Everything you need to know about pension charges and fee types.
What are the different types of UK pension fees?
Everyone expects to pay fees on their pension pots, but are the different charges you should expect to pay?
There are many different ways that pension providers charge fees, but these fall broadly into four main types:
- Platform fee: this is what they charge for looking after your pension, handling the contributions, paying out your money and providing you access to their platform where you can check your funds and use their planning tools.
- Investment fee: this is the cost of the underlying investment funds. This is what they charge for managing the investment fund and picking the right investments for your pension.
- Advice fee: this may be payable as both an initial fee and an ongoing fee. Your provider or adviser offers you advice on selecting suitable investments, along with various other areas of financial planning.
- Flat fee: these fees may be payable for taking certain actions, such as making a one off contribution, setting up drawdown at retirement, taking a one off lump sum, or transferring your money out to somewhere else.
Taking the “execution only” route
Let’s start with the simplest type of provider: the Execution Only provider.
As the name implies, this type of provider offers you the platform, a range of investment choices and you do the rest: selecting the funds, managing your contributions and managing your withdrawals when you retire. They might charge using an All In approach or a Platform Plus approach.
All-In: this is designed to be a clear fee: a percentage of your total pension funds. You select one of their ready-made funds and they charge, for example, 0.5% of your fund a year for everything. This includes all platform and investment fund charges and, in most cases, any flat charges that come with contributions or withdrawals.
Platform Plus: you pay an initial annual charge for everything you have with them on the platform, say 0.4%. You then choose the investments yourself and select from a range of ready-made funds. The funds have different fees and the provider will outline details of these to help you to decide.
In this case, you’ll be investing in various funds which will have their own investment fees. That’s why you’ll need to add the fund fees of each one to get the total cost. For example: a fund might charge 0.3% a year including any dealing costs. This would add up the total cost to a 0.4% Platform plus 0.3% Investment fee= 0.7% a year.
Taking the “advice” route
Those who prefer not to manage all their investments themselves can also choose to go the advice route. There are two main ways to get advice:
Restricted advice providers: providers will give you specialised advice limited to:
- Whether a transfer to their platform is suitable. They will consider your current providers and determine whether there is a good reason for you to transfer to them. They’ll advise against this if you would lose valuable guarantees or if you’d have to pay high exit pension fees to switch to them.
- Where to invest your funds. They will help you pick investments based on the funds they offer.
Although this kind of advice is valuable, it is limited to only advising you on their own products and selection of investment funds
Restricted advice providers will usually charge you a percentage annual pension fee in addition to the platform and underlying investment costs. This may typically be between 0% and 1.5% of your funds each year, with no upfront fee.
Whole of market advice: in this case, the adviser will give you much more comprehensive advice. For example:
- which is the best provider for you on the market
- which investments best meet your needs
- tax and estate planning advice
- a contribution and drawdown plan so you reach your income goal in retirement
Whole of market advice is much more thorough and therefore more expensive. It may typically involve an initial flat charge of around £500-£2,000, plus an ongoing advice fee may range between 0.3% to up to 2.0% per annum.
Execution only route: following an execution-only route may typically lead to total pension fund fees of between 0.5% and 1.5% a year. Higher fees are more likely with a Platform Plus arrangement if funds with higher fund fees are chosen.
There are many investment choices with very low fund costs that are designed to track an overall index like the FTSE100 (also called passive funds). There are also many more specialist funds that aim to outperform an index, (managed funds), and therefore usually charge higher fees.
Advice route: following an advice route may typically lead to total fees of between 1.0% and 3.0% a year, including the advice, platform and fund charges. Some restricted advisers will offer very competitive additional advice fees, which might even be zero. Whole market advisers will typically charge more due to the more comprehensive advice provided.
Pension fund charges comparison: what to look out for
It’s always best to be aware of how much you pay in fees for your investments: if you know your total annual percentage fee, you can easily compare it with other providers. With a Guiide plan, you’ll be able to see the actual expected lifetime charges you can expect to pay over your lifetime, based on the actual plan you have made. This shows clearly the difference a small percentage can make over a lifetime.
Paying 1% more in charges each year doesn’t sound like much. But, for a 55 year old looking to retire at 65 with a moderate income, our research shows this can add up to over £90,000 over a lifetime.
If you pay an extra 1% but get over 1% in extra growth due to higher returns, then the higher charges are acceptable. But if not, it’s important to note that these costs are coming directly out of your retirement income! Here are a few things to think about when choosing which route to take.
Execution only: if you are comfortable doing things yourself, should you pay more charges for managed funds (if this is an option), or less for passive funds? Although managed funds might outperform, this is not guaranteed, and fees are often a lot higher. Using the Pension Freedoms already involve taking large enough risks managing your own pensions. Do you really need to be taking more risk by requiring higher growth in order to make up for higher fees?
With all Execution only providers, you will be doing everything on your own. A key thing to consider therefore is: is the website and app user friendly? Do they offer the right tools to do your own planning and monitoring of your money?
Restricted advice providers: If you prefer a lower cost advice route, there are a number of restricted advice providers that may still charge a considerable additional advice fee. This may be up to 1% per year in addition to what it still restricted advice. Others charge much lower and some even zero, additional costs for this advice. OpenMoney, for example, has no additional fees apart from the platform and investment fees they charge for the restricted advice they provide.
Whole of market advisers: fees for whole of market advice can vary greatly. Some advisers such as Informed Pensions charge low rates of just under 0.3% a year, while others may charge up to 2% per year.
If these additional costs are leading to higher growth rates or tax savings, then great. But if they’re not, is it really worth paying these additional fees?
The most important question to ask yourself is: is it clear what I’m paying and for what? If you can’t understand what support and advice you’re getting and what you’re paying for it, then you should ask yourself why. Charges should be upfront, clear and easy to understand. If not, they are likely being hidden for an ambiguous reason and you should therefore look elsewhere.