Retirement pots: are small fees taking a big bite?

“Fees don't retire when you do, and several small percentages can quietly become a very large bill.”

I regularly see pensions where clients haven't appreciated the total cost because advice, platform and investment charges are shown separately. Just an additional 0.5% on £1 million is £5,000 a year — potentially the cost of a good holiday or a contribution towards a new car.

You do have to separate fees from withdrawals and investment performance before blaming charges for a falling pension. But every pound unnecessarily lost to fees is a pound that can no longer compound or fund retirement.

There isn't a universal acceptable percentage. Complex tax, retirement and estate planning can justify higher costs than a straightforward pension. However, if total annual costs on a sizeable, relatively simple portfolio exceed around 1%, I would want to understand exactly what value is being provided.

Fees can vary significantly between firms, products and funds, so two clients with similar £1 million pensions could quite easily face a difference of 1% a year or more — £10,000 annually.

Charges tend to become most noticeable in flat or falling markets, when withdrawals and fees can make a pension fall faster than expected. In strong markets, investment growth can disguise their impact.

Around 1% in ongoing costs is certainly achievable on a large pension using a lower-cost investment solution. Active management will typically cost more, as can more complex financial planning and a higher level of ongoing service.

Clients should generally be shown their total costs in pounds and percentages, including advice, platform and investment charges. But being given the figures and understanding them are two different things.

Cost matters, particularly over a long retirement, but it shouldn't be the only consideration. What matters is: What you are paying, why, and is is value for money?

Retirement is exactly when charges need more scrutiny, not less. A client drawing £40,000 a year from a £1m pension may barely notice another 0.5% written on a disclosure document, but £5,000 in pounds suddenly feels very real.

I would never use 1% as an automatic definition of expensive. Complex planning, tax work, behavioural coaching and ongoing advice can justify higher costs. But on a large, straightforward pension, anything materially above that needs a very clear explanation of the value being delivered.

Charges, withdrawals and investment performance should be separated. Otherwise clients can see their pot falling and have no idea what caused it.

My rule is simple: show every cost in both percentages and pounds. If a client cannot tell me roughly what they paid last year, the disclosure has failed.

Tiny percentages become very large cheques on seven-figure pensions.

You can't judge a pension fee seen only as a percentage, so turn it into pounds. To split charges from withdrawals and performance, take the pot's value a year ago, subtract what you drew, counted before tax, and the charges in pounds, and the gap between that and today's value is the market. Two traps: fund charges come out inside the fund price, so they hide in performance, and any drawdown tax is usually taken before you're paid, so less reaches your bank than left the pot. Judging a drawdown fee by its percentage is a mistake, because it grows with the pot whether or not the work does, and you pay it every year you draw. So 1 per cent is a fair question, but the test is the bill in pounds against the work. FCA rules make a firm giving an ongoing investment service send a yearly total in cash and as a percentage, adding in the costs of other firms' services it arranges, but getting a total isn't understanding it. Set it against what you drew and ask what it bought.