Once upon a time, not too long ago (up until 6 April 2011 to be exact), employers could force workers to retire at 65. However, since the abolition of the Default Retirement Age, you can continue to work well after 65 if you choose to.
Many business owners enjoy working, and do continue working after retirement age, but what if you do not want to work after the age of 65?
No problem you might think. Nothing can force you to keep working.
Except lack of adequate funds.
But you’re okay, you’re among those sensible people who have organised retirement and investment plans. Nothing to worry about. Or is there? Because you might be one of thousands of people whose retirement age is going to be greater than 65 because of Financial Services Industry fees.
High savings industry fees
Fees on investments is how the Financial Services Industry gets paid for the advice offered and the work done setting up and managing funds and portfolios. Fair enough, it’s completely reasonable that you pay for their services. But do you need to pay quite as much?
Shopping around on the internet to make savings on car purchases or flights or to find deals from energy suppliers is something that comes as second nature to most of us. So, it’s incredible that so few of us apply the same thinking to something that is much more important: our retirement lifestyle.
Regardless of age or how much money you have, high industry fees can delay you reaching your last working day; the day you start your retirement.
In 2013, changes were made to the Retail Distribution Review (RDR), and earlier this year, there was an update to the Markets in Financial Instruments Directive (MiFID 11).
Those changes mean that today, investors have much more information available to them, and information really is power; in this case the power to be in control of your money and who benefits most from it, especially with regard to Financial Services Industry fees.
The impact of high pension fees
However, very few investors understand these fees or their impact on their pension. Here are some examples:
Example 1 – Bill
- Bill is aged 45
- He has pension and ISA savings valued at £300,000
- He wants to retire with a fund in the region of £750,000.
- He’d like that to be achieved by the time he reaches 65.
The total financial services industry cost on his money is 2.5% per annum. Assuming an average growth rate of 6% per annum, the fund value would not achieve Bill’s target value until he turns 73.
In the 28 years it has taken to achieve Bill’s target (£767,000), the total Financial Services Industry charges have totalled £345,512.
£300,000 of this fund value was Bill’s money to start with, meaning it has cost Bill £345,512 to make £467,000 profit. And Bill has lost eight years of Countdown and Father Brown.
Example 2 – Bob
Meanwhile, Bill’s co-worker Bob, who is also aged 45, and also has pension and ISA savings valued at £300,000, and is also keen to retire at 65 with a fund in the region of £750,000.
However, Bob shopped around, and discovered he could get the same returns and same consumer protection as Bill for just 1.1% per annum.
Bob also achieved an average 6% return per annum on his money, achieving a target fund value of £773,000 by age 65. Thereby gaining eight more years of Loose Women (you win some, you lose some).
He was able to do this because his Financial Services Industry charges were just £102,000.
Bob achieved his target retirement fund value at his projected retirement date with one simple decision; to hunt for the best fees.
Now, if Bob decided to keep Bill company, and also retire at 73, Bob’s fund value would continue to compound, eventually reaching around £1,128,500.
And the benefits of finding lower fees apply even if you have less money to play with. Let’s look at another example:
Example 3 – Beth
- Beth is aged 30
- Her pension fund is smaller, valued at £40,000.
- Beth wants to retire at 65.
- The average annual return is 7% per annum over the investment period.
- The total Financial Services fees are 2.13% per annum and no further contributions will be made.
Beth’s fund value is projected to be £203,968; a profit of £163,968. However, it will cost Beth £74,588 in Financial Service Industry fees to make that £163,968.
Example 4 – Lizzy
- Beth’s friend, Lizzy also has a pension fund valued at £40,000
- She too intends to retire at 65.
Like Bob, Lizzy shops around and reduces her fees to 1.1%. As lower fees do not mean lower returns, Lizzy also averages a 7% return per annum.
Because the Financial Service Industry fees do not cause such a drag on Lizzy’s returns, the fund value compounds, and at the retirement age of 65, it has grown in value to £291,105.
Lizzy’s profit is £251,105 (some £87,000 more than Beth’s); the fees she has paid are just £48,623 (£26,000 lower than the fees paid by Beth).
Beth gave away control of her money to the Financial Services Industry, and paid £74,588 in fees over the term to achieve a fund value of £203,968 to live the rest of her life on.
Lizzy took control of her money and achieved a larger fund value of £291,105 for exactly the same financial return, the same financial risk and the same consumer protection.
How to take back control of your pension fund
So how do we take back control of our money?
Just asking your financial adviser is not always helpful, many just declare their own fees or a platform charge and not the funds you invest in. But these fees are really important and as it’s your financial advisers decision, usually to recommend these funds, they have to be a major factor in the decision making progress.
Let us start at the beginning because the financial services world loves to complicate the investment process because it can hide a myriad of fees.
In every other part of our lives technology delivers what we need … instantly, accurately and cost efficiently. So if we ask ourselves why we invest … the answer should be to create additional wealth over our life time to do the things we want to do without fear of running out of money.
So investing is simply… how do you access the markets in the most transparent and cost efficient manner?
How Bill’s fees eat into his pension
Therefore let us take Bill with his £300,000 fund paying 2.5% in financial service fees.
- Bill has a self-invested personal pension (SIPP) and pays £650 + VAT for his SIPP wrapper.
- His financial adviser has suggested that Bill should take advantage of a Discretionary Fund manager (DFM) who charges 0.65% + VAT.
- The funds the DFM buys in the portfolio also charge for their services and these average out at 0.96% with dealing charges
- The financial adviser also charges Bill 0.5% for providing ongoing financial advice.
Overall this does not look to odious… until we start adding up the costs.
SIPP Wrapper: £650 + VAT = £780 or 0.26%
DFM: 0.65% + VAT = £2,340 or 0.78%
Fund charges: £2,880 or 0.96%
Financial Adviser: £1,500 or 0.50%
Total costs: £7,500 per annum on £300,000
And the total cost grows each year as the fund value increases. When the fund value reaches £750,000 the fees are £18,750 per year.
How Bob boosts his pension pot
Bob has taken an efficient route to market. Bob uses technology to hold his pensions and ISA’s in a wrapper giving him transparency and 24/7 access to his money.
- The wrapper provider charges 0.29% and this reduces as the fund grows in value.
- The fund charges are 0.31% which gives Bob access to over 18,000 global stocks
- Bob pays his financial adviser 0.50% to provide ongoing financial advice.
Wrapper charge: £870
Fund charges: £930
Financial Adviser: £1500
Total costs: £3,300 on £300,000
When the fund value reaches £750,000 the fees are £8,250 per year.
5 Ways to boost your pension by cutting your fees
So how do we avoid making the same mistakes as Bill? Here are the top 5 ways you can lower your pension costs and enjoy a bigger pension fund:
1. Check your annual charge
Find out from the company who sends you your statements, how much their annual charge is on the pension or ISA wrapper. Anything over 0.5% is now considered expensive.
2. Check your wrapper cost is based on total funds
If you invest directly make sure the wrapper cost is based on the total amount of funds you hold, not a fixed cost for pension and a fixed cost for ISA.
For example if you had £300K in an ISA and £300K in a pension you may be charged 0.45 on each fund totalling £2,700 per year, by a well-known and respected fund house.
By taking control and reviewing the wrapper charge you can reduce your charges to 0.29% on your combined fund value totalling £1,740… an annual saving of £1000.
3. Ask your adviser to detail the TER of your funds
Ask your financial adviser or fund manager to list the total expense ratio (TER) for each of the funds they have invested you in.
You may have seen these figures in the past listed as the annual management charge (AMC). However this charge did not highlight all the internal charges the fund administrators made which also came out of your money.
You can now buy global actively managed and passive funds for 0.35% or less, so any cost in addition to this is worth querying with your fund managers.
In fact, I would go further and ask for proof of why they are buying this fund with your money and how it benefits you and not them.
4. Check if you are paying for services you no longer need?
If you have a self-invested pension plan (SIPP), are you paying additional Trustee fees for a service you no longer need?
Financial advisers in the past recommended SIPP’s because it gave them access to a wider choice of unregulated funds, however in today’s world this is not the case.
Personal pensions also offer the investor more consumer protection than SIPP’s so why take the risk and save yourself up to another £1000 per year.
5. Consider whether you are getting value for money from your adviser
When financial advisers set up your investment they usually agree a fee for ongoing financial advice and service. This is typically between 0.5% and 1% dependent on the level of service they offer.
As long as you are receiving an on-going and personal service this fee is money well spent. If you have not seen your adviser for a number of years… ask whether paying this fee is adding value to your fund.
Check with your product or wrapper provider to see if an adviser renewal charge is being taken and if it is query the service or stop it with immediate effect.
Making your pension fund work for you
By being prudent, and by understanding the impact Financial Services fees have on your money, you can make your investment work for you and your future retirement lifestyle (not someone else’s). You may want to continue working after 65, but you may not.
Why not ensure you have the option?
Remember it’s your money… don’t just give it away.
About the author
This guide has been exclusively written for ByteStart by Hannah Goldsmith, author of ‘Retire Faster’ and founder of Goldsmiths Financial Solutions. Goldsmiths complimentary ‘Second Opinion Service’ reviews investors’ existing portfolios and makes recommendations on Risk, Diversification, Performance, Cost and Tax efficiency, making investors’ money grow in a more transparent and financially efficient way.
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