Do you know what charges you’re paying on your pension savings? Whether you’re saving for the future in a personal pension, or have retired with your funds in income drawdown, you must be able to answer this question. Otherwise you could regret it later.
Charges cost
Too few investors talk or even think about charges. They’re the great unmentionable c-word, but you may end up turning the air blue when you finally discover the damage they’ve done. Whether you invest in a personal pension or Stocks & Shares ISA, you need to know exactly what your provider, or platform, is charging… or pay a high price.
Small fee, big impact
The good news is that fund charges have been squeezed sharply in recent years. I remember the days when you paid 5.25% upfront simply to buy an investment fund, and another 1.75% each year to hold it.
If you invested £10,000 and it grew at 6% annually, you would have £33,026 after 30 years with this charging structure. That doesn’t sound so terrible until you compare it with investing the same sum in a low cost passive index tracking exchange traded fund (ETF) such as iShares Core FTSE 100.
This has zero upfront charges and an annual fee of just 0.07%. After 30 years you would have a mighty £56,308, assuming exactly the same 6% annual growth. Incredibly, that’s £23,282 more on the same £10,000 investment. No wonder ETFs are so popular. If that doesn’t encourage you to check out how much you are paying, nothing will.
Check drawdown costs, too
If you prefer actively-managed funds, the good news is they’ve got cheaper too. Terry Smith’s hugely successful Fundsmith Equity charges nothing up front and 0.95% annually. I’m an investment trust fan and plenty of these also have low charges.
High charges can also inflict plenty of pain after you retire, if you leave your funds invested via income drawdown, as more of us now do.
New analysis from the Financial Conduct Authority (FCA) shows total charges in pension drawdown range from 0.4% to as much as 1.6%. The difference could cost somebody with a £100,000 pot as much as £32,000 over the course of their retirement, and some could run out of money as a result.
Slow lethal killer
Tom Selby, senior analyst at AJ Bell, has calculated if someone started withdrawing £5,000 a year at age 65, and increased that in line with inflation, their pot would last until age 92 with an annual charge of 0.4%. In total, they would have received around £176,000.
However, with a 1.6% charge, that income would run out by age 88 and they would have received just over £144,000. Selby describes high drawdown charges as “a slow, lethal killer.” You can see why.
The good news about drawdown is that you aren’t locked in and are free to switch at any time. So shop around to see if you are getting the best possible deal. Charges aren’t everything, but by keeping them as low as possible, you can squeeze a lot more out of your pension… and a lot more fun out of retirement.