Pension savers have been urged to check the fees they’re paying on their investment accounts, as this could cost them tens of thousands of pounds in retirement. Investment fees are charged by pension providers to cover the cost of managing and investing your savings. They are usually taken as a percentage of your total pot or as a fixed monthly or annual fee. A new analysis from investment firm Vanguard showed that lower charges could significantly increase the size of a person’s savings pot.
James Norton, head of retirement and investments at Vanguard Europe, said: “There is a growing concern that many people may not be on track for the retirement they hope for. This is not a new issue, but this year’s Pension Attention campaign is another timely reminder for individuals to assess whether their current saving habits are setting them up for long-term financial security. “ He added: “When trying to tackle this issue, individuals should focus on what they can control, one of the most practical being the investment costs they pay.”
Vanguard’s analysis showed that reducing annual pension fees from 1% to 0.5% could add at least £59,000 to a saver’s retirement pot over their career.
For example, someone earning the UK average salary of £37,500 and contributing £250 per month into their pension from age 25 to 66 could accumulate £465,000 by retirement, assuming a 6% annual return and a 0.5% fee.
However, a 1% fee would shrink the pot to £406,000, and a 1.5% fee would further reduce it to £355,000.
Mr Norton continued: “When buying a car, it’s common for a more expensive vehicle to perform better than a cheaper one. So, you may think that higher fees should lead to better investment outcomes. But the higher the fees you pay, the fewer returns you get to keep for yourself. Putting it simply, fees erode your returns.”
He added: “Those high fees are a hurdle that an investment manager needs to overcome just for you to break even.
“Our analysis shows that if you keep your pension pot with a low-cost provider, in the long term you could keep significantly more of your returns and significantly improve your retirement. It is your money and you’re taking the investment risk, so make sure you keep as much of your returns as possible.”
Vanguard shared three checks to make now to ensure you’re not paying over the odds.
Check your current pension
Mr Norton said: “A good start is to review your pension statements to identify the fees you’re paying. Once you know the fees you’re paying, you’ll be able to compare them against other providers to make sure you’re getting a fair deal.”
Make sure it’s the right pension for you
A pension is a tax-advantaged wrapper that can hold investments.
Mr Norton said: “Make sure those investments are working best for you. Consider your financial goals, your life stage, and your risk tolerance—and make sure your pension is aligned.”
Combine your old pension pots
Mr Norton said: “It could be a while since you set some of your old pensions up, or you may have changed jobs a couple of times. Make sure to track down all of your pension pots, check their charges and consider combining them into a new plan.
“This could cut down on admin, provide a clearer view of your savings and mean you save on fees if you consolidate to a low-cost provider.”
