Research from investments firm Vanguard shows that letting your annual fees creep from 0.5% to 1% can shrink a pension that would have been worth £392,000 at retirement down to £345,000, leaving you £47,000 worse off.
As both scenarios assume the exact same monthly savings and investment growth, that £47,000 gap comes down purely to higher management charges.
Since pension fees are taken directly out of your pot rather than sent as a bill, they often slip under the radar – despite taking a huge bite out of your savings.
Here, Which? explains why taking an interest in your pension fees matters, what charges you could see, and how to find them.
If you have a workplace pension through auto-enrolment, your fees are capped at 0.75% of the value of your pension if you stay in the default fund.
Stakeholder pensions are capped at 1% or 1.5%, depending on when they were set up.
Those who have pension schemes that predate auto-enrolment – which launched in 2012 – can be charged extra.
Even within modern auto-enrolment schemes, if you switch to another fund, the charges could be higher.
Find out more:How do higher fees affect your pension?
These fees are taken directly out of your pension and, as fees are often taken as percentages, the amount you lose to them is proportionate to the amount you have saved in your pension.
Vanguard analysed how fees affect a pension pot where someone pays in £250 a month (including tax relief) for more than 40 years, from age 25 to 66.
Assuming an annual investment return of 5.5%, it found that paying 0.5% a year in fees results in a pension pot of around £392,000. However, if fees double to 1%, the pot grows to around £345,000 – a difference of approximately £47,000.
James Norton, head of retirement and investments at Vanguard Europe, said: 'When buying a car, it’s common for a more expensive vehicle to perform better than a cheaper one. So, you may think that higher fees should lead to better investment outcomes.
'But the higher the fees you pay, the less returns you get to keep for yourself. Our analysis shows that if you keep your pension pot with a low-cost provider, in the long term you could keep significantly more of your returns and significantly improve your retirement.'
However, Norton noted that moving your pension carries investment risk, so before taking any steps you need to do your research.
Find out more:What are my pension charges made up of?
Pension charging structures vary between providers, however, modern DC pensions typically involve two main ongoing costs.
These are a platform (or service) fee paid to your provider for administration and account access, and a fund charge paid to investment managers for running your portfolio.
There may be extra charges, depending on what sort of pension you hold:
Service or policy fees –Inactivity fees (Active member discounts) – Exit or transfer fees – Dealing or transaction fees – Foreign exchange (FX) fees – Contribution charges - Performance fees –Portfolio transaction costs – Drawdown or withdrawal fees - Find out more:How do I check what I'm paying in pension charges?
You can typically find how much your pension is charging you in fees a few different ways. You can:
Log in to your online pension portal Check your annual statementsVisit your provider's websiteContact your provider directlyIf you are already in drawdown, providers are legally required to inform you each year of the exact amount paid in charges, presented in pounds and pence rather than percentages alone.
Find out more:source https://www.which.co.uk/news/article/do-your-pension-fees-matter-aHV1i1b8zgIr