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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
If you've ever tried to work out how much you pay for your pension you'll know the charges can be confusing, but the row around costs led by Labour's Ed Miliband isn’t helping to make things any clearer.
The Labour party has a long and chequered past with pensions. When it came to power in 1997 it chivvied along a pensions mis-selling review that had been dragging on since 1994.
This review led to the birth of stakeholder pensions. Stakeholder pensions were a far cry from the standard products offered by the pension providers: fund manager charges were capped at 0.5% for the first 10 years, and at 1% after that. You could switch pension providers without charge, make contributions from as little as £20 when you like, and stop and start contributions whenever you wanted without charges.
The problem with stakeholder pensions was that providers didn’t want to sell them because there was no margin to be made. The good news, however, was that providers had to start competing and pension charges started to fall.
So how did we end up fighting the same fight on charges 15 years later? Well, in those 15 years there has been no move to increase transparency in charges, which mean that providers can still levy high charges without you knowing about it.
Miliband uses Which? research that was carried out in November last year to illustrate the impact of high charges.
A person who saves £50 a month for 40 years into a pension that has a 2% real rate of return will only have £15,964 in their pension pot at retirement if their annual pension charge is 4%. Someone who pays 0.5% a year in charges, meanwhile, will have £32,398 in their pot on retirement.
The figure is shocking, but it is slightly disingenuous as this isn’t just a product charge, it incorporates a number of different charges.
So what are the different charges?
So how do you get to a position where you are paying 4% of your pension fund a year in charges? Here’s how the charges add up, and what sneaky costs you may incur:
Wrapper charge: This is a charge you pay for the pleasure of having a pension. This can include an initial set-up charge, an annual charge or other quarterly charges, and essentially covers the administration of your pension. How much you are charged depends on the provider of your pension. Many charge a set cost, and others will take a percentage of your pension fund as a fee.
These wrapper charges are sometimes known as policy fees, particularly in older policies.
Annual management charge (AMC): This charge relates to the cost of having your money managed by a fund manager. The AMC is a percentage of your fund that is taken each year to cover the costs of running the fund. When it comes to the AMC you should be aiming to pay no more than 1.5%, as anything above this is bad value.
More about this:
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