When considering the various pension transfer advice fees offered by Financial Advisers remember it is not only the price to transfer that matters but also the long term costs.
As a simple example imagine you need a new printer. You find two models of interest in your local store, one is £99 the other £145. If working on price alone the £99 model is the obvious choice but printers have a long term cost of ownership.
What if the print cartridges for the £145 model are £20 and for the £99 printer they are £25. Assuming both print the same number of pages per cartridge then you need to account for the number of times you will change cartridges.
What if the £145 printer is much more robust and likely to last two or three years compared to the cheaper model that may not survive more than a year. You then need to account for how hard you work the printer. It may be, given your specific needs the £99 printer is the best choice but the selection process is based on more than initial price and is not as simple as it might first appear.
What if you pay Adviser A £3,000 to transfer a final salary pension and 2% ongoing annual charges and Adviser B £6,000 to transfer and 1.5% ongoing annual charges. What is the long term cost to you of the higher annual fee?
What if Adviser B suggests a range of investments that deliver consistently higher growth over the long term than the investments suggested by Adviser A. Does the difference in investment value many years in the future more than cover the difference in initial transfer costs?
Do you want ongoing contact with your adviser? If so what are you prepared to pay for that? Of course, based on your specific circumstances Adviser A may be the best choice. Again, the overall cost of ownership calculation is what matters not individual costs.
Pension Transfer Advice Fees – An example
Let’s assume a fund value of £100,000 AdviserA quotes 1% of the fund value and AdviserB quotes 5% to transfer. AdviserA quotes ongoing annual fee of 2.8% and AdviserB quotes 1.75%. Assume the investment, in both cases, achieves annual growth of 7% over 20 years.
The pension transfer fee is – AdviserA £1,000 AdviserB £5,000
Value of fund after 20 years – AdviserA £227,695 AdviserB £278,254
AdviserB has therefore delivered approximately £45,000 more value over a 20 year period.
Of course, it is possible AdviserA suggested investments could perform better than AdviserB.
Let’s assume you retire at age 65 years with a £100,000 pension fund in drawdown. Imagine just as an example you do not need to draw on that fund. AdviserA investment strategy delivers a 4% fund growth over the 25 years from retirement. Adviser B investment strategy achieves 5% growth over the same period.
Ignoring the impact of fees the Adviser A strategy would deliver a fund value of approximately £270,000 at age 90. Adviser B investment strategy would deliver a fund value of approximately £340,000.
Choosing An IFA
Independent Financial Advisers use various charging methods. It is important to understand the charging model (both long and short term) and what is and is not included.
It is important to note annual fees usually include three elements, the investment manager’s fee, the adviser’s fee and the platform fee. Some IFA’s initially quote only the advice fee and it is only later (often too late) that the other element of the fee is mentioned.
Choosing a financial adviser that explains everything (including costs) in simple terms you can understand is crucial. Advisers should have extensive experience of pension transfers and hold all the relevant FCA permissions. Avoid anyone offering financial advice who are not authorised and regulated by the Financial Conduct Authority (FCA).
A pension transfer is certainly not right for everyone and there are risks but if considering the transfer option remember it is long term cost vs benefit that matters.
Past performance is no guarantee of future returns. This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action.