It costs providers the same amount to administer a small pension fund as a large one. So why do most charge you more the more you save?
Most pension providers levy a flat annual management charge (AMC), which typically ranges from 0.5 to 1.5 per cent of the value of their fund. For someone with a pot of £10,000, a 0.5 per cent AMC adds up to annual charges of £50 a year. For the 1.5 per cent fund, the cost is £150 a year.
That might not sound much, but if over the years their pot increases fivefold to £50,000 then the charges will also increase by five times, to £250 for the 0.5 per cent scheme and a massive £750 a year with a 1.5 per cent AMC.
This charging structure dates back to the flat-rate stakeholder charge cap introduced to tackle exorbitant pension charges in 2001. But it is hard not to believe that many providers have stuck with it because it allows them to increase their revenues from scheme members’ pots.
We at NOW: Pensions think charges should reflect the work we do, not the amount of money we can get away with taking from our customers’ pension pots.
That is why we separate the amount we charge for running the investments held within the pension from the fixed administration costs.
Administering a scheme member’s pot costs us broadly the same whether it holds £100 or £100,000, which is why we charge a flat £1.50 per month administration charge.
The costs of running a default investment fund on the other hand do increase in proportion to the amount of money that is invested. So we also levy an ultra-low AMC of 0.3 per cent for our market-leading investment default fund.
Even though our charging structure is comprised of two elements, it works out as affordable as a low flat-rate AMC schemes for those with smaller pots – someone with a pot of £10,000 pays £48 a year with us, compared to the £50 charged by a flat-rate 0.5 per cent scheme. But it is when members’ funds start to grow in value that our charging structure really shows its colours – we charge someone with a £50,000 pot £168 a year, two thirds the price of the 0.5 per cent scheme and less than a quarter of the charge of the 1.5 per cent AMC.
In fact over their lifetime, saving in a pension with a 1.5 per cent AMC will leave an average saver with a fund value 26 per cent lower as a result. That means 26 per cent less income for life.
The Government is urging employers to make low cost a priority – in fact The Pensions Regulator sees it as one of the most important features of a good scheme. So it is essential that employers look not just at the level of the charge, but also the shape of the charge.
The Pensions Advisory Service, the Government-sponsored information service, is well aware that comparing different types of charging structure is not that straightforward. That is why it has set up an online calculator to allow employers to compare charges and what they will mean for their workforce.
Check it out before using another provider and see what good value really looks like.