Why high charges on FSAVC Pension Plans lower the fund value

FSAVC (Free-Standing Additional Voluntary Contribution) pension plans are a type of supplementary pension arrangement available in the UK from 1988 to 2001. If you were sold one, as an alternative to paying more into your company pension scheme, you will find high charges on FSAVC pension plans have significantantly lowered the fund value for several reasons:

1. Annual Management Charges: Most FSAVC plans come with annual management charges, which are fees paid to the pension provider for managing your investments. If these charges are high, they can eat into your investment returns over time, reducing the growth of your pension fund. This has happened to nearly all FSAVC plans. In contrast, your company scheme levies much lower charges, or none at all.

2. Fund Management Fees: FSAVC pension plans typically invest in a range of funds, and each of these funds may have its own management fees. High fund management fees can erode the returns on your investments, reducing the overall fund value.

3. Administrative Fees: Some FSAVC providers charge administrative fees for tasks such as processing contributions, sending statements, and other administrative activities. These fees can add up over the years and impact the fund’s growth.

4. Contribution Charges: Some FSAVC plans may charge fees on every contribution you make. If these charges are high, and they usually are, they can reduce the amount of money that actually gets invested in your pension fund.

5. Exit Charges: Some FSAVC plans may impose exit charges if you decide to transfer your pension to a different provider or take your pension as a lump sum. High exit charges can significantly reduce the final amount you receive from your pension.

6. Hidden Costs: Some providers may have hidden costs that are not immediately apparent, making it difficult for investors to accurately assess the total cost of the FSAVC plan.

7. Poor Investment Performance: High charges can be particularly detrimental if the investment performance of the FSAVC plan is below average. When charges eat into returns, it can be even more damaging if the fund’s investments are not growing at an optimal rate.

8. Impact of Compound Interest: Over the long term, even seemingly small charges can have a significant impact on the final value of your pension fund due to the compounding effect. The charges reduce the base amount on which compound interest is calculated, leading to a smaller final fund value.

If you were sold an FSAVC pension plan, please do contact me for a free, no obligation, assessment of your sale.