Pension scheme charges

If you’re a member of a defined contribution pension scheme, you’re likely to pay some charges. They cover the cost of managing your pension scheme and investing contributions to build up your retirement pot.

Pension scheme charges

It’s important to understand the charges that apply to your pension scheme and the effects these can have on your retirement pot.

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. 

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Why are charges 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 time, charges 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 is an important part. You 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
  • understanding what you get for that
  • weighing these up and seeing whether you’re satisfied that the first is fair in light of the second.

Charges on pension schemes and plans have been reducing. If you’ve got an older scheme or plan, it’s worth reviewing the level of charges you’re paying.

If you’re in your workplace pension scheme, you might pay a lower charge than if you take out a personal pension.

Charges on group personal pensions also are likely to be lower than on self-invested personal pensions This is because the funds tend to be less specialised, but this isn’t always the case and it’s best to check.

It’s worth remembering that the charges on pensions are often lower than on other savings products, such as individual savings accounts (ISAs).

Charges that might apply

Here are some of the common types of charge that could apply, together with a brief description of each.

Annual management charge

This tends to be how most workplace defined contribution pensions charge. Although 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.

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 would 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 investments.

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.

These are more common in pensions you set up yourself where the charge for the investments is often separate to the charge for managing it.

Service/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 decrease the more money you have to invest with them. 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 such costs as these reduce the investment returns of the funds.

These are costs that the managers of your pension might have to keep under review to help make sure you get value for money. You can ask your pension provider for more details.

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 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 monetary amount, such as £10 a trade, or a percentage of the amount you’re investing.

These type of fees are unusual in workplace pensions, but are more likely to be in pensions you set up yourself.

Entry fees or bid/offer spreads

Some funds have two prices. There’s one price to buy into the fund, and another for selling out of the fund. 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 £1.00 per unit and a bid price of £0.98 per unit. This would equate to a 2% entry charge. This would mean that for every £100 contributed, £98 will be invested in the pension.

Initial units, capital units and accumulation units

These special units tend to apply to older pensions.

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 (set out in your pension contract), your contributions will be used to buy accumulation units. These attract lower charges.

The only difference between the two types of units is the charges. But the higher charges on initial and capital units means 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.

Stopping contributions

Some older pension policies might charge you if you stop your contributions. They do this by increasing the charges for looking after your pot in future.

Stakeholder pensions aren’t allowed to charge you in this way.

Transferring your pension pot

If you’re thinking about moving your pension pot from one provider or workplace pension to another, you need to understand the charges involved. So it’s important to compare the charges in the pension you’re considering transferring to with the charges in your current pension.

One thing to look out for is exit charges, including market value adjustment or market value reductions which might apply if you’re invested in a with-profits fund.

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Other charges

Above are some of the more common charges, but others might apply during the lifetime of your pension.

For example, some providers might charge you for fees for taking money from your pension when you retire or receiving certain statements by paper.

Your pension provider should give you a list of all charges and when each might apply.

If you got financial advice when you set up your pension, you might also have agreed that your adviser’s fees are taken from your pension fund.

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MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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