Pension Charges
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What is the main topic discussed in this episode?
Thank you for downloading More or Less from the BBC. This is the version of the programme first broadcast on BBC Radio 4. Here's Tim Harford.
Hello and welcome to More or Less, the programme which welcomes the new year with the same resolution as always. To seek and destroy zombie statistics everywhere. Today we'll be looking at some tragic topics – Christians being martyred for their faith and cyclists being killed on the roads. But we'll have some lighter moments too, notably an abject apology from an Australian. And before all that, let's talk about pensions. the government recently announced proposals to cap management fees on workplace pension schemes. The Department for Work and Pensions stated that if the annual fee was halved from 1.5% to three quarters of a percent, this could boost a hypothetical pension pot by £100,000, which sounds like a big saving from a small tweak, especially since that hypothetical pension pot had only received about £55,000 worth of contributions.
Well, a number of listeners emailed us to say they simply didn't believe the numbers being quoted. So we invited one of them, Geoff Pearce, into More or Less Towers to show him how the numbers do add up. Geoff, you very kindly agreed to join us. Why were you suspicious of this figure? My first thought was it was that figure, £100,000. It's a lot of money and it seemed a bit of a headline. A nice round number. Always be suspicious of a round number. Everyone wants to save £100,000. But then I looked at what was being said in terms of the contribution of £100 a month... for a working life of 46 years. And I looked at that and I thought, well, there must be some growth assumptions in there. Because on that basis, you're only paying in £55,000.
So I couldn't see where the charge of £100,000 came from. If only we had a financial guru in the studio with us. Unfortunately, Paul Lewis is here, presenter of Moneybox. Hello, Paul. Hello, Tim. Thank you for coming in. Fancy meeting you here. I just happened to be passing the studio, Tim.
Could you please explain this to me and to Geoff? Yes. Geoff, can I say first, I think there's something you've perhaps misunderstood, if you'll forgive me.
How much could capping workplace pension fees really add to a pension pot?
These charges don't just come off your money once. They come off every year. And that means that when you pay in your £1,200 in year one, you'll see... I've got a spreadsheet here which explains it all. You've got £1,200 going in. 1.5% of that is £18, which comes off. Then you get growth on your fund because it's invested. And at the end of the year, on these assumptions, which I'll explain in a minute, you've got £1,276 in your fund. So that's carried forward to the next year and you pay in another £1,200. But the 1.5% charge doesn't just come off the money from the next year, it comes off the first year's money as well. So if you're in a fund for 46 years, which is the assumption here, then you're going to find that that first year's contribution and the growth on it are taxed, if you like, by this charge 46 times.
So in other words, that first contribution, 46 times 1.5%, is 69% of your money will disappear in charges.
So by the time I take my pension then, the money that I contributed in the early years has almost disappeared.
Yes, a lot of it has gone in charges. And what this spreadsheet does, by showing you that, and I've set it up to compare 1.5% charges here and 3.25% there, so that's half as big. Now, you see, at the end of year one, it makes almost no difference. Your charges are just £9 difference. But as we scroll down, we find this quite extraordinary thing. And they assume that you're going to work for 46 years, so age 25 to, say, 71. And the difference between those two charge scenarios in this spreadsheet is actually £103,500. So with 1.5% charges, you have £346,000 in your pension fund. With three quarters of a percent charge, you have nearly £450,000 in your pension fund. And that means you've got another £103,000
And that's because these charges come off every year. Now, I have to say, I've taken one big assumption here, which is the only one that would give me £100,000.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:00–2:11
2
How much could capping workplace pension fees really add to a pension pot?
2:11–5:22
3
Why did listeners doubt the government's £100,000 pension saving claim?
5:22–9:39
4
How do annual management charges and compound interest cut into long-term pension growth?
9:39–19:32
5
What assumptions produce the '£100,000 saved' headline and are they realistic?
19:32–28:06