Cost is one of the few elements of investing you can control, and it is never more important than when it comes to your retirement saving.
The money we set aside for retirement has potentially decades to build up. That’s great for investment returns because they benefit from compounding over time, but compounding also applies to the fees we pay. A seemingly small difference in cost at the start of your saving journey can add up to a huge difference by the time you come to retire.
For example, a person might start saving £250 a month into a pension with that money then invested. They increase their contributions as their earnings rise and they achieve investment returns of 5% a year after costs. After 30 years they would have built a pot worth almost £263,000.
If they had to pay fees that were 1 percentage point higher, bringing their return after costs to 4%, their pot after 30 years would reach just £222,000. That’s a difference of £41,000 - or more than 15% of their potential fund.
That’s why it makes sense to drive your costs lower if you can, and to pay only for the benefits and service you value. A lower price may not always be best if you value extra flexibility or service that costs more. Here’s how to work out what you’re paying for your pension.
Breaking down pension fees
Those saving for their retirement outside of a workplace pension are increasingly choosing to do it through a Self-invested Personal Pension (SIPP).
There is typically a charge payable to the SIPP provider which covers the administration of your contributions as well as any other services provided, such as tools and other material to help you make decisions about which investments to choose. This is usually a percentage of the money you have saved but sometimes a flat cash fee can apply for savings below a certain level.
You may find that SIPP providers are prepared to charge a lower annual fee if you have more saved with them.
Importantly, there are separate charges for the companies that invest your money. These, too, are an annual percentage of the money you have saved and taken from your investments with those companies - you don’t have to do anything.
Add the annual charges from your SIPP provider to the charge on your underlying investments to work out the overall annual percentage charge you will pay.
Be careful when comparing
You may need to dig into company websites to find the annual cost of your SIPP, but remember that you also need to compare their charges for investments too.
Different SIPP providers may charge different amounts for the same fund because they can sometimes negotiate discounts from fund providers, which they pass on to customers. If you know the investments you want, check how the cost compares across different SIPP providers.
Watch out for one-off fees
You might have taken great care to find the lowest annual SIPP provider and investing charges you can, but all that work can be undone if you are hit by unexpected one-off fees.
Some SIPP providers may charge for some investing activities, such as buying or selling assets, or to invest in certain types of assets such as exchange traded funds (ETFs), so ask yourself if you are likely to fall foul of these and factor that into your thinking.
Fees in Drawdown
When it comes to taking an income from their pension many opt to take flexible retirement income in the form of Income Drawdown, which allows you to leave your money in your pension pot and take income or lump sums from it as and when you want. Any money left in your pension pot remains invested.
SIPP providers may offer a drawdown facility and it will come with its own set of charges. There will still be investing charges - for the money left inside your pension - as well as a fee to hold your money inside the SIPP, but bear in mind that other charges may apply.
They might include charges to make extra withdrawals, for example.
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Eligibility to invest into an SIPP and the value of tax savings depends on personal circumstances and all tax rules may change. Withdrawals from a pension product will not be possible until you reach age 55. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.