Question: I had no idea there were management fees and investment fees attached to my various pension pots. I am 47 and thinking about retiring in the next 15 years. I have a total pot of £540,000 – what is the highest return, lowest risk option with as low fees attached as possible?
Answer: Many of us are in the habit now of querying whether we are getting value for money, especially as a higher cost of living persists. Yet it is remarkable that we often overlook the area which can make the single biggest financial difference to our lives – understanding what we are paying to have our retirement pots managed. It is critical to know how much you are paying, and the impact of those fees, since high fees add up over time and can take a huge chunk out of your future retirement fund.
It’s worth doing an analysis of your various pension pots (this free service can help you stay on track) to see where you can make improvements as you consolidate your holdings. Often people are surprised at the multitude of charges that many companies deduct from you when investing – this is where the biggest changes can be made.
First is the investment management fee. This is what you pay when you don’t want to manage your money yourself and instead pay for an investment manager to choose and manage investments on your behalf. It is normally charged as a percentage of the value of your assets and may range from around 0.5% to as much as 1.5% or more.
Many people are unaware of how much they are paying their investment manager since this charge is taken out of the value of your assets, rather than billed directly. This is why it is so important to understand what is being taken out of your pot in annual fees and, if you aren’t sure, ask a company such as Netwealth to help you work through the detail.
Other charges include the ongoing cost of trading and underlying investment fees. These costs can be significantly lower if your portfolio manager is using index tracking funds (otherwise known as Passive or Tracker funds) since this approach generally helps to keep costs down compared to managers who select individual stocks or actively managed funds to make up a portfolio. Buying and selling investments regularly can be expensive and this can be heightened when managers rotate the makeup of their funds as their conviction changes.
You may also be paying for ongoing advice and it is worth checking what this consists of and whether it is suitable for your needs – financial advice may add another 0.35% to 0.75% to the total that is being charged on your portfolio. For example, financial planning advice is recommended for circumstances such as setting up a retirement plan or if you are facing uncertainty such as a divorce or other significant life change; however, you should question whether you need advice on an ongoing basis and you should certainly ensure you are not being charged exorbitant fees merely for contributing to an ISA every year which is often the extent of people’s plans.
Platform or custody charges may also be deducted for holding your investments, collecting dividends and interest, and dealing with administration. Again, this is usually charged as a percentage of your managed assets.
Finally, do not forget VAT: often fees are quoted without this included so you may have to factor in another 20% to be added to your fees.
There may be other relatively small charges such as income drawdown or an annuity purchase charge for pensions, but these smaller fixed fees pale into insignificance versus those listed above. All in all, we regularly see investors being charged total annual fees of between 1.8% all the way up to 3%. This type of fee load can be hugely damaging to long-term financial outcomes and we are on a mission at Netwealth to help raise awareness about the impact of fees and to provide a service that is lower cost without compromising on any requirements that clients may have.
You mention that after you consolidate your pension pots you would like to aim for a high return while taking as little investment risk as possible. While this goal sounds sensible on the face of it – who wouldn’t like the highest possible return for as low risk as possible? – it is important to understand what that might mean in the context of your personal attitude to risk and your retirement horizon.
In your case, time is on your side with 15 years until you retire, and over this period you could expect a balanced portfolio to grow on average around 5% a year. This would typically have a mix of stock market and bond investments – nothing too racy – and aim to accrue steady returns by investing in high quality assets.
If you consolidate your £540,000 pot and leave it invested for 15 years, adding nothing more, your pot could grow to over £1.1m using this 5% return assumption. Furthermore, it sounds as though you are likely still to be working, and whatever extra you can save a month into your pension will be boosted by the government by 20% if you are a basic rate taxpayer, and by up to 40% if you are a higher rate taxpayer.
Some people will be inclined to take more risk and have a greater weighting to equities, which typically provide higher returns over time than fixed income assets, but with a more volatile profile. In this case, they may expect annual returns to be higher than 5% on average which will allow the pot to grow more quickly.
Others may find that a balanced portfolio is sufficient for their appetite and needs. Remember, too, that your investment portfolio can continue to grow once you are retired, even if you are drawing from your pot. You suggest you might be 62 when you retire, and you will hopefully have several decades during which time your retirement pot will be both supporting your needs and still earning investment returns.
More generally, it is good to see you focus on this topic. A survey we conducted last year of 4,750 people highlighted that many are not as prepared for retirement as they think. Worryingly, over half (51%) did not factor the effects of inflation into their retirement plans – this is important since the spending power of, for example, £100,000 is reduced to around £67,000 after 20 years of 2% inflation.
Living for longer also means we should allow for extra expenses. The charity Age UK reported a few months ago that the average healthy life expectancy in the UK is around 63 years for both men and women. After this we may increasingly have to fund additional health and care costs – for ourselves and others we care about.
Inflation may be slowly coming down, but prices are still moving up. The NHS is also under tremendous pressure, so private healthcare is increasingly a necessity. We therefore need to make more of the money we have now and better safeguard it for the future.
I hope that you are clearer on how you may re-think your choices for your retirement pot. The best direction I can give is to take the time to consider consolidating your assets, ensure that you understand exactly how much you are paying your manager/adviser, and ask for help if you need it. Whatever happens, avoid letting someone else benefit from all your years of hard work through extracting value via high and hidden fees.
This article was published in the I on 1 st December, 2023.
Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions. Please note, the value of your investments can go down as well as up.
The answer here does not represent financial advice, nor should it be interpreted as a recommendation to invest.
