If you’re a member of a defined contribution pension scheme, you’re likely to pay some charges. But what sort of charges are payable by the member ?
They could cover the cost of managing your pension scheme through pension administration. Or by regular investing contributions through the process of buying or selling investments held within to your retirement pot.
So what basically are pension scheme charges ?
It’s firstly, very important to understand the charges that apply to your pension scheme. Which could have a great affect on your future retirement pot valuation.
The amount and type of charges can vary from pension to pension. Workplace pension schemes might have lower charges than pensions you’ve set up yourself.
At present most simple Auto Enrolment have charge caps allied to them. Which means that the annual management charges applied should not be greater than 0.75% per annum. This is normally based on the valuation of the assets held within that portfolio.
It is a common theme that larger employer’s may have greater economies of scale though the size of the total assets held. So they may be able to attain reduced level of fess with a provider, who is willing to want to look after the current assets and future contributions made by its members.
But why are charges so important ?
The charges you pay matter because, while the performance of your investments can go up and down, you’ll have to pay the charges regardless.
Over the course of time, over many years which pensions are designed for. The level of charges applied by respective provider can make a huge difference to your returns. Even relatively small differences in ongoing costs can add up over time.
While price isn’t the whole story, it plays a really important and vital part as part of your future planning. You will need to weigh up what you’ll pay against what you get for what you pay. This should involve:
- being clear on what you’re paying on a regular monthly basis,
- understanding what value or service you are getting for paying such fees,
- weighing these up and seeing whether you’re satisfied that the first is fair in light of the second. Can your provider justify the fees being charges for the return of service level they are providing to its members.
Charges on pension schemes and plans have been reducing in recent years. Mainly through economies of scale, or by schemes being simpler to manage through the introduction of Auto Enrolment in 2012.
If you’ve got an older scheme or plan, it’s worth reviewing the level of charges you’re paying. These schemes will normally apply higher fees to cover things such as safeguarded benefits. Such as Guaranteed Annuity Rates (GARS), with-profit policies, cover sales commission.
What about older pension schemes !
It was very common in the the late 80’s and 90’s for most schemes to be sold by agents on a commission basis. When your only option was to buy an annuity, but the pensions landscape has completely changed through the introduction of Pensions Freedom in 2015.
Another consideration, could relate to the type of scheme you have. If you’re in your workplace pension scheme, you might pay a lower charge than if you take out a private or personal pension directly with a pension provider.
It may well be that charges on workplace pensions also are likely to be lower than on self-invested personal pensions (Sipp) or a a small self-invested pension (SSAS). In recent years the growth of these pension products have grown massively through the introduction of platforms or apps available on the internet. Where individuals will be responsible for picking their own investments through shares, funds, ETF’s etc. So it pays to shop around and check the level of fees payable ahead of purchasing such pension product.
So what type of charges that a pension provider apply !
Here are some of the common types of charge that could apply, together with a brief outline.
Annual management charge
This tends to be how most workplace defined contribution pensions charge, but some pensions you set up yourself might use this as a way to charge too.
The annual management charge covers the cost of running and administering your pension scheme, as well as investing contributions in your pot.
You’ll be charged an amount each year, either as a set amount or as a percentage of the value of your pension pot investments.
Each investment tends to have a different annual management charge to reflect the type of investment fund. Some are more specialist or are more actively managed, and they often have higher charges.
The charges are usually taken directly. This means it’s already been taken into account when you look at the performance of your investments. Normally they will take a fee each month to even out the costs.
If you’re in a workplace or a stakeholder pension, there’s a charge cap on the default pension investment available if you don’t choose. This is set at 0.75% of the investment. In other words, for every £100 invested, you should be charged no more than 75p.
Policy fees
These cover the cost of administration, and are usually included in the annual management charge. However, older pensions might have a separate policy fee.
Ongoing charges figures
The ongoing charges figure (OCF) covers the day-to-day costs of running an investment fund. It’s usually charged as a percentage of the value of your total investments held in your plan. In the past it used to be known as the total expense ratio (TER).
It’s usually taken directly which means it’s already been taken into account when you look at the performance of your investments.
You can find the OCF for an investment fund in the ‘Key Investor Information’ document. It should normally be highlighted on your provider’s website under the range of funds and investments they offer.
The OFC is more common in pensions you set up yourself where the charge for the investments is often separate to the charge for managing it.
Service or administration charges
Sometimes also known as platform fees, you pay these to your pension provider to cover the administration of your pension. They’re usually charged as a percentage of the money you’ve saved.
Different providers have different ways of charging their service fees but generally they fall into two camps:
- Stepped charges – which means that the charges apply to all your money depending on which price band you’re in.
- ‘Tiered’ charges – this is where your money is split into chunks, with each chunk charged according to which pricing band it fits into.
Often the charges will reduce the more money you invest. This type of charging structure is usually in pensions you set up yourself.
Transaction costs
These are costs as a result of buying, selling, lending or borrowing investments. Your pension pot might be indirectly affected by these costs as they reduce the investment returns of the funds.
The managers of your pension might review these costs to help make sure you get value for money. You can ask your pension provider for more details.
A simple example:
With my Sipp account they will charge me £ 1.50 each time I buy units within a fund, irrespective if its £ 100 or £ 500. they will charge me the same transaction fee. If I buy individual shares they will use charge me £ 11.99 per trade plus stamp duty, but I buy on a set date called “a regular investment” the fee is rescued to £ 1.50 per trade, again irrespective on the size or amount of that trade. So it can be very cost effective to take advantage of any offers provided by your provider.
Trading or switching fees
These are charged when buying and selling certain investments. They could apply if you’re making a contribution and investing or if you want to change existing investments by switching from one to another.
In some cases, there might be a cost for investing that’s charged each time you buy or sell. This could be a fixed amount, such as £10 to £ 15 per trade, or a percentage of the amount you’re investing.
These types of fee are unusual in workplace pensions, but are more likely to occur in pensions you set up yourself.
Entry fees or bid/offer spreads
If you are buying investment funds or unit trusts etc, they normally have two prices. There’s one price to buy into the fund, (bid) and another for selling out of the fund (spread). The bid/offer spread is the difference between the buying and selling price of your units.
It includes an allowance for the initial charge, plus the cost of making the investment (for example, dealing costs and Stamp Duty).
Fees are usually expressed as a percentage of contributions (or switches), for example 2% of the amount to be invested.
For example, a fund could have an offer price of £1 per unit and a bid price of £0.96 per unit. This would equate to a 4% entry charge. This would mean that for every £100 contributed, £96 will be invested in the pension.
Initial units, capital units and accumulation units
These special units tend to apply to older pensions that held a particular type of investment fund.
Typically, in the first few years of your pension policy, the contributions you make will be invested in initial units or capital units. These carry higher annual management charges.
However, after an initial period (usually set out in your pension contract terms and condition), your contributions will be used to buy accumulation units. These usually have lower charges.
The only difference between the two types of unit is the charges. But the higher charges on initial and capital units mean that these might grow in value slower than accumulation units.
You should be able to see if this applies to you by looking at your annual pension statement. It should show how many of each type of unit you have.
With regard to your fees and charges applicable and payable by the member. They are normally taken out automatically by your provider on a regular basis. They should be highlighted and displayed within your annual statement, whether online or in peer format. So take some time to look at your annual statement and see what fees and charges are being paid.
I use a simple analogy in work when speaking to clients, if your pot goes from £ 100K to £ 110K everybody is happy. But if your pot from £ 100 to 90K, they nobody is happy. But do you know where you funds are investing and how are they performing. Most people are invested in a default or lifestyle fund, they just see a headline figure. You may be paying the small fees to run your pension, and if the scheme continues to lose money, can your provider be justified in charges you fees when a pot may be constantly losing money.
What about a small pots pension ?
This could be very applicable if you have a small pot below £ 10,000. This a now a common event as before move jobs on a regular basis, or may be paying small amounts in a scheme based on their salary. Or they could be working part-time.
If you are no longer contributing, could a small pot be eaten away by fees and charges taken by your provider. If no new money is being added into that respective pension. So it may be an idea to review, or could you transfer or consolidate that scheme to another pot in place.
So you can save fees, or possibly simiplify the administration of the number of pensions yo may
It may well be a good idea to compile a simple spreadsheet, to compare fees and charges, investment returns and the benefits on offer. With regard to each particular pension scheme you have in place. It could prove to be a very valuable simple exercise as part of your future pension planning strategy.
Remember !
If you found this blog post useful and informative. Please feel free to check out my other posts covering pensions, savings, investing and recommended investing books on https://moneyminted.co.uk So you too can improve your financial and investing knowledge and ultimately reach your investing and investing goals.
It’s not a get rich quick journey, but you will get there in the end if you think long term and create a plan of action.
Be the first to reply