Knowing how much you are paying in pension charges is vital, as these costs could make an enormous difference to the amount you receive at retirement.

However, it can be tricky to understand exactly what charges you’re paying, and they can vary widely depending on your pension provider and the type of plan you have. Generally though, charges cover the cost of your provider managing and administering your pension, and investing your contributions into the stock market. You may also face a charge for transferring your pension, alongside other fees.

Fortunately, pension charges have fallen substantially over the past decade, but this makes it more important than ever to ensure you’re not paying over the odds as high charges can dramatically erode the value of your retirement savings.

Here’s our rundown of the various different pension charges you might be paying.

Am I paying pension charges?

Chances are, you’re paying for your pension. You will pay some charges if you have a defined contribution pension, also known as a money purchase pension, where the amount you end up with in retirement is dependent on the underlying investment performance. This is the most common type of pension, and may be a workplace scheme, or a personal pension. Find out more about this type of pension in our article What is a defined contribution pension?

If you have a defined benefit pension, or final salary scheme, however, your employer typically pays the charges on your behalf to run the scheme. With this type of pension, the amount you receive at retirement usually depends on how long you’ve worked for the employer and been signed up to the scheme, and your average salary, or final salary when you retire. However, very few companies now offer defined benefit pensions to new joiners, as because they provide a guaranteed income in retirement, they are very expensive for employers to run. Read more about how this type of pension works in our article What is a defined benefit pension?

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What are the different charges?

Some pension providers charge a single overall management fee, which includes other costs. However, you may also find there are different charges on top of this, particularly with older pension plans. So, you need to factor them all in when calculating how much you’re paying in total for your pension.

Annual management charge

Typically, this is your biggest charge. It’s paid to your provider for administering your pension, and usually includes general management costs such as sending out statements and investing your contributions.

In 2015, the government announced a cap of 0.75% on annual management charges for workplace defined contribution pensions under auto-enrolment (find out more about auto-enrolment in our guide How does pension auto-enrolment work?). However, if your pension was in place before this, the charging cap doesn’t apply. Typically, the older your pension scheme, the higher the annual management charge will be, with fees that in some cases can amount to as much as 2% of your pension’s value each year.

Annual management charges for pension schemes have been falling over recent years, since the introduction of the charging cap. These days, annual charges of 1-2% are considered expensive, so if you’re paying this amount, it may be worth considering moving your pension to a cheaper plan.

Underlying fund fees

These are the fees you pay for the management of your funds within your pension. Sometimes they are included in the overall annual management charge. In workplace pensions, for example, underlying fund fees are included in the 0.75% charge cap, but you may pay separately for these if you have an older workplace pension or personal pension.

You can potentially reduce this fee by investing in passive funds instead of actively managed funds that rely on the expertise of a fund manager, as their aim is to beat the market. Read more about where your pension is invested in our article Where is my pension invested?

If you’re investing in cheap tracker funds, fund charges are typically low, and can be as little as 0.1%, as your investment simply follows a particular stock market index, such as the FTSE 100. However, if you’re paying for an active fund that uses the expertise of a fund manager to pick and choose the underlying stocks and shares, you may pay higher charges of more than 1%. Whether this is worth the cost depends on the fund’s performance over time, which is generally impossible to predict with any certainty.

Platform charge

If you’re using an online investment website, also known as a platform, for your personal pension or self-invested personal pension (SIPP) you’ll be charged for using its service to buy and sell investments. This is similar to the annual management charge, and may be included within this, or charged separately. Again, it’s typically a flat fee or a percentage of your portfolio.

Which type of fee structure is suitable for you depends on the size of your portfolio and personal preferences. The bigger your portfolio, the more you’ll pay if you choose a platform with a percentage fee. By contrast, a flat fee could be considered to be more transparent, but it’s worthwhile doing your sums to see which works for you. Also, make sure the platform offers the right investment choice for your individual needs, rather than purely focusing on the fee.

Policy/service fees

These are usually included in your annual management fee. However, some older style pensions may come with a separate policy fee, so check the fine print.

Fees for buying and selling investments

The majority of pensions are invested in stocks and shares and other types of investments such as bonds. Moving your money between funds or shares within your pension could mean paying additional charges. You may choose to do this, for example, in the hope of boosting your potential returns, or because you want to move into safer, less volatile investments as you approach retirement.

Some pension providers will allow a few free fund switches every year, or include estimated costs within other charges, but check before moving your money to ensure you’re clear on what you’re paying.

Contribution charges

These are usually included in your annual management fee. However, some older style pensions may come with a separate policy fee, so check the fine print.

Inactivity fee

If you stop paying into your pension, perhaps because you move jobs or take time out of work, some older providers may charge a fee. If your provider charges an inactivity fee, you’ll find you’re paying higher charges for simply holding the money you have contributed in the past than if you were still paying into your pension.

Pension transfer/exit charges

You may pay a fee if you want to move your pension to another provider in the form of an exit fee, particularly if you have an older pension plan. It may be worth seeking professional financial advice if you want to transfer your pension.

If you’ve a defined benefit pension scheme with a value of more than £30,000, it’s compulsory to seek professional financial advice, as you could lose valuable benefits by transferring the pension. Find out more in our article Should I transfer my final salary pension?

Exit fees can be particularly variable, but have been known in the past to amount to an eye-watering 10%. The Financial Conduct Authority has imposed a cap on exit fees of 1% for savers over 55 who wish to withdraw their money or move to a different provider, while exit fees have been banned on new plans since March 2017.

However, investors in older schemes may still face these fees. So, before you transfer your pension check what fees you’ll be charged, and the transfer value. Whether these fees are worth paying depends on how much time you have before retirement to recoup lost funds. If you’re close to retirement, there may not be sufficient time to make up for losses incurred from high exit fees.

How do I find out what charges I’m paying?

The exact charges you’re paying will depend on the fee structure your provider has chosen to implement and the type of pension you have. If you’re unclear on your pension’s charges, check for the information on your provider’s website, and it should also be visible on your online account. Charges should also be detailed on any documents you received when you set up your pension, and any statements you receive.

If you’re struggling to find this information, contact your pension provider and ask for a breakdown of what you’re paying, and an explanation of how their charges work. Ultimately, the amount you pay is often based on how much you have in your pension, alongside how often you trade, or buy and sell shares and funds. So, charges on the same pension plan can vary between different customers, as they are often a percentage of the amount invested.

What can I do if I think I’m paying over the odds?

You may want to consider transferring your pension into another low-cost plan if you want to pay less in charges, or think about consolidating all your pensions into a single plan. Combining your pensions and moving to a more modern provider with lower fees could potentially save you a lot of money over time, and increase your retirement savings.

Depending on which provider you move to, you may also benefit from a wider range of investment options. Read more to learn about whether this might be the right option for you in our article Should I consolidate my pensions? It’s vital to check any charges involved in moving your pensions to another provider, and making sure you understand the process.

You might also want to seek professional financial advice to ensure you’re making the right decision, and not losing any valuable pension benefits in the process. Find out how and where to get advice in our article How to get advice on your pension.

How can I find a low-cost pension provider?

There are plenty of low-cost pensions on offer from a variety of providers. Some types of personal pensions, such as stakeholders, tend to be cheap, with charges of around 0.6% or less a year in total, but investment options are typically limited. 

‘Robo-advice’ platforms can help you choose a pension plan based on your responses to certain questions about your investment timeframe and approach to risk. You can find out more about how these services work in our guide What is robo-advice?

If you’re comfortable choosing where your retirement savings are invested yourself, self-invested personal pensions (SIPPs) usually offer the widest range of investment options, and these days, annual platform fees of below 0.5%, or a single, low flat fee, are common. Find out more about some of the options and their charges in our article Everything you need to know about SIPPs. 

If you’re paying into a workplace pension, your employer will have control of which provider it uses, but you can ensure you choose the cheapest fund options within your plan if you wish, by switching your investment choice. 

As an example, the government-backed workplace pension scheme National Employment Savings Trust (Nest) has an annual management charge of 0.3%, and you also pay 1.8% on the value of each contribution. So, this amounts to £1.80 on each £100 paid into your pension. Nest states that it keeps costs low by focusing on passive investments, so the underlying funds aren’t actively managed. 

What other potential pension charges should I know about?

Annual allowance charge: This isn’t a fee from your pension provider. It’s a fee imposed by HM Revenue & Customs if you exceed your annual allowance for pension contributions in any tax year. Currently, your annual allowance stands at £60,000 a year, which is the amount on which you can receive tax relief. If you contribute more than this to your pension, you’ll face a charge amounting to a percentage of your ‘excess’ savings.

Previously you might also have needed to consider the Lifetime Allowance, which limited the total pension benefits you could build up over your lifetime without having to pay any extra tax charges when you took money out of them. However, this allowance was abolished on 6 April 2023, so it no longer applies. You can read more about this in our article How do pension allowances work?

Drawdown pension charges: From the age of 55 (rising to 57 in 2028) you can do as you wish with your pension, including leaving it invested for future potential growth, and drawing an income from your pot. If you want to leave your pension but take lump sums or regular income from your pot, you can move your savings into a drawdown plan. You can learn more about drawdown in our article What is drawdown and how does it work? 

Charges for this type of pension vary widely, depending on the provider. You’ll typically pay set-up costs, and fees on withdrawals of lump sums, alongside transfer fees if you’re moving to a new provider to set up a drawdown pension. According to consumer group Which?, drawdown charges can amount to more than £47,000 over retirement, and investors can save more than £12,000 by comparing charges and choosing a good value provider. 

Where can I get advice?

If you’re not sure how much you’re paying in charges, or whether you’d be better off moving to a different provider, you should seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide How to get advice on your pension.

If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.

The consultation is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.