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How to solve the dilemma of pensions charges

A new report has criticised the pensions industry for failing to disclose charges, and says the government should help explain the costs.


by Michelle McGagh on Jul 19, 2012 at 10:18

How to solve the dilemma of pensions charges

A timely report on pensions charges shows the extent to which pension pots can be eroded by costs, and accuses pension providers of ‘maintaining a fog’ around what consumers pay to save.

The report by the Royal Society for the encouragement of Arts, Manufactures & Commerce (RSA), which was sponsored by Dutch pension fund APG, reveals that even modest fees of 1.5% can make a significant dent in a pension pot.

It gives the example of a 25-year-old who plans to retire at 65, and enjoy a pension for the next 20 years. They save £1,000 a year into a pension, increasing the amount in line with inflation of 3%, and they receive a 6% return on their money.

By age 65, without any fees, the pension pot will be worth £248,170, which will create an index-linked pension of £16,080 a year.

However, if they have to pay out 1.5% a year in charges that reduces the retirement income to £9,900 a year.

The truth is that there will always be a cost to pensions; if you invest for 25 years then the costs will be significant. One of the best comparisons is mortgages. People are willing to pay substantial interest for the privilege of taking out a mortgage and owning their own home – so they should accept that they won’t get a pension for nothing.

Issue of transparency

Although costs have to be accepted as part of the process, the transparency of those costs leaves a lot to be desired. Investors who are keen to understand what they are paying for their pension are often stumped by the lack of information on charges and the inability to compare pensions.

The report notes that the inability to compare pensions is a result of charges being rolled together, rather than explained individually.

‘Compounding of charges is one reason why investors have such difficulty in distinguishing between one pension and another. It is simply not made clear to them that a pension provider with a charge of 0.5% will, all else being equal, provide a pension which is a third higher than one which charges 1.5%,’ said the report.

Most pensions show the annual management charge (AMC). Although the AMC is cited as the cost of the investing your money, it does not include audit, custodial and other costs which are charged separately. In a bid to aggregate charges, pension providers are now quoting the 'total expense ratio', but this still does not give you the full picture.

There are still taxes, broker commissions and the dealing costs to be added on top.

The difficulty with extracting the exact cost of a pension is due to providers being unable, or unwilling, to provide the information.

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7 comments so far. Why not have your say?


Jul 19, 2012 at 12:52

Points 1-4 are great but isnt this information already shown on pre-sales illustrations i.e. effect of charges to date?

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Jul 19, 2012 at 13:00

The total fees in my SIPP (fund charges, dealing costs, platform charges, etc.) come to just over 0.4%. My group pension is a tinge higher at 0.5%. No way would I pay anything close to 1%, and above that you might as well not bother!

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Jul 19, 2012 at 15:00

When you say "They save £1,000 a year into a pension" does this take into account tax relief?

If you do not contribute to a pension then the return on investment of your tax contributions is zero. The additional income generated in retirement over and above the state pension is zero.

Using your figures, indexation, inflation etc:


£16,080 pa - with no charges - Utopia - you paid £800 pa HMRC paid £200 pa

£9,900 pa - 1.5% charge - Realistic - you paid £800 pa HMRC paid £200 pa

£0.00 pa - you pay £200 pa to HMRC which the Government will spend wisely on your behalf.

In both fee and non fee illustrations you ARE getting a ROI and more importantly additional income in retirement.

MY pension document at outset said my fund would grow "tax free" and I would get a tax free cash lump sum of 25% of the fund at my chosen retirement date between "50-75."

Two out of three of these promises have now been broken and not by a fund manager, IFA or insurance company. Will the Gov't go for the hat-trick?

What happened to the graduated pension?

What happened to SERPS?

What happened to S2P?

None of these promises were broken by a fund manager, IFA or insurance company.

I maintained my contributions (as they were mandatory) but my benefits were gradually eroded to nothing.

IF you are in a high charging pension fund you can always move to a lower one - see your IFA.

If enough people did then the high chargers would disappear unless they could demonstrate value for money as in the fund demonised by Milliband which has high charges BUT great performance. Just not a pension fund.

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john brace

Jul 20, 2012 at 17:46

sgjhaghsdg - where do you have your SIPP? charges with HL are getting silly.

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Jul 21, 2012 at 11:25

I pay .5% on my fund which is a managed fund by Schroders. Apologies to them if I have spelt this incorrectly. It has always performed very well. I invested in it in 2006, have taken the maximum drawdown allowed and it is currently about 15% higher than when I started.

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Jul 21, 2012 at 13:34

@John - My SIPP is with BestInvest. Some investments trigger a £120pa platform fee, others don't. Vanguard trackers (but not most other trackers) and equities trigger it but my SIPP is large enough for this not to matter; I'm better off with low fees on my holdings despite the one-off annual fees.

BestInvest are also pretty good if you go the (split) fund route as they rebate some trail in a SIPP as long as you have £50k on platform. This £50k includes SIPPs, ISAs and unwrapped for the whole family so isn't too onerous, and also gives you £7.95 equity dealing fees.

My wife's SIPP is more modest so is in a single Vanguard Lifestrategy with HL.

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john brace

Jul 22, 2012 at 09:50

thanks a lot - food for thought

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