The ‘hidden’ pension charges costing Brits up to £37,000 in retirement – how to avoid paying more
SAVERS could end up thousands of pounds worse off in retirement due to rip-off pension charges.
Brits who have worked multiple jobs over their career likely have cash sitting in old workplace pensions – but “hidden” fees could be eating away at their retirement savings.
And by not keeping on top of your charges and shopping around for the lower deals – you could actually end up £37,000 worse off when you retire.
When you join a new company, you are usually “automatically enrolled” into its workplace pension scheme.
You then contribute a percentage of your salary towards your pension each month – the minimum is 5% – while your employer contributes a minimum of 3% unless you opt-out.
The scheme also levies a charge from your total savings every year to help cover its running costs.
This does exactly what it says on the tin – it’s how you pay your provider for running your pension scheme and investing the cash on your behalf, with the aim of the pot growing over time.
Each pension provider will take different fees in different ways and some may only be found buried in the small print.
Examples of these fees include an inactivity fee, a contribution charge, an exit fee, and consolidation fees.
The most common is what is known as an annual management fee.
This does exactly what it says on the tin, it’s how you pay your provider for running your pension scheme and investing on your behalf.
The majority of firms charge between 0.25% and 1% for the service.
Pension fees and charges often take people by surprise.
Research by digital wealth manager Moneyfarm found that around 50% of UK workers aren’t aware they pay annual fees on their pension schemes.
Further findings revealed that the ones that did know they paid, had no idea how much they paid – plus many aren’t aware how they’d find out either.
Only a third think they actually know what their annual fees amount to and just 18% knew how much they were paying their provider.
What is pensions auto-enrolment?
HERE's what you need to know about pensions auto-enrolment:
What is pension auto-enrolment?
Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.
When does auto-enrolment apply?
You will be automatically enrolled into your work’s pension scheme if you meet the following criteria:
- You aren’t already in a qualifying workplace scheme.
- You are aged at least 22.
- You are below state pension age.
- You earn more than £10,000 a year
- You work in the UK.
How much do I contribute?
There are minimum contributions that you and your employer must pay.
Your minimum contribution applies to anything you earn over £6,240 up to a limit of £50,270 in the current tax year. This includes overtime and bonus payments.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
What if I have more than one job?
For people with more than one job, each job is treated separately for automatic enrolment purposes.
Each of your employers will check whether you’re eligible to join their pension scheme. If you are, then you’ll be automatically enrolled in that employer’s workplace pension scheme.
Can I opt out?
You can choose to opt out, but you’ll miss out on the contributions from the government and from your employer. If you do choose to opt out you can opt back in later.
The survey went on to reveal that Brits are, on average, paying annual charges of 2.5%, which according to Moneyfarm is way over what would be considered a reasonable amount.
Worryingly, over half of the nation thinks their fees are competitive and only a few have ever thought to shop around and switch providers to benefit from lower fees for the same service.
But Moneyfarm is warning that these kinds of costs deducted throughout the life of an investment can play an “enormous” part in how much they’re left with in their golden years.
Carina Chambers, pensions expert at Moneyfarm said: “We would consider annual pension fees of around 1% to be a reasonable amount.
“A seemingly small amount in fees can lead to significant shortfalls over the long term.”
She added that while the difference between 2.5% and 1% doesn’t seem much when it comes to pensions, it’s a hefty chunk of change.
Especially because it’s invested over a long period, so the small percentage difference then compounds – meaning it can be pretty significant.
According to Carina’s calculations: “Take a 40-year-old with a pension fund of £40,000 saved in their pot.
“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 your pension – a significant 48% difference!”
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” explained Carina.
“For that reason, you may be paying fees that you are unaware of which could be reducing the size of your pension pot.”
Yet over half of those questioned had no idea about the various types of charges they could be paying on their pension.
Chambers said: “We hear anecdotally, and it is backed up by this survey, that people find it hard to understand what charges they are paying on a pension scheme – even when they have the statement in front of them.
“They can be very hidden. It may be easier to think ‘why bother finding out’, but you really shouldn’t put your head in the sand.”
Moneyfarm has warned that because of the difference a few percentage points can make, it’s important to shop around.
How you can avoid being caught out
If you’ve had several jobs and are looking to combine pots, or are simply looking for a new workplace pension provider, there are some things you can do to avoid being caught out by “hidden” fees.
It’s important to understand your annual management fee and how much you’re paying.
Management charges should always be stated upfront by pension providers.
These are usually charged as a set amount or a percentage of the value of your pension.
It’s important to understand which applies to you to gauge the true cost implications to your savings.
Some platforms and advisors charge different fees for various service elements, so it’s crucial to look beyond the headline management fee.
You need to add all these charges together to get an accurate fee comparison against other providers that may charge one inclusive fee.
How do I consolidate my pension?
IF you have several workplace pensions that you're no longer paying into, you might be better off consolidating them into a single pot.
There are several advantages to this.
The first is that by having your savings all in one place, you’ll only pay one set of fees.
You can also choose which pension provider you want to transfer the different savings to, so you can pick the best one for you.
It also makes it easier to keep track of your money.
You might want to move all your money to whichever of your existing pots has the best fees, or you could move it all to your current employer pension (if you have one).
Alternatively, you may wish to move money to a private pension or use a consolidator service, such as Pension Bee, Aviva, or Wealthify.
Make sure you compare and contrast your options carefully so that you’re picking the best home for your savings.
You’ll need to look at fees but also might want to consider the investment options available.
If any of your pots are over £30,000 you’ll need to get independent financial advice, but even if you have lots of smaller pots you should consider speaking to an independent financial advisor (IFA).
You can use Unbiased or VouchedFor to find a recommended advisor near you.
Also ask whether you’ll be charged a fee to exit your existing provider and to join your new provider, plus whether the age at which you can access your pension is different – for most people this is currently 55, but is set to rise to 57.
You also need to ensure the pension you’re leaving doesn’t come with valuable added perks, or you could lose out.
Stay alert for pension transfer scams as fraudsters often target people transferring their pension with promises of investments that are too good to be true.
Consolidating your pensions
Consolidating your pension pots is almost always a good idea.
That way you’re not stuck paying multiple fees on old pots that are eating away at your retirement savings.
While the savings you can get from consolidating your pensions might be attractive, you should double check you understand the new schemes’ fees.
Make sure you have done all of the calculations and taken into account any applicable fees to get a clear picture of what you are paying now compared to what you will be if you switch to a new scheme.
Rebecca O’Connor, director of public affairs at PensionBee, previously told The Sun: “Bear in mind that some pension providers charge percentage fees and some charge flat rate fees.
“You might need to convert a percentage fee into pounds and pence based on your total pot size, or vice versa do a proper comparison.”
Before consolidating, you should also think about what you want your pension to do as well as the value of the money on offer.
It might not be beneficial to switch to a lower-fee plan if the plan goes on to deliver lower investment returns, for example.
Pension schemes invest your cash to grow it over time, and some schemes may have investments that are performing better than others.
Ms O’Connor said it’s worth considering performance and working out whether you are likely to get a better deal overall with a new pension.
Ask the scheme for information about their investments’ performance if you’re not sure.
Some pensions may also come with benefits such as offering you an earlier age that you can start taking out withdrawals, or guaranteed annuity rates.
If you transfer out of these, you may lose these benefits and therefore will need to weigh up if that works for you or not.
Your pension scheme can tell you if you would lose any benefits by leaving the scheme.
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