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Why pension fees matter

Ed Monk Ed Monk
Fidelity Personal Investing

Cost is one of the few elements of investing that you can control through your choice of pension provider, and it’s never more important than when it comes to your retirement savings.

The small numbers that make a big difference

The money we set aside for retirement has potentially decades to build up. That’s great for returns because they benefit from compounding over time (the process in which earnings, from either capital gains or interest, are reinvested to generate additional earnings), but compounding also applies to the fees we pay. A seemingly small difference in cost at the start of your savings 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 in funds. 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.

It’s important to note that the returns in this example are not a reliable indicator of future returns, and that the value of investments and the income from them can go down as well as up, so you may get back less than you invest. Here’s how to work out what you’re paying for your pension.

Breaking down pension fees

There is typically a service fee, usually a percentage of the money you have saved, payable to your pension provider which covers the administration of your contributions.

In addition, you’ll pay a separate fund management charge to each of the fund providers you choose to invest your money with. These, too, are an annual percentage of the money you have invested with those companies. Different pension providers may charge different amounts for the same fund because they can sometimes negotiate discounts from the fund providers, which they pass on to customers. So remember, when comparing service fees, you also need to compare their fund charges too.

Some pension providers also charge for investing activities, such as buying or selling assets, or to invest in certain types of assets such as exchange traded funds (ETFs), so it’s also worth checking if these apply to your pension savings.

Fees in Drawdown

When it comes to taking money from your pension, many opt to take flexible retirement income in the form of  Drawdown which allows you to take money from your pension as and when you need to, whilst leaving the rest invested with the potential to grow.

With Drawdown there will still be fund charges for the money left inside your pension, as well as the service fee, but bear in mind that some providers may also charge a set-up fee or charge for extra withdrawals, so this is something to watch out for.

If you’re wondering if the charges you’re paying for your pension are high, you could compare them to a Fidelity SIPP (Self Invested Personal Pension). After all, you have the freedom in most instances to transfer your pensions to a provider of your choice.

Why a Fidelity SIPP?

  • Low cost annual service fee
  • Discounted fund charges from leading fund providers
  • No annual fees for Drawdown or withdrawal charges
  • Wide investment choice and award-winning guidance
  • We’ll cover up to £500 if your current provider charges exit fees (T&Cs apply).
  • Flexible retirement options

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 or over the telephone on 0800 138 3944.

Important information

Withdrawals from a pension product will not be possible until you reach age 55. It’s important to understand that pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend that you undertake a full comparison of the benefits, charges and features offered. To find out what else you should consider before transferring, please read our transfer factsheet. This information is not a personal recommendation for any particular investment. If you are in any doubt whether or not a pension transfer is suitable for your circumstances we strongly recommend that you seek advice from an authorised financial adviser.