When taking pension funds into a drawdown arrangement the responsibility for managing that investment rests with you. You will need various tools and partners to help you manage your investment and each comes at a cost.
It is important to understand the makeup of fees and what does (and does not) represent good value. The total ongoing annual fee is generally made up of three parts:
- An investment management fee
- A platform (or product) fee
- An ongoing advice and support fee
Unfortunately, there are those who do the not always make fees fully transparent. It can take some time and effort to establish exactly what you will pay and to whom.
The Impact Of Fees – Some Examples
Total ongoing fees vary (typically) between 1% p.a. and 3% p.a. It is a mistake to assume that these low figures are insignificant. it is important to remember fees are taken out of a pension pot on an annual basis. The power of compounding over the long term should not be underestimated.
As an example compare total fees of 1.75% versus 2% per annum on a pension fund of £225,000. After 15 years the pension pot with 1.75% annual fees will be worth £456,214 and the one with 2% annual fees £440,402.
Charges can vary significantly across providers and change on a regular basis. Advice fees may be between 0.5% p.a. and 1% p.a. platform fees between 0.3% p.a. and 0.5% p.a. and investment management fees between 0.3% and 2% p.a. But remember the cheapest is not always best.
Fees and Charges Are A Moving Target
Improvements in technology over recent years have reduced the costs of pension products, investment platforms and investment funds. A good Financial Adviser will review the market acting as the eyes and ears of their client seeking out the best deals.
As technology continues to improve costs (should) will continue to fall. Of course, that does not mean the providers will automatically pass those savings on to their customers. However, new competition with reduced charges could force a rethink among the larger players. Or, one of the major providers may make a decision to reduce fees forcing others to respond.
An Adviser close to the market will be able to spot good value. Over time a Financial Adviser may decide the fees you are paying are too high. They may decide new circumstances dictate a change of investment strategy or fund. They may determine that alternative funds offer better returns.
Are You Obtaining The Best Value?
A good Financial Adviser will monitor your investment on an ongoing basis. Based on their knowledge of you, your attitude to risk and your objectives they will make suggestions on any action you should take when it is appropriate. They will stay in touch with you to ensure your circumstances or objectives have not changed and perform regular reviews. Ultimately, their objective will be to deliver financial peace of mind.
It is important to consider value not cost. What does your Adviser deliver for their charge? If an Adviser never seeks to engage with you again once the transfer into drawdown is complete then that is poor value. If however they charge a little more than the industry average but they are fully engaged with you and your investments perform well then they will pay for themselves many times over.
If you are following a non-advised route you will be responsible for monitoring your investment and fees.
Paying a little more for investment management if it results in your pension fund growing more than the industry average over the long term is money well spent. You may decide your platform has many features you will never use and seek out a cheaper alternative. Of course, the reverse may also be true.
It is important to understand exactly what you are paying for and what you can expect moving forward. If a bad decision is made it is possible to change but (especially in the early years after sign up) there may be a cost.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance. 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. Tax regualtions can change and any figures quoted above are at the date of publication.