Pension savings often commence years before a person plans to retire, and spreading out payments allows the pot to have a chance to grow. This can be beneficial for those who are looking to retire with a substantial amount of money to achieve retirement dreams, goals and aspirations. However, with saving for a pension comes added charges which can eat into your nest egg dramatically over time if you’re not careful to avoid them.
Mr Glancy said that for those who get this the wrong way around there could be significant and dire consequences for pension saving.
But he also highlighted it was vital for savers to check their charges before switching out of an arrangement.
This is because newer pension products do not always mean better deals for savers.
He added: “It is important to look at the charges before you switch. The other important thing is that some of those older products, although the charges are higher, they have valuable guarantees built in that aren’t available in more modern products.
“For example, they might have an income guarantee – which could guarantee you get 1/10th of your pot as an annual income. If you have a notional pot of £100,000, this would get you £10,000 a year.
“But if you transferred out of that into a more modern product, at the moment you would expect to get 1/25th of that pot as your annual income – as that is the current annuity rate.
“It might look attractive that some of the charges are lower, but this is largely irrelevant if there is a growth or income guarantee that applies.
“People need to be careful before making a snap decision, which could eradicate some of those valuable benefits.”
The Pension Advisory Service has also outlined specific charges savers may face when putting away money for retirement.
Annual management charges cover the cost of a provider running and administering a pension scheme, as well as investing contributions in the pot.
Watching what you are being charged by your penion provider every year is critical. Research has found that reducing fees by just 1.5 per cent can mean the difference between being able to retire at 63 or 80.
Annual charges on older pension pots could be 3 per cent or more, whereas you are likely to be paying less than 0.5% now if your default work fund is a tracker, which follows the performance of stock market rather than trying to beat it. But most ‘managed’ funds actually fail to beat the stock market over time, so that reduced cost could mean you retire far earlier and with more money in your pot.
As Mr Glancy highlighted, transferring a pension pot could also create charges, and so it is advised people take financial advice before doing so.
Finally, stopping contributions to a pension pot could also create charges, with older schemes potentially increasing the cost of looking after a person’s pension in the future.
Generally, it is recommended that you consult a qualified independent financial advisor before making any major decisions on your retirement finances.
Published at Sun, 21 Jun 2020 03:01:00 +0000