As one large pension provider ramps up its management charges, we look at how to ensure you don't pay over the odds for your pension.
I’m not sure there is any area of the financial world which suffers as much negative press as the pensions industry. Rarely a week goes by without some dire warning about just how awful retirement is going to be for my generation, and with inflation still so high, it’s not exactly a barrel of laughs for current retirees.
And this week I noticed yet another worrying piece of news, this time regarding annual management fees.
Uncapping fees
One major pension fund provider, Legal & General, has made a significant change to some of its management charges. From next year 100,000 personal plan holders will see their charges rise. Currently, the firm has a 1% cap on management charges on its funds. However, from next July, that could rise to 1.5% or even higher.
Even worse, the investors hit by these changes are the ones with relatively small sums in their pots, typically less than £15,000, meaning the impact of the change is far greater.
It’s little wonder that many people are completely turned off by the idea of saving in a pension when they hear stories like this. Indeed, the Pensions Minister, Steve Webb, has promised the Government will prioritise dealing with the charges some providers charge, to ensure that as much of the money we invest as possible turns into a pension income, rather than disappearing in charges.
The impact of fees
Let’s say you have £15,000 in your pension pot. The table below demonstrates how much you will have to pay each year on a variety of different management charges, and will hopefully give you an idea of just how charges can erode away your pot.
|
Annual management charge |
How much you’ll pay |
|
0.5% |
£75 |
|
1% |
£150 |
|
1.5% |
£225 |
|
2% |
£300 |
I don’t know about you, but if I’m only making modest contributions (say £100-£150 a month) then I don’t fancy seeing an entire month’s contribution (or more) disappearing in charges.
Your options
If you save with Legal & General, or indeed any pension provider that has made changes to its management fee structure, it’s important that you don’t simply accept the changes and carry on – take the time to sit down and work out whether this deal still represents your best option.
Of course, it may be that your money won’t be too badly affected by an increase in management charges, so you can leave your money where it is.
Then again, you may feel that you want to move to a different provider, perhaps one that still employs a 1% cap on its charges. Before you do make the jump though, it’s absolutely vital that you check whether you will have to pay some sort of withdrawal penalty, or whether moving provider will see you miss out on certain benefits. These charges and benefits may make it worth simply sitting tight, rather than moving elsewhere.
However, you may still feel the need to move your pension to a new home. In that case, I’d really recommend having a read of Why you should transfer your pension for a really comprehensive guide.
Doing it yourself
A final option if you want to cut your spend on management fees is to go with a low-cost SIPP. A SIPP is a self-invested personal pension – in other words, you decide where to invest your money, rather than relying on a fund manager to do it for you.
Not that long ago, SIPPs were the exclusive preserve of those savers with serious cash set aside in their pension. But now, with a number of low-cost options available, they are open to all of us.
For example, with the Hargreaves Lansdown Vantage SIPP there is no annual management charge for money kept in cash or more than 2,400 funds the firm offers, while other investments are capped at 0.5%.
And for transparency, Alliance Trust’s SIPP is pretty admirable, charging a flat annual administration charge of £125, irrespective of how much you have in your pot.
For more on SIPPs, check out The best Sipp for your retirement and How to put together your SIPP.
Not the be all and end all
Undoubtedly, ensuring that you are not paying through the nose for your pension is important. However, it’s by no means the biggest factor on how much you will finish with in your pension pot.
A study by Hargreaves Landown found that in the long run, the charges you pay are behind making decent levels of contributions, starting a pension early, getting higher investment returns and shopping around for an annuity at retirement in terms of influencing your eventual pension income.
So make sure you keep on top of your management charges, but don’t think that getting a deal on small charges will compensate for miserly contributions!
Thanks to Bestinvest for their help with this article.