Despite a trend in recent years for pension charges to be reduced the costs associated with retirement savings can range significantly, pension experts warn.
In the past there were a large number of different charge types. Ronnie Morgan, strategic market insight manager of Scottish Life, says the main charges were:
• member charges, paid as a set monthly fee;
• contribution charges, sometimes paid in the form of reduced allocation where not all of each contribution paid was invested for the member;
• bid/offer spread, the difference between the price the investor buys units in a fund and the price they get when the units are sold; and
• annual management charge levied on the accumulated assets of the member.
Often Mr Morgan says these charges were combined, making the overall cost of a pension difficult to ascertain.
Morten Nilsson, chief executive of Now Pensions, says when looking at a plan that was taken out 20 years ago, advisers should be trying to spot and calculate the following charges:
1) Bid/offer spread
2) Initial unit charge
3) Accumulation unit charge
4) Separate policy charge
5) Early encashment penalties
6) Separate transfer penalties
7) Charges for switching funds
8) Market value adjusters
9) Hidden investment charges outside of the annual management charge (covered by the total expense ratio)
In terms of market averages, when stakeholder pensions were introduced in 2001, Mr Nilsson says it is important to note charges were capped at an annual management charge of 1 per cent, although this was subsequently increased to 1.5 per cent for the first 10 years.
Many providers took advantage of the increase, although Mr Nilsson says the 1 per cent charge did become something of a benchmark. Since then, he says there has been downward pressure on charges, although some of providers have reduced the quality of the investment proposition.
The advent of automatic enrolment has maintained the pressure on charges and the simplification of those charges, Mr Nilsson points out.
At the lowest level, for large single employer group pension schemes Tom McPhail, head of pensions research of Bristol-based Hargreaves Lansdown, says charges might be just 0.3 per cent today.
For the government’s default auto-enrolment scheme, Nest, scheme charges are equivalent to around 0.5 per cent over a ‘saving lifetime’, which Mr McPhail said “is also a typical level for a good value DC scheme”.
Exact charges are more complicated for scheme like Nest, which levies an initial contribution charge (1.8 per cent) in addition to the AMC (0.3 per cent).
For smaller employers with lower paid employees, Mr McPhail says a charge of 0.7 per cent to 1 per cent might be typical.
Charge cap from April 2015
Earlier this month the government confirmed it was going to cap charges on occupational pensions at 0.75 per cent, to include all standard charges including initial contribution fees but not trading costs.
According to government calculations, Nest for example falls well within these thresholds.
Mr McPhail says it is very rare to come across a new scheme today with charges in excess of 1 per cent, however there are existing schemes with higher charges and one still occasionally comes across old individual arrangements with charges as high as 2 per cent a year or more.