The days of pension fund managers charging extortionate fee are gone, but is your pension being held back by those historical cost unnecessarily.
In the past ten years the pension companies have had the opportunity to reward their share holders and chief executives with dozens of unfair and unnecessary pension charges, a new study has concluded.
The Government has completed a damning study into the pensions market in recent months, prompting new legislation in the next couple of months to ban excessive pension charges. For some pensions advisors, the good times are definitely over.
The only cost your pension should normally occur is a standard annual management fee, but in the previous decade pension companies have been able to create various inventive and new charges for auto-enrollment pension schemes, which constitute the bulk of all company pensions (and will include all workplace pensions by 2017).
Previously your company might have paid pension companies for advice referring to the pension fund and then pass the cost on the staff, despite no agreement to carry the financial burden. In some cases this had sliced half the value off the first year of pension contributions to some auto-enrollment schemes.
If you aren’t in an auto enrollment scheme, typically there is an annual management fee to pay which calculates as a small percentage of your overall pension pot, typically between 0.5 and 0.8 per cent. This should cover most of the daily costs of the pension.
As a rule of thumb you should be exceedingly cautious of any additional costs imposed against your pension for relatively straight forward administrative tasks like updating individual records, obtaining tax relief and using an online pension tracker service.
Nearly all the services that many savers use on a day to day basis should be covered by the annual account charge, in most cases ‘tinkering’ with your pension shouldn’t cost you anything.
Excessive Pension Charges
Funds that incur additional charges are typically those that are exceedingly niche and specialist, because of their small size they often tend not to be able to hand down the economies of scale to the saver. Funds that sometimes invest in commodities and assets that are inherently expensive to buy and sell can also incur more pension charges, especially if they depend on needing to pay for expert knowledge in order to be able to trade effectively.
If you are just starting out building up your pension reserve fund, it’s probably best to pay into a renowned and established pension firm that will not inflict any unfair or unexpected pension charges on you and stay away from the smaller funds.
Fund Manager Expense Charges (FMECs) are often the result of index linked pensions (pensions that rise and fall in value founded on the prices of shares on the stock market). Selling shares will incur certain fees and charges and also cost is usually passed on to the saver. HMRC, solicitors and stockbrokers will all take a share of the proceeds in any share deal, so if you are going to invest in an index linked fund, it might also be wise to put money into a deposit fund (one which invests traditionally in real world assets and not shares).
Finally if you have more than one pension you may be paying twice for the same service, combining pension may be the solution but get some expert advice first.
Pension Charges – Pension Review
In May Pensions Minster Steven Webb said: “With millions of people taking up pension saving for the first time under automatic enrolment, we have to give people confidence that they will get good value for money. That is why we are banning consultancy charges, where scheme members end up paying for advice given to their employer.”.
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