Don’t let charges pick your pension’s pocket27 May 2016 Back to results
There are lots of different charges that can apply to your pension and understanding them is important to make sure you’re not paying more than you have to.
Finding a low cost pension matters, because charges come straight out of your pension pot, and so the more you pay the less you’ll end up with for later life.
It’s very likely that you’ve got more than one pension. Perhaps you set up a personal pension for yourself and you’ve joined the workplace pension scheme offered by various employers over the years. It’s easy to end up being a member of three, four or even five different schemes and some of them may date back a long way.
But all of your schemes won’t carry the same charges and the older they are the more expensive they’re likely to be. It can, therefore, make sense to reduce the number of pensions you’ve got – this is called pension consolidation – and to transfer your pension savings to a scheme with low charges.
To help you understand the different pension charges, we’ve listed the most common ones below. You can then check if they apply to your own scheme and at what level they’re set.
Once you’ve worked out what you’re paying, you can then shop around and see if you could get a better deal. That way you’ll be able to keep more of your savings and build up a bigger pension pot for later life.
· Annual management charge
This is most commonly charged as a percentage of the value of your pension pot, although some schemes charge a monetary fee. The charge covers the cost of running your scheme and investing your savings. Different investment funds will have different annual management charges.
· Policy fee
This is a scheme administration charge that is often, but not always, included in the annual management charge.
· Bid-offer spread
This is the difference between the buying price and the selling price for unit linked investments. The difference only tends to be charged in older pension schemes. Where applicable it means there is a cost to buying and selling these investments in your pension.
· Fund switches
If you want to take the money you’ve invested in one fund and move it to another there may be a charge for doing this and it can either be a percentage of the amount you’re moving or a set fee. Some pension schemes will let you make a certain number of switches for free each year.
· Allocation rates
Some – generally older – pension schemes won’t invest all of your money, and will keep some of it as a fee for looking after your savings. The allocation rate is the proportion of your money that’s invested. Most schemes have now moved away from this charge.
· Transaction Charges
Some schemes may charge you if you change contribution levels.
· Exit penalties
If you want to transfer your pension savings to another scheme then there may be a charge to pay. You’ll also have to check if you’re in a with-profits scheme or have invested in with-profits funds, as leaving could result in your savings being subject to a market value adjustment.
The pension market has been trying to simplify and reduce charges to make it easier for savers to understand what their scheme costs. But there are still lots of different types of pensions with varying charges and many older schemes carry some that newer ones don’t.
It may seem like a lot to get your head around, so we recommend speaking to your financial adviser to give you details of all the charges you’re currently paying, you’ll be able to see just what sort of value you’re getting and whether or not it would make financial sense to move to a different scheme.