The high cost of pensions and saving/investing for retirement was in the news this week because the UK Government have decided to step in and start capping the exorbitant charges levied by our pension providers.
This highlights another example of why you can’t trust the Financial Services companies to look after your money for you because, left to their own devices, they will take advantage of your financial ignorance in order to profit at your expense.
If you think I’m being harsh here then keep reading and you’ll change your mind.
Were going to get a better understanding of what’s been going on this week and then I’m going to share with you some ideas of how you can avoid these exorbitant charges to save better for your retirement.
How Much Do Pensions Cost?
If you have a pension, like I do, then you might want to take this opportunity to check how much your pension provider is charging you for managing your money.
As the BBC highlighted, the costs in annual percentage terms sound very small and nothing to worry about but as I’ve said to you on a frequent basis, those small percentages really, really matter when you are investing over the longer term, as you will see again later in this article.
Pension charges vary a lot depending on who is managing your pension for you.
According to the UK Office Of Fair Trading (OFT), the average annual cost of managing a new style pension that was set up in 2012 is 0.51%.
However, the OFT estimates that there are more than 186,000 pension pots containing £2.65 billion of investments subject to annual charges of 1% or greater.
The investigation also discovered that some older pension schemes set up more than a decade ago are charging fees as high as 2.3%!
So what, I hear you cry – that’s hardly anything at all isn’t it?
Well no, actually.
How Much Are These Charges Costing In £ Terms?
According to the UK Government, for an average person investing £1,200 into their pension in the first year and then continuing to invest throughout their working life of 46 years, the money they will lose out on because of these charges is huge.
With a “small” 1% charge, Mr or Ms average stands to lose £170,000 and with a 1.5% charge, you stand to lose a whopping £230,000.
With a modest annuity rate of 5%, that could cost you £8,500 to £11,500 of annual retirement income every year of your retirement, just because of these “small” percentage costs.
By my calculations, this is a loss of 24% to 33% of your total pension fund on retirement.
So if you are thinking you might like to take a 25% cash lump sum from your pension pot when you retire, like a lot of people do, say to fund a “round the world” cruise, buy a retirement property, or fulfil some other lifelong dream of yours, these “small” charges of 1% to 1.5% could cost you £45,000 to £63,000 of your lump sum.
Not so insignificant now is it?
What Is The Government Doing About It?
The UK Government have decided to step in and cap the charges that the pension providers will be allowed to charge.
But they are not sure at what level the charges should be capped, so they have started one of their infamous consultations.
The Government’s Pension Minister, Steve Webb, said that the Government are thinking of capping annual pension charges at somewhere between 0.75% and 1%.
Which?, the consumers association, said that this was too high, asking that they should be set much closer to the average pension cost of 0.5% as they are concerned that if the cap is set higher than this, the providers will see that as permission to raise their charges up to the cap.
For the record, I agree with Which? and I don’t have a lot of confidence in the UK Government to get this right, mainly because their track record of bringing changes to the Financial Services industry is poor.
So, if you can’t rely on the UK Government and the pension industry providers to look after your retirement savings, then what can you do instead?
How To Protect Your Retirement Savings, Plans and Dreams
Before I go any further, I’d just like to say that I have pensions held with my former employers.
I also have a Self Invested Personal Pension (SIPP) that I manage myself.
I also have other savings and investments too.
In other words, I don’t put all of my eggs into the one basket; I don’t rely solely on the pension industry; I don’t rely on the UK Government and I manage as much of my own investments as I can.
And I suggest that you start doing the same if you have the capability to do so and you don’t do it already.
Managing your money is too important a task for you to outsource it to someone you can’t fully trust.
Indeed, the life and dreams of yourself and your family depends on it.
Pensions are not savings vehicles, they are investment vehicles.
The advantage of investing in a pension is that there are tax-free benefits available when you put money in.
In exchange for those advantages, there are an awful lot of restrictions, which I write more about here.
But there’s no law that says all of your long-term investments have to be in a pension of some kind.
As well as putting extra money into your pension or SIPP to get your hands on the FREE money offered by your employer and the tax man, you can consider additional “investment streams”.
What’s more, I’m going to show you a way of investing for retirement that doesn’t have all the restrictions attached that I mentioned above.
It’s also a way that you can continue to invest, growing your fund, even while you are in retirement drawing a pension income from your traditional pension fund!
Do you want to know what it is?
Investing In Shares
Shares are much more flexible than pensions.
Indeed, most pensions consist of a large number of share investments – mostly in large blue-chip companies that you would know and recognise.
For a list of the advantages of shares compared to pensions, see here.
If you are new to shares you have probably not given them much thought before but these advantages make them worthy of investigation.
That’s what I thought 25 years ago when I started investing in shares.
And what’s more, if you can add up, understand percentages and have a reasonable level of intelligence, then you can invest in shares too.
You don’t need to be a City whiz kid or an accountant to invest in shares.
You don’t need vast pots of money and it doesn’t take a lot of time and energy to learn if you get yourself a bit of training and support.
YOU can start right now by signing up for my free e-book – “How To Invest In Shares“.
This e-book won’t be available free for ever so why not sign up below now and make a positive start?
And of course, if you’d like to have a chat with me about it, then you can contact me here.