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Q&A: pension charges explained
Labour leader Ed Miliband has attacked pension charges for being too high, but what exactly are you paying for?
by Michelle McGagh on Jul 24, 2012 at 09:30
Performance fees: If the funds that your pension is invested in do well then the fund manager could be in line for a performance bonus. This is typically a percentage payment if their fund exceeds a certain benchmark. Not all funds pay out performance fees.
Total expense ratio (TER): Following criticism of AMCs, many funds have starting providing a TER figure. This is the measure of the total costs associated with managing and operating a fund – including management fees, legal and custody fees. However, it is still difficult to glean a true picture of the costs because TERs do not include dealing costs.
Dealing charge: The more the funds your pension pot is invested in buy and sell shares, the higher the dealing charges will be. Depending on the fund manager’s style, they may buy and hold stocks – keeping them for a long time – or they may turn over the stocks frequently. The latter will cost you more money, so it’s worth investigating.
However, you also have to look at whether the returns on the fund justify the dealing costs. If the fund is making a stonking return then paying increased dealing charges may be worth it.
Dealing charges are being widely debated in the pensions industry at the moment as they can substantially bump up the cost of a pension – hence the 4% charge example that Miliband uses – but there are moves to bring the costs down.
Exit charges: Trying to get out of a pension contract could cost you dearly. Many contracts, typically those written in the 1980s, had exit penalties written into them. Whether you want to leave the pension contract because you have set up a new scheme or you have changed job, you should make sure you’re not going to get stung on the way out.
Adviser fees: If you received financial advice when you took out your pension plan, you may be paying for that advice out of your product. Even though many people believe advice is free, it is actually paid for through a commission that is paid from the pension provider to the adviser – and the money they use to pay it is taken out of your pot.
Under new rules advisers have to disclose exactly how much they charge for setting up your pension and discuss how you will pay for that charge. If your adviser tells you his advice is free, don’t be fooled.
Will I be charged for my workplace pension?
Workplace pensions do not, unfortunately, escape pension charges. However, you may be entitled to a discount on charges if you are an active member of the pension scheme, ie, you contribute regularly.
In some schemes the costs you pay do not vary depending on the size of your fund, and you will have to keep paying them even if you no longer contribute. Some employers think it is unfair that those active members should subsidise those who leave the pension early and so provide an active member discount – this means active members pay a reduced annual management charge.
If you have an active member discount, you lose it if you leave your employer and subsequently leave the pension scheme.
Where can I get a low-cost pension fund?
A number of pension providers offer low-cost pensions, but the one you are sure to hear more about in coming months, and may even become a part of, is the National Employment Savings Trust (Nest). This is the government-backed pension scheme that has been launched to coincide with the government’s plans to auto-enrol millions of people into workplace pensions.
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