Pension savers have warned about one “mistake” many make with their retirement pots that could cost them thousands of pounds. A staggering 83% of UK pension savers said they have “no idea” what they’re paying in pension fees, according to research from Interactive Investor.
A lack of knowledge may leave millions vulnerable to poor value and reduced retirement outcomes, as they unwittingly pay over the odds for their pensions. Investment fees are charged by your pension provider to cover the cost of managing and investing your savings. They are usually taken as a percentage of your total pot or as a fixed monthly or annual fee.
Calculations show that even a 1% annual fee on a typical Self-Invested Personal Pension (SIPP) can erode retirement savings by tens of thousands of pounds over time. This could mean years of lost income in retirement.
Antonia Medlicott, founder and managing director at London-based Investing Insiders, wrote on news platform Newspage: “There is a big knowledge gap when it comes to understanding pensions. Pension fees, in particular, are very poorly understood. And that means far too many people are paying more than they need to be – and losing out on precious retirement income as a result.
“Differences of less than 1% might not seem worth worrying about. And over the course of one year, you could only be talking about relatively small amounts. But it’s when you start compounding those differences over the lifetime of a pension that you see how important fees are.”
For example, if you invested £50,000 for 30 years at a 5% annual growth rate, you’d finish with £187,265 after 0.5% annual fees. Raise those fees to 1.5%, and the total drops to £140,340 – a difference of £46,925.
Ms Medlicott added: “Those kinds of figures could mean the difference between the retirement of your dreams and one plagued by money worries.”
Dr Ramin Nakisa, managing director at PensionCraft, said the fees add up over time and could even tip into the hundreds of thousands of pounds.
He said: “It’s always worth reviewing the fees you are paying for the management of your pensions and investments as even a small percentage difference can add up over time. After 30 years and compounded interest, you could be looking at 10s of thousands if not hundreds of thousands of pounds difference.
“Of course, where the wins are greatest are for those who have taken the time to educate themselves and manage their own funds with the benefit of only paying minimal platform fees.
“A solid global tracker is likely to give similar returns to managed funds but with maybe a whole percentage point or more difference in professional fees, a pension that has grown from say £200,000 invested over ten years at an average of 6% a year, will see your pot worth netting an amount of just under £360,000 if the fees are just 0.15%.
“The same amount invested with annual fees of 1.5%, would only be returning £310,000, with over £40,000 of your gain being ultimately lost to professionals.”
Craig Rickman, pensions expert at Interactive Investor, said: “Every pound you pay in fees that doesn’t translate to a better outcome, is a pound less for you to enjoy in your golden years.
“The tricky part for savers is that, while portability of pensions means that you can switch to somewhere else that provides better value, many don’t know how much their current providers charge. They have no idea whether their existing pensions offer fair value.”
Scott Gallacher, director at Rowley Turton, said it’s about striking the right balance.
He said: “As independent advisers, we always want our clients to get good value for money — not just low costs. It’s about having a pension that’s well run, properly invested, and matched to your long-term goals.
“A cheap-as-chips pension isn’t much help if it’s not performing or doesn’t suit your needs. Sometimes paying a little more for the right plan can actually leave you better off in the long run. The key is striking the right balance between cost and quality.”
Rob Mansfield, independent financial advisor at Tonbridge-based Rootes Wealth Management, agreed, highlighting the importance to ensure goof value for money.
He said: “It’s never a bad idea to check and question your pension. The key consideration is value, not cost. What are you paying, what do you get for that and is it value for money? The argument goes that if you cut your costs then it’s more money in your pot but that only works if it’s a like for like swap.
“Making sure you’re in the right risk level fund is more important than shaving a little bit off your costs. The landscape has improved a lot over the past decade.”