High pension fees have the potential to significantly reduce retirement savings, according to recent analysis from investments firm Vanguard. The research indicates that an increase in annual fees from 0.5% to 1% could result in a pension pot being £47,000 smaller at retirement.
This hypothetical scenario assumes consistent monthly savings and investment growth over more than 40 years, from age 25 to 66, with monthly contributions of £250 (including tax relief) and an annual investment return of 5.5%. Under these conditions, a 0.5% annual fee leads to a pot of approximately £392,000, while a 1% fee results in a pot of around £345,000.
Pension fees are typically deducted directly from the pot, which can make them less noticeable. James Norton, head of retirement and investments at Vanguard Europe, highlighted that higher fees do not necessarily lead to better investment outcomes, as the amount of returns kept by the saver is reduced.
Fee caps vary depending on the type of pension. Workplace pensions established through auto-enrolment have fees capped at 0.75% if the saver remains in the default fund. Stakeholder pensions are capped at 1% or 1.5%, depending on their setup date. However, self-invested personal pensions (SIPPs) do not have a fee cap, though they may offer access to a broader range of investments with lower charges.
Pension charging structures can include platform fees, fund charges, and potentially financial adviser fees. Other charges may include service or policy fees, inactivity fees (banned in default workplace auto-enrolment pensions), exit or transfer fees (banned for personal pensions established on or after 31 March 2017), dealing or transaction fees, foreign exchange fees, contribution charges (such as NEST's 1.8% on contributions), and performance fees.