Picking an auto-enrolment pension scheme
There are three specialist auto-enrolment pension providers that are targeted towards Small Businesses. Please do not consider this list to be exhaustive there are others out there but don’t expect all of them to be interested in the custom of companies with just five employees, which is why most people gravitate towards these three.
Here is a summary of their fee structures:
|Scheme provider||Contribution charge||Management charge||Total employee cost over five years *||Employer Costs|
|People’s Pension||0%||0.5%||£26.28||One off £500 + VAT|
|NOW||£1.50 pm||0.3%||£105.08||£36 + VAT per month|
Correct as at 01/02/2016
* To work out the annual cost we assumed an employee is receiving the UK average salary of £26,500 and is making the minimum contributions required under auto-enrolment (£414 pa) and to keep it simple we did not factor in investment growth, which slightly favours those with a lower management charge.
It’s perhaps worth noting that I found the fees for NEST and the People’s Pension within one minute. It took ten minutes to find the information on NOW. On top of this NOW seem to have an employer admin charge that no other providers charge.
Why fees matter so much
With long terms investments fees make a huge difference. Here is a Telegraph article that makes the point well. It says that an investment of £12,000 returning 6% per annum would be worth £16,103 if you pay 0.25% annual charge but just £15,041 if you pay 1.5%. Extend that to a hopefully bigger pension pot and many years of contributions and we are talking £10s of thousands if not £100s of thousands by the time you come to retirement.
Don’t forget investment returns and charges though
Whilst pension funds (and investment funds generally) are pretty clear about some of their fees. What they are not clear on is how much fees get incurred on the actual investments held.
For example your pension fund might invest in an investment fund such as this Aviva UK Growth fund which charges a fee of 0.82% per year. Alternatively it might invest in a Vanguard FTSE Tracker which charges just 0.08% per year.
It’s really not easy to find out the total of these embedded costs and it’s not something we are going to try and do here. The general Caprica opinion on investment is that everyone should stock up on super cheap trackers from the likes of Vanguard or iShares via a SIPP or ISA but that doesn’t help with the auto-enrolment decision ….
Which to go for
We think in most cases you will want to choose between NEST (which is Government backed) or The People’s Pension because of the high management fees charged by NOW.
Where Caprica Online manages the auto-enrolment process we have decided that on balance NEST offers the best service.