How cutting charges could boost your pension pot by over £1,000

Reducing charges on your pension can have a dramatic impact on the amount of money you end up with in retirement. Even cost differences that seem small can make a big difference.

Moving to a new pension provider that charges just a few tenths of a percentage points less may feel like more effort than it’s worth, but it quickly adds up. Just how much could you save by switching your pension?

How a small fee reduction makes a big difference

Let’s look at what difference it could make if you cut your pension charges by a quarter of a percent (0.25%).

If you held £10,000 in a pension, paid 1% in fees and benefited from 5% investment growth you’d have £10,400 in your pot after a year. If those charges were cut by just a quarter of a percentage point to 0.75% you’d have £10,425 at the end of the year. That extra £25 might not seem like a large amount, but it has a dramatic impact when we multiply it over several years.

Over 20 years it adds up to more than £1,000:

Source: AJ Bell. Assumes a £10,000 starting pot with investment growth of 5% pa and charges cut 0.25%, from 1% to 0.75%. Charges are deducted from investment growth and capital annually

It all adds up

Most people will build up larger pensions over the course of their lifetime. The more you have in your pension, the more amplified the impact of high charges can be.

Based on the same calculations used in the example above, someone with a bigger starting pension pot of £100,000 would be nearly £10,800 better off after 20 years, while a £250,000 pension could be boosted by nearly £27,000 just by reducing fees by 25 percentage points a year.

This is just one illustration of a relatively small reduction in charges. But you can see that it quickly adds up.

In many cases it will be possible to cut costs by much more than a quarter of a percent, with a bigger impact on your pension pot as a result. This is especially the case for those invested in older pension products, where fees can be much higher.

How much am I paying for my pension?

Working out how much you’re paying at the moment isn’t always easy. The fees you pay will normally be calculated as a percentage of your pension pot and deducted from your investments – for example, a 1% charge on £100 of pension investments costs you £1 a year.

It’s normally deducted from your pension pot, so you won’t necessarily be aware the money is being taken. And the fees are deducted from all the money you have in your pension, including any investment growth.

The fees may be taken on different dates, depending on the provider. Some charge monthly, taking 1/12th of the annual fee each month, for example. Your pension company should be able to give you a statement of all the costs and charges, illustrating in pounds and pence what you’ve paid.

It is also common to pay two separate charges – one for custody and another for investment management.

Custody fees (sometimes referred to as platform costs or administration fees) cover safekeeping of your pension, and are normally charged by the pension company you hold the account with. Investment management fees cover the cost of running the funds your pension is invested in.

Sometimes all of this is covered by a single fee, and sometimes you’ll pay two separate charges depending on the type of pension you have and how the pension company manages it for you.

Reducing fees

Getting good value for money is really important when it comes to your pension. Of course, in some cases outperformance could mean an investment makes up for the higher costs, and whatever the costs of your pension you’ll want to ensure you’re getting a good service.

If you want to reduce your pension charges, you’ll normally need to shop around to find a new provider and move your pension. Most pension pots can be moved to a new provider, although this does depend on the type of pension you have. Some pensions, such as Defined Benefit schemes, come with crucial protections and normally shouldn’t be moved unless recommended by a professional financial planner.

It can take several weeks, or even months, to find and then consolidate your pensions, but our system takes the hassle out of the process by carrying out all the admin, meaning you don’t have to contact all your existing pension companies and move each account individually.