How cutting charges can boost your pension pot by over £50,000

Pensions come with great tax perks to help boost your retirement savings, including sheltering the investments you hold in a pension from tax. But high pension charges can eat into your overall returns. And just like investment returns, the impact of higher charges on your pension pot can compound over time.

How much could you save by making sure high charges aren’t eating into your hard-earned savings?

Even a small fee cut can make a big difference

Moving your pension to a lower cost provider might seem like a hassle, but the benefits can quickly add up. Let’s look at the impact of cutting your pension charges by a quarter of a percentage point each year (0.25%).

The average private pension pot for someone aged 25 – 34 in the UK is £18,800, according to the ONS. If you’re paying 1% in fees and benefit from 5% investment growth on that £18,800, you’d have £19,552 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 £19,599 at the end of the year. That extra £47 might not seem like a big deal, but it has a dramatic impact when we multiply it over several years.

As per the table below, over 25 years it adds up to over £3,000, without even considering extra money being paid in.

Source: AJ Bell. Assumes a £18,800 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.

Bigger pots mean bigger savings

People saving for retirement might already have a larger pension value or uncover lost pots from previous jobs that could all be combined in a lower cost plan. The bottom line is, the more you have in your pot, the more that higher charges will eat into its value.

For example, if we used a bigger starting pension pot of £100,000 in the calculations above, a 0.25% annual cost reduction would mean you’re 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 a quarter of a percentage point (0.25%) a year. A chunkier cost reduction of 0.5% a year could leave you £52,700 better off from that larger pot.

This is just the impact of a small 0.25% reduction in charges, but it still quickly adds up.

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

How much am I paying for my pension?

The first step to lowering your charges is to work out what you are paying now. It isn’t always simple - especially with some of those older plans - but the potential rewards on offer make a comparison worthwhile.

You might pay a single fee or be charged for separate elements of your pension. This will depend on the type of pension you have and how the pension company manages it for you.

Fees are often charged as a percentage of your pension value and deducted from your investments – for example, a 1% total charge on £1,000 of pension investments costs you £10 a year.

Account fees (sometimes called custody, 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.

Whether these are charged separately or combined into one account fee, 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.

Whilst we are talking about lower charges, getting good value for money is crucial and whatever the costs of your pension, you’ll want to ensure you’re also getting a good service. It’s worth researching customer reviews (e.g. Trustpilot scores), when you’re shopping around.

Combining your pensions

If you want to reduce your pension charges, you might need to find a new provider and move your pension(s). We offer a free pension finding tool, where you can track down lost workplace pensions and combine them into one, low-cost pension account.

Some pensions, such as Defined Benefit schemes that come with valuable guarantees and protections, shouldn’t be moved unless recommended by a professional financial planner.