Quick answer
Why charges matter
Pension charges are deducted from your pot, not from your contributions. This means they compound over time, you are not just losing the charge itself, but also the investment growth that money would have generated. Over a 30 or 40-year period, even a small difference in charges can amount to a significant reduction in your final pot.
For example, a pension pot of £100,000 growing at 5% per year over 20 years would be worth approximately £265,000 with no charges. With a 0.5% annual charge, it would be worth around £240,000. With a 1% annual charge, it would be worth around £215,000. The difference between 0.5% and 1% in charges is £25,000 over 20 years.
Types of pension charge
Annual management charge (AMC), the most common charge, expressed as a percentage of your pot deducted each year. Typical AMCs for workplace pensions range from 0.1% to 0.75% per year.
Ongoing charges figure (OCF), also called the total expense ratio (TER), this is the total annual cost of running a fund, including the AMC and other expenses such as administration, legal and audit costs. It gives a more complete picture of the cost than the AMC alone.
Platform charges, some pension providers charge a separate fee for administering your pension, in addition to the fund management charge. This may be a flat fee or a percentage of your pot.
Transaction costs, the costs incurred when a fund buys and sells investments. These are in addition to the OCF and are disclosed separately under MiFID II regulations.
Exit fees, some older pension schemes charge a fee when you transfer your pension to another provider. Exit fees on pensions set up after April 2017 are capped at 1%. Older schemes may have higher exit fees, which is an important consideration when reviewing whether to transfer.
Steve's observation
Charges are one of the few things in investing that you can control. You cannot control investment returns, but you can choose lower-cost funds and providers. Over a long period, keeping charges low is one of the most reliable ways to improve your outcome.
That said, the cheapest option is not always the best. A slightly higher-cost fund with better investment management or a more appropriate strategy for your circumstances may deliver better net returns than a cheap but poorly managed fund. The key is to understand what you are paying and whether you are getting value for it.
The charge cap
Since April 2015, the total charges on the default fund of auto-enrolment workplace pensions have been capped at 0.75% of the value of the fund per year. This applies to the default fund only, charges on other funds you choose to invest in may be higher.
The charge cap means that if you are in the default fund of a modern workplace pension, your charges should be no more than 0.75% per year. Many large workplace pension providers charge significantly less than this, some as low as 0.1% to 0.3% per year.
How charges compound over time
The impact of charges is not linear, it compounds over time. Each year, the charge is applied to the full value of your pot, including the growth from previous years. This means the absolute amount deducted increases as your pot grows, even if the percentage charge stays the same.
This is why charges matter more for larger pots and longer time horizons. A 0.5% charge on a £10,000 pot is £50 per year. On a £200,000 pot, it is £1,000 per year. Over 20 years, the compounding effect means the total cost is far more than the sum of the annual charges.
Checking your charges
Your pension provider is required to disclose the charges on your pension. You can find this information in your annual statement, on the provider's website or by logging in to your online account. Look for the OCF or TER for your fund, and any additional platform or administration charges.
Reducing your charges
If your charges are higher than average, there are a few options. You may be able to switch to a lower-cost fund within your existing scheme. You could consolidate old pensions into a lower-cost arrangement. Or you could consider moving to a different provider with lower charges.
Before switching, always consider the full picture, exit fees, the quality of the new scheme, any loss of benefits and the tax implications. Guide 13 covers pension transfers in detail.
Pause for thought
- Do you know the annual charge on your pension fund?
- Have you compared your charges to the typical range for workplace pensions (0.1%–0.75%)?
- Do you have any old workplace pensions with higher charges that you could consider consolidating?
- Are you paying any exit fees or platform charges in addition to the fund management charge?
Coaching point
Key terms
Frequently asked questions
What to do next
Check the charges on your pension and compare them to the typical range. If you have old pensions with high charges, consider whether consolidation might be beneficial, but take advice before transferring.
Guide 11 explains how to review your pension investments, bringing together everything from this section to help you assess whether your pension is on track.