Top tips for your pension
Pension scheme charges
Different pension schemes have different levels of charges. It’s important to understand the effects that charges may have on your retirement pot.
Pension scheme charges
If you’re a member of a defined contribution pension scheme, you’re likely to pay some charges. The charges cover the cost of administering your pension scheme and investing contributions to build up your retirement pot.
Workplace pension schemes may have lower charges than individual schemes. The amount and type of charges can vary from provider to provider and from scheme to scheme. It’s important that you understand the charges that apply to your pension scheme and the effects that these will have on your retirement pot.
Other charges may apply during the lifetime of your pension, particularly if you make some changes to the way it’s being run.Your pension provider should provide you with a list of all charges and when each may apply. If you received financial advice when you set up your pension, you may also have agreed that your adviser’s fees are met from your pension fund.The following sections set out the types of charge that could apply, together with a brief description of each.
Charges that might apply:
The annual management charge
You will be charged an amount each year, either as a set monetary amount or, as a percentage of the value of your pension pot. The annual management charge covers the cost of running and administering your pension scheme, as well as investing contributions in your pot.
Due to their specialist nature, some investment funds will have higher annual management charges, than the standard charge offered on the default or mainstream funds in the scheme plan. It’s worth bearing in mind the next few points:
- Over the last 10 years, charges on pension schemes and plans have been reducing. If you’ve got an older scheme or plan, it’s worth reviewing the level of charges you’re paying.
- Your employer may have negotiated lower annual management charges with the provider. Therefore, if you’re in your workplace pension scheme, you may pay a lower charge, than if you take out a personal pension.
- Charges on group personal pensions (GPPs) also are likely to be lower than on self-invested personal pensions (SIPPs) because the funds tend to be less specialised, But, this is not always the case and you should check this.
- It’s good to remember that the charges on pensions are often lower than on other savings products, such as individual savings accounts (ISAs).
These cover the cost of administration, and are usually included in the annual management charge. However, older pensions may have a separate policy fee.
This is an investment charge. It refers to the difference between the buying and selling price of a unit, in a unit-linked investment, which most often happens when switching your investments. A typical bid/offer spread would be 5%. The buying and selling price of the units in a fund depends on the value of the assets in the fund.
Your provider or the trustees of your workplace pension are likely to offer you a range of different investment funds to invest your contributions. If you want to move the savings in your pot from one investment choice to another, there may be a fee for doing this. The fee might be a fixed amount, or a proportion of your pension pot.
Sometimes, your provider will let you make a certain number of free switches each year. As an alternative to switching funds, it’s also possible to select a different fund for investing future contributions, while leaving the value built up in the ‘old’ fund invested. There is normally no charge for redirecting contributions in this way, but we suggest you check this with your scheme
For some pensions (typically older ones), the provider may not invest all of your contribution to your pot. Sometimes, they may use only a proportion of your investment to buy units, and may keep the rest, as a way of being paid for looking after the pot. The proportion that is invested is known as the allocation rate.
As a rule of thumb, the older your pension, the lower the allocation rate will be. Some older pension policies would have used only 50% of the first few years' contributions to buy units.
Due to pressure to offer fairer terms, most providers have increased the amount that they allocate, so that most allocation rates are now closer to 100 per cent.
Initial units, capital units and accumulation units
Providers who don’t use reduced allocation rates, may charge you by using different types of units. You should be able to see if this applies to you by looking at your annual pension statement, which should show how many of each type of unit you have. Again, these special units tend to apply to older contracts.
Typically, in the first few years of your pension policy, the contributions you make will be invested in initial units or capital units, which carry higher annual management charges. However, after an initial period (set out in your pension contract), your contributions will be used to buy accumulation units, these attract lower charges- typically 1% a year.
The only difference between the two types of units is the charges. But, the higher charges on initial and capital units, means that these may grow in value slower than accumulation units.
Some older pension policies may charge you if you stop your contributions, by increasing the charges for looking after your pot in future. Stakeholder pensions are not allowed to charge you in this way.
Transferring your pension pot
If you’re thinking about moving your pension pot from one provider or workplace pension scheme to another, you need to understand the charges involved.
Your fund value (the value of your pension pot) may be higher than your transfer value (the amount available for you to transfer to another scheme). Where the transfer value offered is lower than the fund value, the difference is usually the value of the remaining initial charges that were due to be collected throughout the remainder of the term of the contract.
The charges in your new scheme may be higher or lower than those of your existing scheme.
It’s important that you consider getting financial advice, if you’re thinking about a transfer. To find out more about getting financial advice, click here.
If you are in a with-profits policy or have invested in with-profits funds, you may incur an extra charge known as a market value adjustment or market value reduction. Your provider will give you full details if this charge applies.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.