Exempel på effekterna av avgifter för pensionens storlek

A pensioner has just retired, aged 65, with an index linked annuity from a personal pension of £10,000. If they also receive a typical state pension of £7,500 and have a tax allowance of £10,500 then they will be paying (10000+7500 – 10500) * 20% = £1,400 per year in tax. The year before retirement they will have needed a pension fund of £290,000 to buy such an annuity.

The fees on this annuity will have been 0.5% * 290000 = £1,450 per year if managed on a cheap passive basis. However if it was actively managed then the fees will have been of the order of 1.5% annual management charge and 1.2% hidden internal fees.

This adds up to £7,830 per year in fees. If there was also a platform charge of say 0.8% then the total fees would be GBP 10,150 per year (i.e. more than their pension once they retire).

This should help to put into context just how much we pay in pension fees every year that most people are completely unaware of.

A man retiring aged 65 will need £29 to buy £1 of index linked pension (this is the assuming that he shops around and gets the best deal available). The actuarial cost of providing an index linked annuity for an average man calculated by projecting forward the GAD mortality tables for the UK population and investing in index linked gilts is £20. This means that if he has saved up a retirement fund of £290,000, then he immediately loses £90,000 in fees.

Suppose you are buying a £200,000 house and also saving for a pension pot of £200,000 (to buy a pension of about £7,000). In very simple terms half way through you have £100,000 left on your mortgage and £100,000 saved up in your pension, so you have nothing net. If you are paying 4% interest on your mortgage then this is 3.5% above base rates and so is effectively a fee of £3,500. If you have your pension fund actively managed then you will probably be paying another 2.7% at least on the £100,000 of pension fund. This adds up to a £6,200 fee (in one year) on a total portfolio of value £0.

It would not be fair to say that this £6,200 is a fee for nothing as what you are actually getting is a synthetic £100,000 equity exposure with an active management overlay. I make two points about this: People should only be buying this if they have actually chosen they want it and £6,200 is far too much to pay for it anyway unless you have a crazy view about either the equity risk premium or the value of active management.

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