New Which? research finds that high charges and hidden costs are eroding pension pots by as much as a third of their value.
At a time when auto-enrolment means many people are becoming pension investors for the first time, Which? has found expensive fund charges and hidden costs that are not being disclosed by pension providers. Our latest research shows that because of missed investment growth, retirees could have to accept just two thirds of the pension income they would have earned.
Pension fund costs
Which? found that pension providers are charging more, much more in some cases, for pension versions of popular retail funds. This means pension versions of a fund will consistently return less than identical retail counterparts. For example: one of Axa Wealth’s pension versions of the popular Invesco Perpetual High Income Fund costs 1.80% each year, while the retail version costs just 0.92%. Royal London offers the M&G Recovery fund at 1.7% (1.86% including additional expenses), almost double the retail tag of 0.91%.
Out of more than 17,000 pension funds, more than 1,000 listed annual charges of 2% or more; around 2,300 charge between 1.5% and 1.99%; and more than 5,500 charge between 1% and 1.49%. Fund charges could mean retirees have less money when they retire or their pension savings will run out sooner.
Research shows that between setting up your pension fund to its final payment, up to 300 different charges are taken from savers’ pension pots. There are sales fees, fund supermarket fees, setup costs, contribution fees, fund manager expenses, transaction costs, withdrawal charges and many more. While these are arguably part of the cost of doing business, this extensive list illustrates the extreme amount of intervention in pension investing. Some of these fees will be clearly set out, but some won’t.
Harry Rose, Which? Money Editor, said:
“A two percent charge may not seem like much, but the true significance of even the smallest fees over time can make a startling difference to the size of your retirement pot. Call your pension provider and ask them in no uncertain terms how much is being taken from your pension every year. Some of the charges cannot be avoided, but there may be cheaper versions of the same fund available or a different investment strategy that suits your needs.”
Consumers looking to keep costs down should:
Call your provider: Ask them exactly how much is being taken from your pension every year. Make sure you ask about performance charges and who pays transaction costs (sometimes they will be included in the management fees).
Exit fees: It may be worth leaving the fund and moving provider, but some pension funds have very high exit charges so check what these are before you make a decision.
Consider tracker funds: Tracker funds can be significantly less expensive and may meet your investment goals.
Financial advice: A qualified financial adviser will be able to assess how much you’re paying in costs, how much it would cost to rearrange things and recommend how to do so without taking on more investment risk. But be careful about ongoing service.
Notes to editors
Fund costs: Many pension providers use several different share classes of the same fund, each with a different price, including older ‘bundled’ share classes. The ‘bundled’ annual charge can include a product fee, a platform fee and advice, regardless of whether advice is still being provided. Newer, unbundled fund charges, will be the cost of the fund alone and savers will need to take into account the provider fee. For example, Hargreaves Landsdown offers the Invesco Perpetual High Income fund for 0.87% plus its own fee of 0.45%.
Pension charges: The Transparency Task Force, a group of experts campaigning for better disclosure of investment costs, found that up to 300 different charges are taken from pension money.
Illustration one: The simplest way to illustrate the effect of percentage charges is with a static investment pot. Let’s say you have £250,000 invested: if investment returns are on average 5% a year then after 10 years of compounding you’d have about £388,000. But if fees are 2% a year then after 10 years you would be left with £326,000. The gap widens over longer periods. After 20 years, 30% of your pot has been eaten by fees and after 30 years, 43% . That means that instead of just over £1m, you have £590,000.
Illustration two: A 25 year old starting their first job and contributing £200 each month to a pension (net of tax relief and employer contribution. If the contributions increase by 3% each year as her salary grows and she enjoys annual returns of 5%. By the time she turns 65, after working and saving for 40 years, she would have saved a respectable £476,000. However, once you factor in annual fees of 2% she is left with only £313,000.