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An introduction to pension charges

Three main factors influence the size of the pension pot you build up:

  • How much money you and your employer pay in,
  • the investment returns from the fund, or funds, you invest in, and
  • the charges you pay.

The first two factors will have the biggest effect but it’s important you understand what you’re getting for your money.

There are many different types of pension plan and over the years there have been several different types of charges. So this guide provides general information rather than specific details on a particular pension product.

Typically people buying an Aviva pension plan today will pay:

  • an annual management charge, and
  • extra fund management costs.
Annual management charge

The annual management charge covers a wide range of activities. These include:

  • Setting up your policy.
  • Issuing you with the information you need on joining the scheme.
  • Taking in your and your employer’s contributions and applying them to the investment funds you’re in.
  • Obtaining and applying tax relief to boost your contribution.
  • The investment management of the funds you invest in, apart from any extra fund management costs.
  • Switching your investment funds if you request this.
  • Keeping your records up to date including the current fund value.
  • Sending you yearly statements that show the performance of your investment funds.
  • Giving you access to your records through our on-line Pension Tracker tool.
  • Changing your records if you request this, for instance if you move address or get divorced.
  • Providing information about your choices when you retire and making sure your pension pot is available for the retirement product you choose to give you an income in retirement.
  • Providing information about transferring your pension pot to another pension scheme provider, if you decide to transfer.
  • Answering any queries you may have on your pension scheme or wider pensions issues.

The annual management charge (AMC) is calculated as a percentage of the value of your pension pot.

For example, if your pension pot is worth £1,000 and the AMC is 0.8%, then the annual charge will be approximately £8 (as a fraction of the charge is applied daily or monthly and the value of your pension pot varies from day to day, or month to month, the total charge for the year wouldn’t be exactly £8). If your pot later grew to £10,000 the annual charge would increase to approximately £80. So the amount of annual management charge you pay increases in proportion to the increase in the size of your pension pot.

It may also be influenced by:

  • the size of your employer’s scheme (if you are in a company pension scheme) as, generally, the larger the employer the more cost-effective it is to administer the scheme, resulting in a lower charge.
  • charges for advice you have received, where these have been deducted from your funds and paid to your adviser.
Summary of the total charges you may incur
Charges taken as a percentage of the value of your pension pot + Charges taken by reducing the value of the assets of the funds you’ve invested in
Annual management charge Additional fund costs* Fund manager expense charges Portfolio turnover expenses

* Additional fund costs are normally taken in this way but may sometimes be taken by reducing the fund’s assets.

Extra fund management costs

The annual management charge covers most of the charges for several of the investment funds available under your pension plan. But it doesn’t cover all the possible costs.

The extra costs can be split into three types:

  • Additional fund costs
  • Fund manager expense charges, and
  • Portfolio turnover expenses.

Additional fund costs

Some funds are more expensive to run than others. This might be because:

  • The fund is small, or
  • It invests in assets that cost more to buy and sell, or
  • The fund manager charges extra for their expertise.

So you are charged an additional fund cost if you invest in one of these funds. We will tell you the amount of any additional charge before you decide whether or not to invest. This additional charge is normally calculated as a percentage of the value of your pension pot at the same time as the annual management charge.

Fund manager expense charges (FMECs)

FMECs are additional charges that the fund manager can’t generally predict in advance. But they aren’t directly caused by turnover, ie buying or selling assets in the fund. We cover turnover expenses in the next section.

FMECs are specific to a particular fund. An example would be fees charged by the fund’s trustees. The fund manager pays these charges as and when they occur and passes the cost on to the people invested in the fund by reducing the value of the fund’s assets.

Some funds may have no FMECs at all. But if a fund does include an FMEC, our fund guide will include an estimate of the additional percentage charge payable based on the fund’s previous expenses.

The combination of the annual management charge + any additional fund charges + any FMECs is often referred to as the total expense ratio. However, this excludes portfolio turnover expenses, so doesn’t cover all of the possible costs.

Portfolio turnover expenses

In addition to the charges outlined above, all funds incur expenses whenever they buy or sell assets. These include:

  • stamp duty, which is a tax paid to the government on the sale of shares and property, and
  • the fees of people involved in the sale, such as a broker or solicitor.

Portfolio turnover expenses currently cannot be expressed as part of the total expense ratio. They’re taken by reducing the value of the assets in the funds you’re invested in.

Portfolio turnover expenses depend on:

  • the type of fund – for instance a deposit fund will have lower dealing costs than a fund that invests in shares; and
  • how often the fund manager buys and sells assets. The higher the portfolio turnover rate – that is, the more a fund buys and sells assets – the higher the expenses will be.

Remember, though, that the fund manager has to buy and sell assets that the fund invests in. Low portfolio turnover rates don’t necessarily mean better value for money, as more actively managed funds with higher dealing costs can deliver better returns. Sometimes the dealing costs may rise because of external circumstances. For instance, if you invest in a fund that tracks an index of shares, like the FTSE 100 index, the transaction costs will increase if there are changes in the companies that make up the index. This is because the fund manager will have to buy and sell shares to make sure the fund accurately tracks the index.

Summary of the total charges you may incur
Charges taken as a percentage of the value of your pension pot + Charges taken by reducing the value of the assets of the funds you’ve invested in
Annual management charge Additional fund costs* Fund manager expense charges Portfolio turnover expenses

* Additional fund costs are normally taken in this way but may sometimes be taken by reducing the fund’s assets.

WC03089 09/2012