High pension charges & your retirement
Informed Choice chartered financial planner Martin Bamford was quoted in the Independent on Sunday today, in an article looking at the impact of charges on pension funds.
High charges have been a topic of interest in the press for several months now, with comparisons being made between the typical charges for pension funds in the UK and other European countries.
It is fair to say that the charges levied in the UK are higher than elsewhere.
High charges, even when expressed as a single annual management charge, reduce the rate of investment growth within a pension fund and result in a lower eventual fund value. This means a lower income in retirement than you would have received in a plan with lower charges.
Within the article, Martin provides an example of a 25-year-old woman who contributes 5 per cent of a £22,000 salary to an Aviva stakeholder pension.
Based on an annual management charge of 0.9%, the investor would have accumulated a pension fund of £174,000 by age 65, assuming 7% annual investment growth. The 0.9% annual charge is available to investors who take out this plan directly online, without the benefit of any financial advice.
If the same investor had picked a Stakeholder pension plan with a 1.5% annual charge during the first ten years, reducing to 1% a year thereafter, the total expenses deducted during the lifetime of the plan would have been £55,254 instead of £47,300 with the 0.9% annual charge.
The introduction of Stakeholder pensions in 2001 resulted in a big shake-up of pension plan charges, with many providers shifting to a single annual management charge of 1-1.5%.
Prior to Stakeholder, it was common for pension plans to levy around four separate charges, including an annual management charge, monthly policy fee, lower allocation rates and bid/offer spreads on investment units.
Martin concludes his comments in the Independent on Sunday article by reminding readers that value is always more important than price.
“People saving for retirement should always focus on value rather than price alone. If you exclude the cost of advice, pension plans are cheaper, but you run the risk of making poor investment decisions and losing far more in investment returns than you would have paid in advice charges.”
You can read the article in full here. Do speak to us if you are concerned that you are not getting best value from your current pension arrangements.