if you’re worried about choosing for yourself. Finally, don’t think of shaking up your retirement savings as a one-off exercise. Keep reviewing your retirement planning regularly – you may need to ring the changes again in the future.
