How do charges work on pension funds?
Your money won’t be looked after for free, and pension charges are inevitable. The amount you are being charged can very wildly from provider to provider, and even from fund to fund within a provider. Being on top of your pension charges can make a huge difference to your pension pot in the long term.
Initial Charge
Many funds have an initial charge specified as a percentage, which is the cost of buying the investments. For example, if the initial charge was 5%, and you invested £1000, the initial charge would be £50 and you would receive units worth £950 of the investment trust, which means your investment needs to grow by around 5.3% before you even start to make any gains on your investment. The good news is, many pension providers discount this initial fund charge, often to 0%, so it’s worth shopping around.
Annual Management Charge (AMC)
All funds have an annual management charge, specified as a yearly percentage. It’s normally a few percent, and is taken out of the fund on a daily basis. Again, many platforms offer discounts on these annual management charges, and it is worth shopping around as, over time these can mount up significantly.
Ongoing Charge Figure (OCF)
The annual management charge is what the fund manager is charging you for managing your money. It is defined by law, and includes certain things, but not others. However, there are other costs that the fund manager can deduct from the fund that aren’t included in the AMC. The OCF is a total of these plus the annual management charge, which can give a more realistic estimation of the charges you’re paying.
If a fund has a big difference between the AMC and the OCF, you would have to ask yourself why that is.
Additional Fund Charges
Pension providers can also charge additional amounts for looking after certain funds. One of my pension providers, Aviva, calls it an ‘external fund charge’. This is on top of the OCF and any initial charges, and on top of the fee that Aviva charges for managing the pension in the first place.
Pension Management Charges
But don’t forget, you then have your pension managers charges top of that. My work pension fund is currently with Aviva, and charges 0.45% of the total money invested, alongside an additional charge for some funds. So, for example, if I wanted to invest in the CF Woodford Equity Income fund, there would be a 0.45% management charge from Aviva, plus a 0.65% extra ‘external fund charge’, alongside the funds OCF of 0.75% for a total charge of 1.85%. If you consider that inflation is currently about 2.5%, that means the fund has to return 4.35% a year just to break even.