Have you been looking forward to the sunset years where you’re free from work and the pressure of bosses? Well, with Monday just around the corner you might be one of the lucky ones to have an extra hour or two to enjoy the tranquillity in your backyard or a few extra hours fantasising in bed – with nothing to stress about.
Retirement might seem like a mirage and pretty far away for most employees. For others, though, it’s a constant nightmare about financial constraints and health issues. Some even worry about the expenses that come with opening up a pension pot1. That’s why you should ensure that you consult about pensions, pension charges and everything that’s involved with retirement planning.
However, even before you start searching for a reliable pension advisor or pension providers, you need to know some basic facts and here’s a comprehensive guide on pension plans and pension charges.
Understanding Pension Charges
Pension schemes are your savings for a fantastic retirement. They feature various options like the state pensions2, workplace pensions, personal pensions, defined contribution pensions, among others. Like with any other financial product, these retirement plans come with various charges.
These charges vary, and they depend on your plan provider since various pension companies take diverse approaches when it comes to pension fees. When it comes to annual fees, for example, most lenders can vary widely, and some charge you a single annual management fee and others that charge it on a fixed-term3 basis.
Most pension users have no dies about what they’re getting into or what they’re paying. That’s why it’s essential to understand the various types of pension charges UK that your provider might impose and here are some of the most popular pension types include:
Annual Management Fee
The annual management fee or annual management charges4 (AMCs) cater for your pension management expenses like the costs associated with administration. It’s common for some pension companies to hide fees in small print and footnotes so the headline annual management costs for your pension scheme might not entirely represent the ultimate amount your provider charges you. Therefore, make sure that you press your lender to offer you the finer details of the AMCs.
Underlying Fund Fee
It’s a famous pension charge that caters for managerial charges. It pays the fund managers. It’s a fee that most plan providers hide in small print, but it does come on top of the annual management charges.
Service or Policy Fee
It’s another fee that’s hidden. In addition to the AMCs, some lenders will stick this fee on your pension pot to cater to the ‘administration expenses.’
Some pension firms will charge you an inactivity fee which essentially means that when you decide to stop paying into your pension plan, you’ll pay some penalties. The pension charge is also referred to as the ‘active member discount’. In an attempt to offer a positive spin on the costs. Therefore, you must keep an eye out for these, especially when you move jobs a lot and own several dormant pension funds.
The contribution charges are a percentage that providers take out every time you pay into your pension scheme. Some lenders will impose a commission of 2% each time you deposit money into your fund so the costs of your monthly contributions can stack up. Fortunately for you though, these costs are less common today than a few years back so when choosing a pension plan, be sure to ask your provider if they include this fee in their schemes.
It’s a pension fee that caters to withdrawing or transferring your pension pot. Exit fees do vary more widely than even the AMCs. According to several reports, more than 700,000 pension plan users have faced exit fees of up to 10% – a situation that has led the Financial Conduct Authority (FCA)5 to impose a cap of 1% for pension savers over the age of 55, and an exit fee ban on any new pension schemes.
So, before you take out a plan, make sure that you consult your financial advisor and figure out if the pension provider you want charges an exit fee of more than £10, or if pension plan comes with unique benefits or guarantees (such as a guaranteed annuity rate).
Most pension provider today, with the financial crisis paralysing businesses, many pension companies are making transfers tricky with high exit fees and cumbersome processes. So it would help if you were careful when selecting your pension provider.
In some states, some pension companies will add another charge in the form of a ‘platform fee.’ It’s another cost they’ll impose just for the privilege of using their services.
Taking pension plans will subject you to several charges. These charges will cater to the costs of administering your pensions and investing contributions to build up your pension pot. Workplace pensions might feature lower expenses than most individual pension schemes.
When you’re figuring out the amount you need to put into your pension plan every month, it’s essential to consider several factors. These include:
- The amount of capital you’ve already save into your pension plan
- The number of working years do you have left
- If you’re hoping to increase or lower your pension contributions in the future
- The amount you can expect your investments to grow to between now and your retirement
- How much will your boss contribute to your pension pot, and if they do offer you contribution matching
When you consider these factors, you’ll be able to figure out the total amount you need to save. Moreover, with a reliable pension calculator, you’ll also estimate the amount you can save and possibly receive in the future.
Well, unlike pension charges, pension management charges work differently. Your plan provider charges you annual fees for the administration and management of your pension plan. Depending on the pension provider, it could be a set amount of capital or a specific percentage value of your pension scheme. The charge caters to the expenses of running your pension and making investment decisions on your behalf.
These charges have a significant impact on your savings, but seeking professional pension advice can help in ensuring that you won’t get enslaved with unexpected hefty costs.
Well, some of the widespread pension charges include:
- Annual management fee –these are the pension administration charges
- Exit fee: It’s a fee enacted if you withdraw or transfer your pension pot. It can vary significantly based on the pension lender
- Platform fee: It’s a pension cost enforced by some pension providers for using their service
- Underlying fund fee: It pays the managers of your pension fund and could be enacted on top of the annual management costs
- Contribution charge: Some pension lenders might charge you a proportion of your contribution each time you pay into your pension scheme. It’s often 2% of the capital paid in
- Service fee: It’s another admin fee that most pension providers will add on to your charges
- Inactivity fee: Most pension firms will penalise you this fee if you stop your pension contributions