Thinking about pension charges now can make all the difference in retirement

Our research finds that fewer than half of UK pension savers say they care about the cost of their pension charges, so is indifference leading many to miss out on valuable retirement income over the long term?

As the nation struggles with the worst cost-of-living crisis in a generation, households up and down the country are cutting their cloth accordingly and reviewing the cost of their utilities and services. It’s therefore surprising to learn that fewer than half of UK adults with a pension (48%) say they care about the cost of their pension charges. The research conducted by YouGov¹ on our behalf shows that, in comparison, 7 in 10 people with a mortgage (71%) or a current bank account (70%) pay close attention to what they’re charged for these products.

The poll also found that among those who say they don’t care about what charges they pay on their pension savings:

• Almost 1 in 5 (18%) haven’t got round to looking into or thinking about what they are paying,
• 16% think they don’t have enough currently saved for charges to make a difference,
• 14% say they don’t believe charges will make a difference to their pension savings when they come to retire,
• 14% say that they trust their pension companies’ charges are reasonable, so they don’t need to take any further action,
• just over 1 in 10 (11%) say that pension charges are too complex to understand, and
• 10% say it’s too difficult to find out what charges they pay.

A retirement shortfall

These research findings might leave the average pension saver asking, ‘Do pension charges really matter?’ For obvious and undeniable reasons, the answer must be ‘Yes, they absolutely do’, because excessively high charges can eat away at an individual’s pension savings and leave a potential income shortfall at retirement.

So it’s worthwhile to compare prices even when, at face value, pension charges don’t seem to be too unreasonable, especially when presented in percentage points. Qualifying workplace pensions have a 0.75% charge cap (or a broadly equivalent charge under a combination charging structure) for all default funds, with many providers charging less than this, but even then, there are real differences between how much different schemes charge customers over the long term.

Giving back to save more

For example, our rebate on member charges could help the average worker save £1,000s by the time they reach retirement.² Our management charge, which is already competitive at 0.5%, also includes a rebate which gives back between 0.1% on savings over £3,000 and 0.3% on savings over £50,000, and since its introduction 2 years ago, we’ve given back a total of more than £20m to our members.

Over the long term, it all adds up

Despite the evidence that charges matter, many pension savers who don’t give it much thought will continue to pay higher charges for similar products unless they start thinking about how much it is costing them over the long run.

Over the last decade, a sharp focus on charges has helped to deliver better value for members, but as our research highlights, there is still some way to go. It’s our responsibility as pension providers to drive home the effect charges can have over the long term on our members’ pension pots.

Value for Money metrics

While charges are important, they are, however, only 1 aspect of the value members get from workplace pensions. With the impending introduction of the new Value-for-Money metrics (VfM)³ – part of a joint FCA/TPR initiative – we expect a renewed focus on other aspects of value.

This is expected to include the new online pensions dashboards, which should make it easier and clearer for pension savers who are thinking about moving their pots to contrast and compare the value of the product they are transferring from and to. As these metrics are rolled out, we think they should always be clearly visible, but especially at times when savers are likely to make key decisions about their pensions.

We think the new VfM metrics will help to deliver more educated consumer and institutional decisions when choices are made to select a pension provider.

These days, the cost and value for money of pretty much everything are, quite rightly, under the microscope, so it’s important that pension providers remember the responsibilities they have to their customers and continue to work on making pension charges and other VfM benefits accessible, comparable, and as clear as possible.