Pension savers have been urged to check their accounts.
Pension mistake set to cost 2.4 million Brits an estimated £60,000 in retirement (Image: Getty)
Millions of self-employed workers across the UK could be forced to work longer or delay their retirement due to paying unnecessarily high fees on their pension investments, a new analysis warns.
Research from InvestEngine showed that more than half of the UK’s 4.4 million self-employed people could be putting their financial future at risk by overpaying pension charges. George Bonello, Head of Pensions at InvestEngine, said: “Too many self-employed people are unknowingly handing over tens or even hundreds of thousands of pounds in fees that could otherwise be funding their future. While a 1% pension fee might seem small, over decades, this snowballs and seriously erodes returns later in life.”
Pension savers have been urged to check their accounts. (Image: Getty)
Investment fees are charged by your pension provider to cover the cost of managing and investing your savings. They are usually taken as a percentage of your total pot or as a fixed monthly or annual fee.
According to InvestEngine’s pension pot calculator, even a 1% annual fee on a typical Self-Invested Personal Pension (SIPP) can erode retirement savings by tens of thousands of pounds over time. This could mean years of lost income in retirement.
For example, if someone on the median UK salary of £37,430 contributed 5% of their income – around 5% a month – into a private pension over 40 years, their pot could reach £289,000, equating to an annual retirement income of £11,560 (assuming 7% annual returns and all eligible tax relief claimed). Combined with the state pension of £11,973 per year, this would provide around £23,500 in retirement income.
However, after factoring in a 1% annual fee, the pension fund would shrink by nearly £63,000, cutting yearly retirement income by £2,500 – an amount equal to around seven years of lost retirement funds.
High earners risk losing even more. Someone earning £120,000 and investing £500 per month could accumulate close to £940,000 after 40 years if subject to a 1% fee.
Without those fees, the total could instead reach £1.2million – a £259,000 difference, which could boost annual retirement income to £60,000 with the state pension included.
Despite these long-term risks, many self-employed workers are unclear about the costs attached to their pensions. InvestEngine’s research found that 39% of pension holders did not realise there were fees involved at all.
Meanwhile, more than half (56%) do not know how much they currently pay, which is equivalent to 2.4 million of the UK’s self-employed.
Alarmingly, one in four (24%) believe higher fees are a sign of better-quality pensions, a misconception that could cost them significant sums in the long run.
Mr Bonello said: “Our latest analysis shows just how much of an impact high pension fees can have – a difference of tens of thousands of pounds, and potentially delaying retirement by seven years or more.
“Unfortunately, too many people are unaware of the fees they’re paying – or mistakenly think higher costs mean better performance, but with living costs still high and retirement incomes under pressure, minimising unnecessary charges has never been more critical.
“Self-employed people make up around 13% of the UK workforce, but with no employer contributions and no default scheme like a workplace pension, many face greater challenges when it comes to retirement planning, so every advantage matters.”
