Expenses
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You will not be surprised to
learn that If you have a Personal Pension or a Stakeholder pension
then you are going to have to pay some expenses to the company
that runs your pension for you. You and I wouldn't work for free
so its not surprising then that companies that manage pensions
don't either.
Ttraditionally the charging
structure of some pension contracts has been extremely confusing.
In many cases it can be very hard to understand exactly what
charges are being made, especially when many of them are not
described as a charge at all! Stakeholder pensions have a clearer
charging structure than many traditional Personal Pension policies
but the market is constantly changing and the introduction of
Stakeholder Pensions has impacted on the charging structure of
many Personal Pension contracts.
The charges you may pay on your
Personal or Stakeholder pension will depend upon the terms of your
contract. Every pension provider must show you a "key features"
document. This document sets out the effect that charges may have
on your investments. This can be a very useful document as the
charges on some contracts are very confusing.
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Types of charge
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Bid/Offer spread
This is a slightly tricky one. It
may not at first sight look like a charge at all. The "Offer" price is
the price at which you can buy units in a fund. The "Bid" price
is the price at which you are able to sell units in a fund. The
Offer price will be higher than the Bid price therefore the price at
which you buy units will always be higher than the price at which
you can sell units, the difference is a charge on each contribution.
The Bid/Offer spread is the difference between these two prices and
is typically 5%. It represents the cost the pension provider will
encounter buying and selling investments.
Stakeholder Pensions must be law
have the same Bid and Offer prices.
Policy fee
This is often a monthly charge
taken from your contributions, it is normally only a few pounds.
Allocation Rates
In some pensions not all of your
contributions are invested in units to provide for your retirement.
In some instances only a fraction of your actual contributions are
invested, the percentage which are invested is called the allocation
rate. The allocation rate can be quite small for the first couple of
years of contributions but then normally increases. An example might
be an allocation rate of 94% for the first two years (i.e. Only 94%
of your contributions are invested in your pension, the other 6%
goes to the pension provider) and then an allocation rate of 98% for
the remainder of the contract.
Annual management charge
This is typically a percentage of
your total fund which gets deducted each month. Rates will vary
between Personal Pensions but Stakeholder Pensions are not permitted
to charge more than 1% of the fund.
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Use our online calculator
to get an estimate of your basic state pension.
Its free and
simple to use you can even include it on your own website!
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If you have a pensions
related question then please let us
know.
If it's something other people
would find useful then we will post an answer in our Frequently Asked Question
(FAQ) area.
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Read the guide to
investment in the pensions guide. It explains what you need to
think about before investing for your retirement.
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