According to figures from Money Management, an annual management fee of just 1.5% a year can wipe out 40% of the value of a typical fund over its lifetime. So it’s vital to keep pension costs as low as possible. “People spend a lot of time analysing the cost of their car insurance, yet they might only save £50 a year. But they may not realise that they can also switch to a cheaper pension provider and save hundreds, or even thousands, of pounds a year, which could easily translate to an income in retirement 20% higher,” says Steve Latto, head of pensions at Alliance Trust Savings, in The Daily Telegraph.
Before you jump ship, ask your pension provider for a scheme valuation so you can see how well it has performed (exceptionally brilliant performance, while rare, can excuse some fees). Also ask for a separate ‘transfer value’ so you know whether there will be any exit penalties to pay if you leave the scheme. Bear in mind that both valuations will fluctuate daily.
Next, consider any valuable benefits you may give up if you switch. Some older pension schemes offer guaranteed annuity rates. This means that when you retire you are likely to receive a more generous annuity than you would get on the open market, given today’s low annuity rates. That alone could make sticking with your provider worthwhile.
Once you’ve decided to move, there are a number of options. If you don’t fancy doing much investment legwork yourself you can usually buy identical holdings to those already in your pension by handing over to a discount broker. For example, Cavendish Online discounts the cost of personal pensions from most British life insurers by 0.36% per annum, says John Greenwood in The Daily Telegraph.
For a bigger saving, be prepared to make the investment decisions yourself via a self-invested personal pension (Sipp). Most Sipp providers will charge you an initial set-up fee and then an annual charge so do some research first – Hargreaves Lansdown is the cheapest provider, according to MoneySavingExpert.com. You pick and choose the funds you buy within the Sipp wrapper. This gives you the opportunity not only to control the charges you pay, but also to control your risk profile.
If you want something very cheap and very simple, go for tracker funds. You can build a portfolio of ultra-low-cost trackers from US discount tracker giant Vanguard, through Alliance Trust Savings.