Pensions can be an expensive business. When you’re busy focusing on whether you’re saving enough or how to access your pension to match your lifestyle, it can be difficult keeping up on exactly how much you’re paying in fees and what impact this is having on your pension.
It’s important you understand the charges of your pension provider, as fees eat into the income you’ll get during retirement. When you’re receiving a service, fees are a fact of life, but you don’t want these costs to mean you miss your dream retirement income or have to work longer to reach your goals.
In this guide, we look at the fees you could be charged by your pension provider in two important stages; when you’re saving for your pension and when you start withdrawing from it. In the industry, this is known as accumulation and crystallisation.
We worked with consumer financial group Boring Money to find out how much you could be required to pay in three scenarios; when you’re saving for your retirement, and when you’re withdrawing from your pension through either flexi-access drawdown or with irregular lump sums – Uncrystallised Funds Pension Lump Sum.
At Moneyfarm we believe you should know exactly what you’re expected to pay for your pension as this will impact your retirement income. We only charge a management fee at an account level, which means there are no surprise flat fees or charges for rebalancing, transferring or for meeting targets.
The total cost of investing includes two further costs, the transaction cost (market spread) and fund fee, but these aren’t controlled by Moneyfarm or any provider.
Costs of saving into a pension
Whether you’re opening your first personal pension to help supplement any workplace schemes, or want to transfer old pension pots to a different provider to make your money work harder, there are a range of fees you may be required to pay by your pension provider to set up and manage your pension savings.
For our research we imagined a 45 year old transferring a £50,000 workplace pension into a personal pension, with a direct debit of £250 a month going in until the age of 60. Purchasing a single fund or pension portfolio, this pension would grow by 5% a year to give a final pension pot value of £170,000.
Our research showed this cost an average of nearly £12,900 over 15 year across digital wealth managers and more traditional investment platforms, although this could cost as much as £25,900 with one DIY platform. At Moneyfarm, this would have cost you just £12,550.
Below are the fees you may be required to pay a pension provider for keeping your pension with them. Remember, at Moneyfarm we charge you one fee at an account level, the management fee – although you will also be subject to ETF fees and the impact of market spread. The ETF fee is included in the research calculations.
Initial set up
The first cost you may be exposed to when opening a new pension is the initial set-up fee. It’s pretty rare for a provider to charge you to open an account these days, although these charges do still exist.
It’s common to be charged for transferring your pension savings to or from a provider, especially if it’s a pension scheme that includes so-called safeguarded benefits, like a defined benefit pension.
If you want to transfer a defined benefit pension that’s worth over £30,000, you’ll need to speak to a Financial Adviser before you can transfer out of the scheme. Remember, this will come at an additional cost, so it’s important you factor this into your calculations.
If you’ve got a Guaranteed Minimum Pension (GMP) or Guaranteed Annuity Rate (GAR) you might be required to pay extra too.
For a provider, running a pension can require more work than an ISA. As a result, providers will sometimes charge a pension administration fee, which covers the management of your pension and can sometimes be separate to the ‘general’ management fee.
Not all providers charge a separate pension management fee, but look out to see if the normal management or administration costs for their pension is different from their ISA or General Investment Account (GIA).
Management or account fees
To have experts look after and manage your pension on your behalf, you will usually have to pay a management fee – which can we charged at an account or product level. Even if you want to take control of your pension investments yourself, you will still have to pay a platform fee.
These charges usually come in two forms: a flat-fee or a percentage-based fee.
A flat fee is a single fee that generally doesn’t adjust to changing values in your investment portfolio.
Percentage based fees differ according to the value of your investments, and are usually charged when a provider is managing your investments on your behalf. These fees are usually tiered, so you may pay a smaller percentage fee the more you have invested.
At Moneyfarm you pay a management fee of just 0.7% on anything up to £20,000, 0.6% on anything between £20,000 and £100,000, 0.5% on anything between £100,000 and £500,000, and then 0.4% on anything above that.
Usually when you transfer your pension, it has to be done in cash, which will then need to be invested. Digital wealth managers like Moneyfarm don’t tend to charge investors to buy and sell investments, but many traditional providers and platforms do.
Providers and platforms can also charge investors to set up a direct debit or to reinvest dividends. Reinvesting any income you earn from investment can help you maximise your returns through compound interest. This is where the interest you earn on your investments is reinvested and then earns its own return. One of the most powerful forces to investing, this can make a real difference to your returns over the long-run.
Always understand whether costs include VAT, as this can often be added on later. Remember, whilst VAT often isn’t charged on ISA or investment account services, it is often applied to pension charges – so watch out!
Cost of pension crystallisation
Today, there is much needed flexibility over how you can manage your pension savings during retirement to make sure you’re managing your money in the right way for you. Gone are the days where your only option was to swap your savings for an annuity – a regular income until you die.
You can now keep your savings invested throughout your retirement, which means your money can continue to work hard for you. With retirements lasting over three decades now the norm, that’s a long-term time horizon that, if used correctly, could help strengthen your retirement income.
Whether you decide to enter flexi-access drawdown or want to take lump-sums here and there, you need to make sure you understand all the costs you could be faced with as these could significantly eat into your retirement income.
By keeping your savings invested, you’ll be subject to many of the same costs as when you build up your pension pot and a few extra.
For our research with Boring Money, we assumed a 60 year old had a £300,000 pension and wanted to enter income drawdown to take a regular income. After taking the 25% tax-free lump sum, they had an £11,250 annual income for the next 20 years.
On average this cost someone in retirement £23,100 across their retirement, although this could cost as much as £41,300. At Moneyfarm this cost just £19,900.
The third scenario takes a 65 year old investor with a £500,000 pension pot, who wants to take ad-hoc lump sums over 15 years.
This was by far the most expensive option for those needing financial security in retirement, with the cost averaging £35,200 across the industry. This shot up to nearly £70,000 with one provider. Taking ad-hoc lump sums with Moneyfarm would have cost just £29,800 in this scenario.
Tax free lump sum
One of the great things about investing in a personal pension are the generous tax benefits. You can take 25% of your pension as a tax-free lump sum from the age of 55 – you’ll pay income tax on the rest, however you decide to take it.
This is sometimes referred to as a pension commencement lump sum (PCLS). Although you can get a quarter of your pension savings tax-free, this can come at an additional cost with some providers that investors should look out for and can cost up to £150 +VAT.
Drawdown/regular income fee
Income drawdown gives you a more flexible approach to your income during retirement. By keeping your savings invested in the market, you can decide how much you want to take as a regular income and how frequently you want to get it.
You can still take your 25% tax free lump sum from the age of 55, paying usual rates of income tax on the remainder. By keeping your pension invested, you’re hoping your money will continue to grow in value.
It is common for investment providers to charge you a fee to enter drawdown and is most often referenced in the cost sheets as an ‘annual drawdown fee’, although it can also be called an “annual payroll” fee. On average, we found this fee cost around £142.80 per year.
Altering payment date/frequency
Whilst drawdown gives you flexibility over how often you want to withdraw from your pension and how much you want to take from it, if you want to take advantage of this flexibility and change the date of your payment or frequency, you might be charged by your pension provider. This can easily cost £10-£25 plus VAT a time.
If you close your pension within the first 12-24 months, your pension provider could charge you as much as £300, plus VAT. It’s less common to be charged for closing your pension after the first 24 months, however.
Ad-hoc payments – Uncrystallised Funds Pension Lump Sum (UFPLS)
If you have no need for your tax-free lump-sum, you can choose to take your tax-relief with
your withdrawals instead. This is known as a uncrystallised funds pension lump sum (UFPLS). You’ll get 25% of each withdrawal tax-free and pay income tax on the rest.
Pay a close eye to UFPLS charges as fees can differ significantly between providers. Charges can range from nothing, to £25 – £225, excluding VAT, for a single payment.
As you prepare for financial security throughout retirement, it’s crucial you understand how costs can impact how much you will have to play with. If you’d like to talk this through with an expert, book a call with one of our Investment Consultants today.