How much does a pension cost?

A couple researching how much a pension costs

How much does your pension cost? If you don’t know the answer, pension fees and charges could be eating into your retirement savings without your knowledge.

More than six out of ten people said they didn’t know they pay annual pension charges, according to research conducted by Profile Pensions. Nearly half said they wouldn’t know where to find out how much their pension costs*. 

Finding out your pension charges is vital, as it could make a huge difference to the amount you end up with when you retire. For example, assuming a pension value of £50,000 growing at 5% a year, reducing your charges by 67% a year could save you a massive £18,239 over 20 years**. This money could either be used to help boost your income in retirement, or to retire a couple of years early. 

You usually only have to pay charges on your pension if you have a defined contribution pension, where your income in retirement depends on the value of your fund at retirement age. If you have a defined benefit pension -  often referred to as a final salary scheme -  your employer will normally pay the charges for this type of pension scheme. With a defined benefit pension, the amount you get at retirement is based on how long you’ve belonged to the scheme, your average salary during this time - or your final salary when you retire -  plus the proportion of your earnings you’ll receive as a pension for each year you’ve been a member of the scheme.

How do I find out my pension charges?

Your pension charges can often be found either on your annual pension statements, or on your provider’s online pension portal if you manage your retirement savings online.  You can also contact your pension provider and ask for a breakdown of your pension charges. 

Many providers charge a single annual pension management fee, which can vary widely. An annual charge of 1-2% is expensive, as there are plenty of pensions which have annual charges that are three times less than this at 0.4%***. 

As well as pension management fees, there may be other charges  to watch out for. These might include a separate policy fee to cover administration costs, and a transaction fee which is charged when you buy and sell investments. Older pensions may also have exit charges if you want to withdraw your money or move to a different plan. 

We all want to retire with a good pension pot, yet all these costs can significantly reduce our savings. Not only are you forgoing the costs themselves, but also any growth or returns that you could have earned on them over the long-term. If you’re saving into a pension with steep charges over several decades, this could mean you end up missing out on a substantial sum.

If you ask a pension adviser to check your pension and explain your pension charges,  find out whether there is an up-front cost for this service, and what other costs are associated with the pension advice you’ll receive.

What if my pension fees are too high?

If you discover that you’re paying over the odds in pension charges, it may be worth consolidating your pensions into a single low-cost plan. This can not only reduce the charges you pay, but should also make your retirement savings much easier to manage as you’ll only have one provider to deal with. You may also benefit from a wider range of investment options than your current pensions offer. However, transferring to an alternative pension won’t be right for everyone. For example, if one of your pensions enables you to take out more than 25% tax-free, you’ll probably be better off leaving it where it is. Transferring from a final salary scheme is unlikely to be a sensible option either, as you’ll be giving up a guaranteed level of pension in the future.  Always seek professional advice so you can be certain that you won’t lose out on any valuable benefits if you switch.

Capital at risk. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.

Telegraph Media Group Limited is an Introducer Appointed Representative of Profile Pensions, a trading name of Profile Financial Solutions Limited which is Authorised and Regulated by the Financial Conduct Authority. FCA Number 596398. Registered in England & Wales, Company Number 07731925. Registered Office address: Norwest Court, Guildhall Street, Preston. PR1 3NU.

* YouGov on behalf of Profile Pensions. Total sample size was 2096 adults (October 2019)

** Based on a pension value of £50,000 growing at 5% a year with charges 0.4% and 1.2% applied. All figures quoted are for illustration purposes only and may be higher or lower than illustrated.

*** https://www.profilepensions.co.uk/infographic/hidden-charges/

Information correct at date of publication.