01 Jan 2024

Pension fees and charges explained

Learn about pension charges and understand how much you’re paying

When a business provides you with a service or helps you with something, you expect to pay for it. That’s just how the world works. Pensions are no different – but pension fees and charges often take people by surprise. In fact, 69% of 45 to 65-year-olds are unaware of the charges on their pensions.

That’s not good. If you’re buying a service, it’s best to know how much you’re paying for it. Then you can decide whether it’s good value for money, or if your pension provider charges too much.

If you do decide to change pension providers, comparing fees and charges is a big part of deciding which new one to go with. That’s particularly true if you have an older pension, as pension charges have been going down over time.

And you always have to pay those charges, whether your pension investments do well or badly. Over time, they can make a big difference to your pension’s performance. So it’s very important to make sure you’re happy with how much you’re paying your provider.

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Want to simplify your pension savings?

Bringing all your pensions into one place could save you money on fees and charges. You could track down lost pots you’ve forgotten about, too. Find out whether it’s right for your pension savings.

Pension provider charges

The average person has 11 jobs in their lifetime. So most people end up with a few different pots with different providers. 15% of working-age people have four or more pensions, while the average Millennial will probably end up with five pensions.

Each pension provider will take different fees in different ways. Different types of pension will also have their own fee structures. Some fees might only appear in the small print, so unless you read every detail, you won’t know how they work or how much you’re paying.

If you want to find out what fees and charges you’re paying, you can:

  • Check your annual pension statement. It should give you a full breakdown of every fee or charge you’re paying.
  • If you manage your pension online, visit your pension portal. Again, full details of whatever you’re paying should be easily available.
  • Just call or email your provider. They’ll share full details of any charges or fees, and be on hand to answer any questions you have.

What pension fees and charges are – in more depth

Now we’re going to talk you though the main kinds of fees pension providers charge. That’ll help you know what to look out for when you’re looking at fees you’re already paying, and thinking about ones you might have to pay.

Contributing to your pension

  • Your annual management fee does exactly what it says on the tin. It’s how you pay your provider for running your pension scheme and investing on your behalf. They’ll usually charge either a set amount or a percentage of your total pension pot.
  • If you’re managing your pension through an online platform, you might well have to pay a platform fee. It covers the costs of keeping your chosen platform up and running. Again, it’ll either be a set amount or a percentage of your pot.
  • Your provider will invest your pension in one or more funds. You might choose the funds; they might choose for you. They’ll all have their own set of pension fund management fees or fund charges. Be sure to add them in when you’re working out how much you’re paying.
  • Many providers charge an underlying fund fee. It goes straight to the fund managers who invest your money. If you want to avoid paying it, look for passively rather than actively managed funds.
  • Service or policy fees cover a pension’s administration costs. These days, providers usually wrap them up in the annual management fee. But if you’ve got an older pension, you might find you’re paying separately for admin.

Old pension pots

  • If you stop paying into a pension, you might have to pay an inactivity fee. Or you might have an active member discount that disappears. This kind of fee can eat into your pot’s value. If you have to pay one, you might want to transfer that pot into an active pension.
  • With older pensions, you sometimes had to pay a contribution charge every time you paid into it. That’s now much less common. Again, if you’ve got an old pension and you are paying this charge, you might well benefit from switching out of it.

Transferring or drawing your pension

  • Depending on how you choose to access your pension, there can be a one-off or regular charge. It can be a fixed amount, a percentage of the amount drawn down, or (rarely) a combination of both.
  • Some providers ask for an exit fee when you withdraw or transfer money out of your pension. After some savers had to pay exit fees of up to 10%, the FCA capped exit fees at 1% for savers over 55, and banned exit fees in any new plans.

Pension charges cap

The pension charges cap came into force in 2015. It applies to the defined contribution pension schemes that employers auto-enrol you in. If you’re in one and have chosen its default arrangements:

  • you’ll never pay more than 0.75% of the total value of your pension pot in administration or investment fees.

But note that the cap doesn’t cover transaction costs. So you might have to pay a charge when your investment manager buys or sells assets on your behalf.

Pension transfer fees

There are many reasons for transferring a pension pot into another pension. You might find a new provider with lower charges, or one that gives you more control over your funds. Perhaps you’re looking for higher or lower levels of risk.

Whatever your reason, you might have to pay an exit fee. We’ve touched on them above. They’re now capped at 1% for savers over 55, and banned in any new plans. You should also look to see if you’ll lose any important benefits when you transfer your money from one pension into another.

Pension consolidation fees

You probably won’t have to pay pension transfer fees for bringing your pension pots together in one place. But the fees and charges you have to pay might change. So make sure you’ve:

  • worked through all of your old pension fees and charges in detail
  • understood any fees and charges for the pension you’re bringing them into
  • checked for any benefits you might lose
  • are sure that the new pension gives you a better deal.

Even though it’s much easier to manage different pensions when they’re all in one place, consolidation might not be the right choice. You could lose more money than you gain by bringing them together.

If you’re not sure what the right decision is, it might be worth getting some advice from an independent financial adviser.

Financial adviser pension fees

As this is an article about fees, we shouldn’t forget to mention pension adviser fees! You have to pay most advisers for their help and support. Their advice can be a very worthwhile investment. If you’re not sure where to find an adviser, try the Unbiased website.

There’s no fixed amount for financial adviser fees on pensions. They’ll base their charge on many factors, including their own level of experience, and the kind of advice and ongoing relationship you’d like.

What’s next?

When was the last time you checked the pension fees you were paying on your pension pots? It’s really important to keep track of how much you’re paying, no matter where you are in your retirement journey. You could be paying too much – or you could have the balance just right. But if you don’t check in every once in a while, you can’t be sure.

If you don’t know where your pension pots are, you’re not alone – one in five people has lost a pension. If you need help finding yours, you can use the government’s free tracing service to track them down. 

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