Most savers are working hard to achieve a comfortable retirement, putting away a little every month and building up a pot of savings.

However, even the most astute pension savers tend to make one critical mistake, a mistake that’s all-too easy to make for many years without noticing. And that could cost you potentially tens, or hundreds of thousands of pounds, in lost retirement income.

The biggest mistake you can make
The vast majority of pension savers save diligent every month and put this money away in a pension fund, or selection of funds, chosen independently. Unfortunately, these funds, which are supposed to be looking after your money, can be more costly than looking after the money yourself.

A recent study by consumer magazine Which? found that the average annual management fee charged by investment funds in the UK is around 0.85% per annum. By itself, this fee is not outrageous, but it’s enough to have a significant impact on long-term returns.

For example, if investor A puts away £150 a month into a pension plan with an annual management charge of 0.85%, over a period of four decades, they will accumulate a pension pot of £388,000. That’s assuming an average annual return of 8% (around the same as the FTSE 100’s annual return for the past two decades). The total value of fees paid over the whole investment period will amount to £98,000.

This is a sizable sum, but it’s only half of the picture. Most investment platforms charge an annual account fee on top of fund charges. Even the lowest annual platform fee will add an extra 0.25% per annum, although some others can charge as much as 0.5%.

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If investor A chooses a fund platform with a management fee of 0.5% per annum, on top of the 0.85% fund fee, for a total of 1.35% per year, they could pay a staggering £146,000 over four decades, with an investment of £150 a month.

Avoiding the trap
So, how can you avoid this fee trap? Well, here at the Motley Fool, we believe that the person best positioned to take care of your financial future is you. That means investing your own money, without the help of costly fund managers.

You can reduce the annual fees paid to zero by investing yourself. DIY investing giant Hargreaves Lansdown (LON:) doesn’t charge an account fee for share accounts, and if you pick stocks yourself, there’s no fund management fee to pay.

Without fees holding them back, your savings can really take off. For example, if investor B acquired a basket of shares, with an average annual dividend yield of 5% and a capital gain of 3% per annum, over 40 years, putting away £150 a month, their investment pot would grow in value to £486,000, with zero fees. That’s £146,000 more than investor A’s terminal portfolio value, after fees.

Double your State Pension
I’ve written before that if you want to double your State Pension in retirement, you need to build a savings pot of around £230,000. Saving £146,000 in fees over 40 years is nearly two-thirds of this target.

According to my figures, a pot of £486,000 at retirement is enough to give you an annual income of £19,000, excluding the State Pension of around £8,500. In other words, just by doing the investment work yourself and avoiding high fees, you could more than triple your retirement income.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.



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