Are you being robbed by pension charges?

"People need to get more bang for their buck, or they are not going to bother."

This tough message, from Lord McFall, chairman of the Workplace Retirement Income Commission, came as he presented a report in August into pension saving, and refers in part to the danger of high plan charges deterring savers from using pensions to save for retirement.

His committee's recommendations, which relate to the planned launch of automatic enrolment of employees into workplace pensions in 2012, include a request for a cap on charges - at 1.5% - which it suggests will help limit the damage to the value of retirement pots over time.

These proposals follow hard on the heels of a controversial report issued by Consumer Focus in July that suggested some independent financial advisers have been busily persuading pension customers to switch to new plans, at higher annual renewal commissions (known as 'trail'), before commission is banned by the Retail Distribution Review at the end of 2012.

'Churning' activity

While several critics, especially IFAs, lined up to pour cold water on Consumer Focus's findings, citing lack of real evidence, the Financial Services Authority, the regulator, has previously warned about the risks to consumers of such 'churning' activity.

Switching pension schemes can sometimes be the right move, so long as the new investments are appropriate, the exit penalties are not severe and there is no loss of any valuable future benefits such as a guaranteed annuity.

Malcolm McLean, pension consultant at actuaries Barnett Waddingham, says: "Modern arrangements allow an individual to switch between pension providers free of charge and without penalty. If an individual is paying high fees they should look to renegotiate with the provider or investigate transferring elsewhere."

Typical annual charges for pensions are between 1 and 1.5% a year - although they can be higher, especially for more tailored self-invested personal pensions (SIPPs). This is in addition to any set-up charges you may face, which range from zero to hundreds or even thousands of pounds for complex or high-value funds.

A difference of a percentage point or less in fees may not sound much, but over a lifetime can result in a sharply-reduced return and a lower income in retirement.

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McLean calculates that a 35-year-old contributing £200 a month into two identical pension arrangements, both with an investment return of 7% a year, but one with an annual management charge (AMC) of 0.6% and the other with a 1% charge, would retire after 30 years with £211,000 and £196,000 respectively.

That seemingly insignificant extra 0.4 percentage point deduction will dent the final fund by £15,000.

What else to watch out for

It is not just the plan charges you need to watch out for. Most pension plans invest in collective investments such as unit trusts, which carry their own management and additional administration costs that also eat into returns.

So look out not just for the AMC, which can be as high as 2% or more and gives a clearer picture of the ongoing costs of an investment, but also for the total expense ratio (TER) on the underlying funds.

It can also pay to be wary of certain investments that add extra layers of charges, such as those imposed by providers that outsource investments to other firms or put your cash in to multi-manager funds (funds of funds) that incur double AMCs, thereby eating further into the pot.

And there are some fund managers who like to buy and sell their holdings more regularly than others, adding extra trading costs to the mix.