By Paul Lewis
Presenter, Radio 4's Money Box
It can be hard to work out how much fees eat into pensions
Annual fees on a pension of 1.5% a year can reduce its value by nearly 40%, the Royal Society of Arts has said.
Its report analysed the effect of the annual fee on the fund and the pension produced.
Calculations show that a pension of £16,000 would be cut to £9,900 a year - a loss of about 38%.
But Standard Life said its charges were more modest and its 0.7% charge would cost just 14% of the fund over a lifetime.
The report's author - founder of Hermes Equity Ownership Service, David Pitt-Watson - told Radio 4's Money Box what a difference charges could make.
He quoted an example of someone saving £1,000 a year for 40 years, but with no fees charged.
"In the first year, they save £1,000 and get a return of 6% and that's £1,060," he said.
By the time they are 64, they will have a pot at the end of that year worth nearly a quarter of a million - £248,000 - and that will give them a pension - that will go up every year by 3% - of about £16,000."
The real world
He then reworked the figures with a typical annual fee deducted.
"That pension reduces from £16,000 to about £9,900, a reduction of almost 40%, simply as a result of the fact that we have added 1.5% charges per year from the age of 25 to the age of 85."
Your personal pension pot largely depends on how long you save
As well as growth of 6%, the figures assume inflation at 3%, and 20 years life after 65.
He has also factored in potential investment growth lost on the money taken out by fees.
John Lawson, head of pensions policy at one of the UK's biggest pension providers, Standard Life, disputed David Pitt-Watson's figures.
"With our typical pension at 0.7% you would lose around 14% of your fund over a 40 year period, which is a lot lower than the 40% quoted by the RSA."
But he confirmed that the annual fee could be higher in some cases.
"You can invest in funds managed by other fund managers and in some cases charges will go up to 2%," he said.
"The charges are to cover the administration and the fund management, mainly."
What the customer wants
Conceding that running a fund of £50,000 or £500,000 cost "roughly the same amount", he explained why the pensions industry charged a percentage.
"That's what's preferred by consumer organisations and consumers themselves," he said.
"A large fund might get lower charges with a fixed fee, but somebody paying in £40 or £50 a month is probably better off having a single annual [percentage] charge."
Across the industry fees can vary widely.
Money Box has seen information given to financial advisers from one provider showing charges ranging from 0.5% a year to almost 3%.
Des Hamilton, from the Pensions Advisory Service, said it was often difficult for consumers to work out exactly what the total charge was.
"There are disclosure rules which require providers to make sure this information is provided in its literature," he said.
"But you can find the total investment charge excludes initial charges and administrative charges, which are disclosed somewhere else.
"It's a requirement to disclose them but not a requirement to disclose them in a way we can easily understand them."
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