Think you know how much your pension costs? 'Hidden' scheme charges and how you can find out how much you're paying
Pensions minister Steve Webb has announced today that all defined contribution workplace pension providers will have to offer complete transparency to savers and employers about how much they are being charged for their pension.
The Government will submit an amendment to the Pensions Bill designed to crack down on the hidden charges that over the course of a career can have a huge impact on your total pension pot.
It is hoped the change will allow savers to see whether they are in a good value-for-money scheme and so that charges can be compared across the industry by employers.
Confused? Many pension savers are unaware how much they are being charged.
Even clued-up pension savers may not be aware they are being charged not only an annual management charge, but also a host of other fees related to the investment of their pension contributions.
If you don't want to wait for the legislation to be enacted, This is Money - with the help of Hymans Robertson and Investment Sense - has identified what to keep an eye out for in your pension documents.
What are 'hidden' charges?
Members of workplace pension schemes have to pay charges worth a proportion of their total pension pot to pay for the administration of their savings - typically known as the Annual Management Charge (AMC), which averages around 0.84 per cent in UK schemes currently.
But the problem is that scheme providers are not always including additional charges associated with pension investment within the AMC.
This not only means that employers can't properly compare charges when setting up a company pension, but also that employees may suddenly be hit with a series of other charges once they start saving - either because they don't understand the information in their pension packs, or because the information on such charges has been buried in their small print.
These may include costs for switching investments from one fund to another; fixed monthly fees; a 'contribution fee' that is a percentage taken out every time you pay into your pension; or payments to advisers who helped set up the scheme.
Other charges you could keep an eye out for is the Active Member Discount - which sees the amount you're charged ramp up when you leave the company - and early transfer penalties that charge you when you move your pension elsewhere shortly after signing up.
The Office of Fair Trading's report into workplace pensions identified 18 different charges that are being levied on pension savers in various schemes (not all at once...hopefully).
Announcement: Steve Webb is calling for total transparency from workplace pension schemes on charges.
How and when are these charges paid?
The charges are deducted directly from your pension pot, but when they are taken out will depend on the charge.
Transaction charges for example may be levied whenever you invest, switch or withdraw from a fund; while contribution charges are typically taken out each month when you pay into your pension.
AMCs are calculated based on the total amount in your pension throughout the year, so it has to be calculated on a daily basis. The National Employment Savings Trust (NEST), which has a 0.3 per cent AMC and a 1.8 per cent contribution charge, says it takes AMC payments from pots daily.
You will be able to see the effect of these charges and how much you've paid in total when you receive your annual pension statement, alternatively you could find out online if your provider has a decent pension portal.
Previously, commission payments to advisers who set up the scheme may have been included in the AMC by providers, but the Retail Distribution Review (RDR) was introduced last December which banned such commission payments, so any adviser charges must now be levied as a separate charge.
How can an employee find out how much they're being charged by their pension scheme?
This information should be included in the standard documentation you're sent by your pension provider when you first sign up, whether you can understand the charges as they're described to you is another matter altogether.
Once you're signed up, the amount you've been charged should appear in your annual pension statement.
Newer schemes are more likely to be transparent about their charges, though the information might be more difficult to find if you're a member of an older scheme.
But if this still leaves you confused, the best thing to do would be to contact your pension provider and ask them to confirm and explain their charges.
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