Even for those familiar with pensions it is undoubtedly the case that many could retire earlier if they took one vital step and reviewed the fees being charged on their retirement and investment plans. Contributor Hannah Goldsmith DipPFS – Goldsmith Financial Solutions.
The Financial Services Industry charges fees on all investments – that’s how they get paid for the advice they offer and the work they do setting up and managing funds and portfolios. In principle that is fine – but even financially savvy people have no idea what these fees are or the impact these fees have on the value of their retirement fund.
Buying a service without understanding the costs or the impacts these will have is unusual. Most of us, if short-changed in a shop, will not hesitate to make a fuss straight away. We use the internet to compare prices and make savings when we purchasing insurance or looking for the best energy deal. For some reason we don’t apply the same logic and shop around when looking at the products for our retirement.
Whatever your personal circumstances high industry fees can mean that your ‘stop working’ day is significantly delayed. With the changes implemented in the ‘Retail Distribution Review’ (RDR) five years ago and the new update to the Markets in Financial Instruments Directive (MiFID 11) which came into force on the 3rd January 2018, investors have never had so much information available to them. Investors now have the power to take back control of their money from the Financial Services Industry and do what’s right for them. After all, this is your money and you are saving for your retirement not your fund managers. Yet very few investors understand the fees and the impact of those fees.
It’s clearly problematic. Without the information on how much is it costing us in total Financial Services Industry charges and the impact that has on our long-term future wealth, it’s not surprising that people don’t know they should take action or what that action should be. Perhaps it is because we do not have sufficient information presented to us when we invest, to allow us to make that decision, or we do not want to look ignorant in front of our trusted advisor or perhaps we do not think it is happening to us.
Let’s have a look at an example:
Inventor A, aged 45 has pension and ISA savings valued at £300,000 and wishes to retire with a fund in the region of £750,000 and preferably at the age of 65. The total financial services industry cost on their money is 2.5% per annum. Assuming an average growth rate of 6% per annum the fund value would not achieve the target value until the investor is aged 73.
Remember, £300,000 of this fund value was Investor A’s money to start with, a profit of £467,000 has been generated and it has taken 28 years to achieve target value. It may be a shock to find out that the total Financial Services Industry charges have totalled £345,512 over this time.
Investor A has had costs of £345,512 to make £467,000 and they have lost eight years of their desired retirement lifestyle.
Investor B, also aged 45 and with pension and ISA savings valued at £300,000, wishes to retire with a fund in the region of £750,000 and preferably at the age of 65, decided to review the industry costs. Investor B realised that they could get the same returns and same consumer protection for 1.1% per annum. They also achieved an average 6% return per annum on their money. They achieved a target fund value of £773,000 by age 65 – eight years before Investor A.
In other words, they have achieved their target retirement fund value at their projected retirement date with one simple decision; shopping around to get the best fees. As £300,000 was Investor B’s money anyway they have made a profit of £473,000 in 20 years not 28 and it has cost investor B only £102,000 (not £345,512) to make £473,000 and achieve their lifestyle objective. If at the time they decided to delay retirement to age 73 like Investor A, the fund value would continue to compound and be in the region of £1,128,500, an additional increase of £360,000.
Here is another example:
Investor C is aged 30, has a smaller pension fund valued at £40,000, and looking to retire at age 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.
The fund value is projected to be £203,968 and as £40,000 was investor C’s money already, she has made a profit of £163,968. The Industry would report how well she has done and Investor C may be content with her advisor’s recommendations. However, it has cost Investor C £74,588 in Financial Service Industry fees to make £163,968.
Investor D, like Investor C has exactly the same scenario but shops around and reduces her fees to 1.1%. Lower fees do not mean lower returns and investor D also averages a 7% return per annum. Because the fees do not cause such a drag on the returns, the fund value compounds and at retirement age of 65 has grown in value to £291,105. As investor D already had £40,000, a profit of £251,105 has been generated but with a reduced industry cost of only £48,623.
Investor C gave away control of her money to the Financial Services Industry and achieved a fund value of £203,968 to live the rest of her life on, paying £74,588 in fees over the term.
Investor D took back control of her money and achieved a fund value of £291,105 for exactly the same financial return, same financial risk and same consumer protection.
Which of these investors is most like you? If you are the type of investor who is doing less well it is time to start being a little more prudent and investing some time to understand the impact that the fees you are paying are having. This will allow you to take control which in turn will give you a much greater chance of retiring with the funds for the retirement lifestyle you want on the date you plan to retire, or possibly even sooner.