Do you want to minimise erosion of your retirement funds? You must understand pension charges
Most products or services come with fees or charges, and pensions are no different. These costs can vary quite drastically depending on the pension product and provider.
You might think the more you pay in pension charges, the better service you’ll receive. However, much of the time, the opposite is true. If this is the situation with your pension, you could be paying more money for nothing. Therefore, you must check your pension regularly to ensure it’s providing you with value for money. If your financial future is important to you, it is highly recommended you engage with a financial advisor (such as Portafina) before making any decisions.
Pension charges you could be paying.
There are various pension charges you could be paying. These include:
- Provider charges
- Platform charges
- Management charges
Let’s take a look at each of these in more detail.
These fees are often referred to as annual management charges. They pay for the costs of the particular system on which your pension resides.
Another name for Platform Charges is Fund Charges. You pay these to cover any fees involved with trading and the costs of the technology that enables trading.
If you use the services of a financial professional, such as a regulated financial advisor, you will pay ongoing management charges. However, you should not be too concerned about these. An ILC report from 2019 included data showing people who received financial advice had an average of £30,000 more in their pensions than those who didn’t.
How pension charges affect you
You might not consider a slight percentage difference in your pension charges to be significant. However, you’d be wrong. Even minor percentage differences will mount up over time, potentially eroding your pension pot.
If you don’t understand your pension charges, you’ll have no opportunity to reverse any erosion. However, you might not feel comfortable dealing with pensions. If this is the case, consider using a financial advisor to help sort out your high pension charges.
Why pension charges differ
Although it is frustrating, you must accept that pension charges differ between different schemes and providers. One of the main reasons for these differences often comes down to the provider using outdated systems.
Advances in digital and internet technologies have cut down the need for much administration around pensions. However, older, paper-based schemes don’t benefit from such efficiency. The provider passes the cost of increased administration onto you in higher charges.
Moreover, heavy administration slows down the process of investing. Therefore, you could end up paying higher charges for a poorer service.
Your pension might remain on an outdated system for a couple of reasons. Firstly, your provider may not have gotten around to updating your plan. There is also the chance that they’ve purposely left you on an old pension scheme because it’s more profitable for them.
Generally, the best pensions are more efficient. This efficiency enables them to have lower charges and better performance.
Can you reduce your pension charges?
There are a couple of ways you try to reduce your pension charges. One method is to use a pension-combining service. They will take your multiple personal and workplace pensions and combine them into a single scheme. However, their primary function is to combine your pensions to end up with the same level of charges.
A better solution could be to consult a regulated financial advisor. They can assess all aspects of your current pension plans, including the charges. Having done that, they will compare what you have with suitable products available on the market. Of course, you will have the final say, but it makes sense to get such advice.
Could you be paying no pension charges?
Probably not. Several years ago, products known as “with profits” pensions were available. One of the unique selling points of these products was that they were free of charges.
However, this was not quite the case. The charges associated with such schemes were far from transparent, and they had been wrapped up in other aspects of the scheme. Therefore, if you have one of these, you might want to get it checked out.