A simple pension oversight could cost Brits tens of thousands of pounds, according to analysis from investment platform AJ Bell. The study shows that savers can boost their retirement pot by moving their pension to a provider that charges lower fees.
Impact of high pension charges
Charlene Young, senior pensions and savings expert at AJ Bell, said: "Pensions come with great tax perks to help boost your retirement savings, including sheltering the investments you hold in a pension from tax. But high pension charges can eat into your overall returns. And just like investment returns, the impact of higher charges on your pension pot can compound over time."
According to AJ Bell's analysis, someone with a pension pot of £18,800, paying 1% in fees on investment growth of 5%, will have £19,552 in their retirement pot after one year. Cutting the charge by a quarter of a percentage point to 0.75% would leave them with £19,599 after a year.
Long-term savings boost
Over 25 years, that extra £47 would add up to more than £3,000 before taking into account additional contributions to the pot, according to AJ Bell. Lower fees would add up to even more in a pot if the savings are greater.
Using the same calculations as above, a 0.25% annual fee cut on a pension pot of £100,000 would bring a boost of almost £10,800 after 20 years, AJ Bell says. For a £250,000 pension, this could rise to £27,000 by reducing fees by 0.25% a year. Slashing fees by 0.5% a year could add £52,700 to that same quarter of a million-pound pot.
Cutting costs further
Ms Young said: "In many cases, it will be possible to cut costs by much more than a quarter of a percentage point, with a bigger impact on your pension pot as a result. This is especially the case for those in older pension products, where total fees can be much higher."
Fees are often required to pay professionals to invest and manage money, so the providers of Defined Contribution (DC) pensions charge to cover those costs. Such fees are not usually paid under a Defined Benefit (DB) pension scheme, as this type guarantees a certain amount from employers.
How pension fees work
Pension providers usually take fees directly from pension pots. Such fees can include an annual management charge, an admin fee or investment fund running costs. The fees are often a fixed percentage of what is in a pension pot or a set amount, such as £20 per year. Fees can vary between pension providers, so it is worth checking your provider's charges with those of others on the market.
