Saving for your retirement is one of the most important financial goals of your working life as you build up enough money to cover you later in life.
Most people build up their retirement pots through their workplace pensions, but you could use a self-invested personal pension (SIPP). If you’re self-employed, you might decide a SIPP is a good option.
But when building up a retirement fund in a SIPP, you should be aware of the fees involved, which over the long term could cost you tens or even hundreds of thousands of pounds.
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Although fee amounts can look like incredibly small percentages, even a small increase can take a large chunk out of your retirement savings.
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If you contribute £250 to your pension each month from age 25 to 66, you would build up a pension pot of £392,000 by the time you reach retirement, assuming a 5.5% average annual return and a 0.5% fee.
But if those fees were twice as high, at 1%, £47,000 would be lost from your pension pot, leaving you with just £345,000, according to analysis by investment manager Vanguard.
If the fee was 1.25%, you’d be £66,000 worse-off compared to a 0.5% fee, and you’d miss out on £87,000 if the fee was 1.5%.
Do higher fees affect your pension returns?
As fees are often taken as percentages, the amount you lose to them is proportionate to the amount you have saved in your pension, meaning if your pension pot is large you can expect to lose more of your pension to fees.
James Norton, head of retirement and investments at Vanguard Europe, said pension investors should look at the fees they are paying on their retirement pots and take control of the investment costs they pay.
He warned: “When buying a car, it’s common for a more expensive vehicle to perform better than a cheaper one. So, you may think that higher fees should lead to better investment outcomes. But the higher the fees you pay the less returns you get to keep for yourself.”
Put simply, higher fees mean lower returns.
“Our analysis shows that if you keep your pension pot with a low-cost provider, in the long term you could keep significantly more of your returns and significantly improve your retirement,” Norton said.
“It is your money and you’re taking the investment risk, so make sure you keep as much of your returns as possible.”
How to reduce fees on your pension
If you contribute to a workplace pension, you likely do not have the power to get your employer to move to a different provider with lower fees. However, if you contribute to a private pension, shop around for providers to find the best deal.
However, fees are not the only thing you should consider.
For example, while Vanguard’s fees are low, they only give access to Vanguard’s own funds so you have a more limited range of investments than provided by other platforms.
Below is a list of some popular SIPP providers and the fees they charge.
Swipe to scroll horizontally
Provider
Fees
Trading 212
No platform or purchasing fees
InvestEngine
No platform or purchasing fees
Vanguard
Account fee: £4 a month under £32,000, 0.15% (max £375 a year) over £32,000
Fund management cost: 0.06% to 0.79% depending on the fund
AJ Bell
Shares account charge: 0.25% (max £10 a month) Funds account charge: 0.25% on first £250,000, 0.10% on £250,000 to £500,000, no charge over £500,000
Shares dealing: £5 per trade Fund dealing: £1.50 per trade
Hargreaves Lansdown
Shares account charge: 0.35% (max £12.50 a month)
Funds account charge: 0.35% on funds up to £250,000, 0.25% between £250,000 and £1 million, 0.1% between £1 million and £2 million, no charge over £2 million
Funds dealing: No charge for regular investing, £1.95 for one-off trades
Shares dealing: No charge for regular investing, £6.95 if you had 0 to 19 trades last month, £3.95 if you had 20+ trades last month
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