Understanding Pensions Charges

Trying to get your head around the realm of pension charges can, at times, be like trying to navigate a minefield, but it does not have to be difficult. A great deal of pension providers will aim to provide customers with clear and transparent guidelines in order to understand the way in which charges are structured for a particular pension plan.   

The principle charge a policy holder is likely to encounter is an annual administration/management fee, the cost of which is dependent on the particular fund in which you choose to invest your pension contributions, as well as the pension provider you have opted to purchase from.  

Many pension companies will charge additional fees because their brokers/salespeople are paid a commission. Due to these charges there will be less of your money going into your fund and so less money working for you. 

Many providers allocate a fixed number of annual switches which contributors can use free of charge, but once the upper limit has been exceeded, then certain fees will arise; these are dependent on the pension providers terms and conditions, which should be clearly outlined prior to the commencement of any pension plan.  

Usually, transaction charges will apply to lump sum contributions made during the course of the pension plan, although there are a number of pension policies to opt for, for those individuals wishing to make these types of contribution without incurring additional charges.

A way to compare the costs of different pensions is to look at what is known as the "reduction in yield". The term reduction in yield -- or RIY -- is a way of expressing the impact of all charges on a savings, investment or pension’s policy over a period of time. It sets out the reduction in the yield or return that would otherwise have been provided if the policy carried no charges at all. Reduction in yield is an excellent way of judging which policies are good value.  

As stated earlier, pension provider should make all their charges known to the customer prior to the commencement of any policy, pension providers that do not have transparent, flexible and comprehensible charging structure should be avoided.