Britons could boost their pension pot by £47,000 simply by switching to a cheaper investment fee, new analysis has found. Cutting annual pension charges from 1% to 0.5% could make a huge difference to the amount saved over a working lifetime, according to investment firm Vanguard.
How the figures compare
Its analysis found that someone paying £250 a month into a pension from the age of 25 to 66 could build a retirement pot of £392,000 if their investments returned an average 5.5% a year and they paid a 0.5% annual fee. But the same saver would have just £345,000 at retirement if they paid a 1% fee.
That is a difference of £47,000 – despite making exactly the same monthly contributions and assuming the same investment return. The impact of higher charges becomes even more stark when fees rise further. With a 1.5% annual fee, the projected pension pot would fall to £324,000.
Focus on what you can control
The figures have been released during Pension Awareness Week and Pension Attention, both of which aim to encourage people to take a closer look at their retirement savings. Vanguard is urging pension savers to pay particular attention to the fees being deducted from their pots, warning that seemingly small charges can compound over decades.
James Norton, head of retirement and investments at Vanguard Europe, said: “When trying to tackle this issue, individuals should focus on what they can control, one of the most practical being the investment costs they pay.”
He added: “The higher the fees you pay, the less returns you get to keep for yourself. Putting it simply, fees erode your returns.”
Check your pension statements
Mr Norton said savers should remember that higher charges do not necessarily mean better investment performance. He said: “Those high fees are a hurdle that an investment manager needs to overcome just for you to breakeven.”
The analysis assumes a monthly gross contribution of £250 between the ages of 25 and 66, alongside an average annual investment return of 5.5%. Vanguard said the figures demonstrate why savers should understand exactly what they are being charged and consider whether their existing pension remains suitable.
Its research found that 57% of people do not have a clear understanding of the fees they pay on their pension. Savers are being encouraged to check their pension statements and identify all the charges being applied before comparing them with other providers.
They should also consider whether their pension investments remain appropriate for their financial goals, stage of life and attitude to investment risk. Another potential issue is the number of old pension pots held by people who have changed jobs.
Research cited by Vanguard found that 40% of non-retired UK adults have two or more pension pots. The investment firm said tracking down old pensions and checking their charges could help savers get a clearer picture of their retirement savings.
It also said some people could consider combining old pots into a new plan, although savers should check the costs and features of their existing pensions before transferring. Mr Norton said: “It is your money and you’re taking the investment risk, so make sure you keep as much of your returns as possible.”
