By Lee Halpin

Management charge, service charge, product charge, administration charge and platform charge. These were some of the examples cited by the Financial Conduct Authority to highlight the inconsistency in terminology when pension providers refer to core administration charges on their products.

The context of the review in this case was focussed on income drawdown products, which are, in essence, contracts that are used to withdraw pension savings. This is part of a wider exercise to consider how the market is evolving after the introduction of the pension freedoms in 2015. The review uncovered that, even the simplest charging structures were found to have between one to three categories of administration charges to consider, whilst some of the more complex structures had between nine and sixteen different charges.

It is therefore not difficult to arrive at the same broad conclusion as the regulator – pension product charges can be difficult to understand, and most consumers can find it difficult, or well-nigh impossible, to compare these on a like-for-like basis.

Consequently, this results in people following the path of least resistance and sticking with products they have always had. Analysis of non-advised drawdown sales backs this up – with 89% of sales over a two-year period being for existing rather than new customers.

Charges are particularly important to consider when it comes to pensions given that they are long-term savings vehicles, and it is in consumers best interests to shop around for the right product. The magic of compounding returns should work in the investor’s favour over a saving period of many years, if not decades. But, conversely, for every pound overpaid in unnecessary charges, it is not just one pound lost but also the compounded return you would have had on that capital, ultimately leading to less income in retirement.

There is also the danger that, because of the long-term nature of a pension product, very little attention is given to the present circumstances.

At the extreme, there will be policyholders who only turn their attention to their pension arrangements when they start to think about accessing their pension savings. By this time, their decisions have played out and the timeframe for making changes that will really impact their financial outcomes will have materially diminished. However, going forward, changes to how pension charges are disclosed should make it easier to compare charges and ultimately shop around to get the best value for your pension savings.

Much like the existing annual requirement that has applied to non-pension services like investment platforms and portfolios managed by discretionary investment managers since 2018, pension providers are now obligated to issue information on the actual charges levied on pension pots and present this clearly in pounds and pence.

But can total pension charges vary that much?

In a word, yes – average total charges can range from around 0.4% to 1.6% across providers and, indeed, some are even higher than this range. The effect of this wide variation in charges is perhaps best illustrated by considering the difference in annual income that an individual could expect to receive if they intended to fully withdraw their pot over a 20-year period. Using the regulator’s calculations, an individual could increase the annual income from their pot by 13%, by paying 0.4% rather than 1.6% in charges. For example, for an individual with a pot of £100,000, this would be an extra £648 a year on top of an income of £4,9221.

It should be noted, however, that the change to how pension charges are disclosed only applies to pension decumulation products at this stage and does not apply to pension accumulation products (those in the saving phase). But a clear direction of travel with a focus on transparency and delivering value has been established by the regulator over a number of years now so it would appear to be a question of when, rather than if, similar disclosure requirements will also be introduced for pension accumulation products.

There are, of course, various factors which influence those who do not or cannot engage with pension decisions.

But if one thing is clear is that inertia should be avoided when it comes to your pension charges. It is in everyone’s best interests to find out exactly how much they are paying for their pension product and whether there are better alternatives. So, this step is a positive one that should help in giving a ready-made opportunity to clearly gauge your pension charges each year.

Lee Halpin is head of technical services @sipp