Question: “When analysing my pension costs, I worry that the 0.8% in the fees I see is not the full picture – is there anything else included I’m not aware of? I have a £630,000 pension pot and I want to ensure I am not paying unnecessary charges.”
Answer: Nobody likes to feel they may not have the full picture. And, it’s very important to question the total cost to have your pension managed, since the ramifications could affect how comfortable you will be in retirement and for how long your financial security will last.
Getting a fair deal is something we should seek no matter what the topic, especially when the cost of living remains highly challenging. The UK’s financial regulator, the Financial Conduct Authority (FCA), wants to see this fairness better embedded in how financial organisations treat and charge their customers.
It introduced the Consumer Duty Act last July to encourage firms to act more responsibly and to be more transparent. The fact they felt compelled to do this is, in itself, a worrying sign, and highlights just how much the industry needs to change to ensure clients are getting full transparency and value for money.
This regulatory initiative speaks to your quandary – how can you know whether your pension offers value for money if it is not clear how much you are paying in total for a service? It’s therefore worth exploring the range of fees you may be charged when investing.
Annual investment management fee – this applies when a provider selects and manages investments on your behalf (in your case, your pension) and is normally charged on a percentage basis of the assets they manage for you.
Regulated advice – this is typically charged on an ongoing basis as a percentage of the assets under advice. Advice may focus simply on the portfolio being appropriate for your needs or it may also include financial planning. Some providers offer advice on a one-off basis as a lower cost way to address specific life events, such as retirement or divorce.
VAT – Investment and advice fees are often quoted excluding VAT, so always check if it is included and be ready to factor in an extra 20% if it needs to be applied.
Custody or platform charges – this is the fee for holding your investments, collecting dividends and interest and dealing with corporate actions and administration. It’s normally charged as a percentage of the assets administered and is typically included within the Investment Management charge for fully managed portfolios, though not for DIY platforms.
Transaction charges – these are charges that are incurred when investments are bought and sold. They can be a commission charged as a percentage of the trade value or an administration charge, which is usually a fixed fee between £10 and £50 per trade. Some providers do not charge extra for transactions, but it is an important additional cost to check on and to understand when that is not the case. Foreign exchange charges, in particular, can add substantial cost to an overall charge and are often not highlighted.
Underlying investment/fund fees – if your pension portfolio is made up of collective investments such as actively managed funds, investment trusts or ETFs, then these investments will have their own fees and charges for investing your money. You won’t see these deducted from your portfolio as it is factored into the price of the investment each day, but it will affect your total net return. The choice of the underlying investment can make a big difference in final outcomes given their different underlying costs and this is where passive funds such as ETFs have become so popular versus active managers who will be significantly more expensive.
As you can see, there are many different layers that make up the whole, and it is not surprising that investors are not always aware of these different component parts. The result is that the final all-in costs can often reach 2% or more each year, although this doesn’t need to be the case – more efficient providers such as Netwealth can offer the same quality service for around 1% or sometimes less, and that can make a huge difference.
Let’s take your £630,000 pension pot as an example. While you haven’t stated how old you are, if we assume growth of 5% a year, and you withdraw £2,500 a month, and pay 2% in fees, your pot could last for almost 33 years before it runs out. Take the same assumptions and pay only 1% in fees, however, and your pot could last for over 44 years.
This calculation is indicative of the level of difference that a 1% fee saving every year can achieve, regardless of factors such as inflation or other income. This revelation is often quite an eye opener for clients when they realise how much their key investment pots, such as pensions and ISAs, have been depleted over time due to high fees – but remember, that does not need to be the case. It is very well worth making sure you understand the charges being applied to your pension and any other investments.
To help you assess what your overall charges are, you should ask your pension (or other investment) provider how much you are being charged for each of the components I listed earlier and insist on an understanding of your total all-in fee. Ask whether VAT is included. Establish what you are receiving if being charged for ongoing advice and consider whether that is what you need or whether one-off advice may be more appropriate for you.
No matter what stage we are at in our individual financial and employment journeys, it is imperative for us all to assess the overall fees we are being charged. As you can see, it is quite possible that you are paying more than you might think and, if you can minimise some of these costs, you could have many more years of a generous retirement income, or substantially more to leave behind to loved ones.
This is your pension, your future – make sure that as much of it as possible remains in your hands to make the choices you want, rather than allowing others to take a larger slice than they should.
This article was published in the I on 4 April, 2024.
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.
