The true cost of pensions
Our pension pots have to withstand many charges and fees. Moneywise runs through the main ones to be aware of.
Do you know how much your pension is costing you in fees and charges?
Three quarters of us don't even realise our adviser receives an ongoing fee, let alone know a full breakdown of the costs.
So what then are the charges to look out for?
Annual charges are typically 1-1.5% although fancier pension schemes like SIPPS will cost more with higher set-up fees. And don't assume that a marginally higher annual charge will only have a marginal effect on your pension pot.
Take two identical pension arrangements: one with a 1% annual management charge and the other with a 0.6% AMC. Based on certain conditions, after 30 years one would have a pot worth £211,000 and the other £196,000. That's £15,000 less for an AMC that's just 0.4% higher.
The investments your pension is held in will also incur charges. Aside from annual fees, there are also admin and marketing fees to consider so look at an investment's total expense ratio, which includes most costs. The lower the better but to give an idea the average TER for investment trusts is 1.11% and 1.66% for unit trusts.
Beware of multi-manager funds that charge double AMCs and also look out for managers that make frequent trades as this will add extra trading costs.
Advice costs too: the more specialised help you get the more money you'll give away in fees but you have to weigh up if you're confident enough to make your own investment choices.
If you arrange your pension through an independent financial adviser, expect to pay them 0.6% a year in commission.
They'll take this each year even if you don't receive any more advice.
You can get round this by pickng your portfolio yourself through a broker – provided you're hapy making these decisions.
Unfortunately some of these charges are unavoidable but you can at least ask your pension provider or – if you have one –IFA to clearly outline all its charges. That way at least you're not kept in the dark.