It’s very important to question the total cost to have your pension managed whenever you are evaluating a wealth management provider – which you should do upfront when first choosing one and then regularly to ensure costs don’t creep upIt’s very important to question the total cost to have your pension managed whenever you are evaluating a wealth management provider – which you should do upfront when first choosing one and then regularly to ensure costs don’t creep up.
The names of costs and charges, and what they mean
Annual investment management fee
This applies when a provider selects and manages investments on your behalf 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.
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. Sometimes doing it yourself is not as cost-effective as it may appear.
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 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, which is one reason that passive funds like ETFs have become so popular (there may still be a place for actively managed funds in your portfolio, however).
The choice of the underlying investment can make a big difference in final outcomes given their different underlying costs, which is one reason that passive funds like ETFs have become so popular (there may still be a place for actively managed funds in your portfolio, however)
It will be clear by now that there are many different layers and permutations of fees which may be applied to the management of your pension. The result is that the final all-in costs can often reach 2% or more each year, although you will find highly cost-conscious providers can offer a comparable service for 1%. Netwealth can even deliver less than that in some cases.
Top Tip
Dissatisfaction with wealth management fees is one of the primary reasons that people come to us to search for a new provider. It may be that they have crept up over the years or that they were always too high and the person has only just come to this realisation (I hope we can take some of the credit there!).
It really is vital not to take it for granted that you are getting good value and to insist that no fee remains hidden or not explained to your satisfaction. Even seemingly small savings can add up to a huge difference over time. If you suspect that you might be overpaying for any element of your wealth management provision, please get in touch for a sense of what you could be paying elsewhere. Or, if you already know you need a change, take our wealth manager matching questionnaire and start the process of comparing leading firms today.
Lee Goggin
Co-Founder
The savings really do add up
Trimming costs can make a huge difference to your final financial position. Let’s take that £630,000 pension pot as an example. If we assume growth of 5% a year, withdrawals of £2,500 a month, and paying 2% in fees, that pot could last for almost 33 years before it runs out. Take the same assumptions and pay only 1% in fees, however, and that pot could last for over 44 years.
If we assume growth of 5% a year, withdrawals of £2,500 a month, and paying 2% in fees, that pot could last for almost 33 years before it runs out. Take the same assumptions and pay only 1% in fees, however, and that 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. If you shop around for a more cost-conscious provider, 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. It really does all add up to big differences to your wealth.
Don’t be afraid to ask
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. Don’t be afraid to ask for anything to be explained and justified; it is your money after all.
Don’t be afraid to ask for anything to be explained and justified; it is your money after all
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.
Important information
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
