January 2023
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Your pension savings will provide a great pension – for your pension fund manager

Unless you’re a higher-rate taxpayer or get generous contributions from your employer, it’s probably not worth saving in a pension fund. Some figures:

Like unit trusts, the charges of just 1.5% to 2.5% that we pay to pension fund managers can look quite trivial. But over the longer term, they can have a disastrous effect on our retirement income and a correspondingly wonderful effect on the retirement income of our pension fund managers.

Take a saver who from 25 to 35 puts in £2,000 a year made up of own contributions, money from employer and tax relief. From 35 to 45 this goes up to £5,000 a year and from 45 to 65 to £7,000 a year. By 65, the saver will have put a wonderful £210,000 into their pension fund.

Assuming the money grows by the pension fund industry average of 3.4% a year. If the money is in a low-cost pension scheme with just 1.5% in fees, the saver will have £286,000 left. But the fund manager will have taken a healthy £65,500 for his or her efforts. If, as is more likely, the total charges including high 1st- and 2nd-year commissions, annual fees and dealing costs are actually around 2.5%, then the saver’s £210,000 will have only crept up by a very modest £28,500 to £238,500. But the fund manager won’t be too worried as they’ll pocket £96,600 (see figure)

In Denmark, Holland and Germany, management fees are 0.5% or less. But in Britain they’re 3 to 5 times as high. I believe the only way to save for a pension is with a low-cost SIPP (o.5% charges) and buy shares directly – do not, repeat not, put your SIPP money in a unit trust or other kind of fund otherwise you’ll be paying both your SIPP charges (0.5%) plus fund charges of say 2.5%. Only a madman or fool would do that – but sadly that’s precisely what most SIPP savers do.

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