There’s no getting around it; what you pay for your pensions and investments truly matters.
The recent development concerning St James’s Place (SJP) is the latest example of why it’s vital to know how much you’re being charged.
Last week, the UK’s largest wealth management firm announced plans to overhaul its fee structure, most notably scrapping controversial exit penalties on its pension plans and investment bonds.
In a nutshell, SJP is getting rid of some charges, replacing them with others, and is unbundling each fee component to make things clearer, and in many cases cheaper, for its customers. The firm aims to implement the changes by Q3 2025.
Although its fee shake up won’t directly impact DIY investors, the growing debate around costs stretches to all corners of the investing space.
Whether you take financial advice, use a robo adviser, or manage affairs yourself on a platform such as interactive investor, it’s a timely reminder to check that your fees are reasonable for the services you receive. Paying too much can make a dent in your financial future.
Why are exit fees disappearing?
New regulation, such as the Financial Conduct Authority’s (FCA) new Consumer Duty regime which stipulates that financial firms must deliver good consumer outcomes, is helping to stamp out exit fees, plus any other excessive costs and charges.
The phasing out of exit penalties is good news for investors. Whoever you choose to invest your money with, if you’re not happy with any aspect of your portfolio, you should have the freedom to move some or all your money elsewhere without losing a chunk of it. interactive investor removed exit fees five years ago.
While the FCA has no plans to introduce an outright ban on such fees, last year the regulator made its views on the matter abundantly clear.
“The Duty does not allow firms to put unreasonable exit charges on their products.
“Such charges are unlikely to be fair value, may cause foreseeable harm and are unlikely to support customers in fulfilling their financial objectives.”
What can often muddy the waters for investors is that exit fees can be badged up in different ways - early withdrawal charge and surrender penalty are two other examples, even though all three essentially mean the same thing: if you encash or transfer your investments within a specified time frame, your provider will charge you.
Thankfully, over the past decade such fees have largely become obsolete. But you still need to watch out for them. They can be found lurking in some older-style pensions which have transfer penalties baked into the product design.
However, just because your existing pension provider applies a transfer fee doesn’t necessarily mean a switch is off the table. If your current plan isn’t doing what you need it to do - for instance, the investment options are too restrictive, you can’t keep track of your portfolio online, or the annual management costs are toppy - then a transfer might still be in your best interests. The drawbacks of any exit penalties must be weighed up against the wider benefits offered by your new plan.
How can charges impact how your investments grow?
Put simply, if you pay over the odds, your financial goals may suffer. And exit fees are one of several charges that can be incurred when investing for your long-term future.
But, as always, we can’t talk about costs without discussing value. The cheapest isn’t necessarily the most valuable is a message that’s constantly drummed home. And this argument clearly has merit. Most people are happy to pay more if it gives them exactly what they want, or solves a complex problem.
But a further truth is that lower-cost offerings don’t have to work as hard to prove their value. And the good news is, investment costs are one of the few things you can control. Investing will never be free. But it doesn’t have to be expensive either.
- Fund charges: the only thing investors can control and why they matter
- What are your financial blind spots?
Earlier this month, interactive investor launched Pension Essentials, with a transparent, low-cost monthly fee of just £5.99 for those with pension pots under £50,000.
We believe it’s important that you not only know what you’re being charged, but for those fees to be fair and reasonable too, whatever your level of wealth.
If you’re a DIY investor, it’s equally important to understand the fees in all aspects of your portfolio. Take the time to grasp what you pay for your platform, your fund and investment trust charges, and any transaction fees you incur, such as for trading activities. This will help you to keep as much of your growth and income as possible.
So, how much of a difference can lower portfolio fees can make? Let’s crunch some numbers.
The below table compares total annual portfolio fees of 0.5%, 1%, and 1.5% and calculates the impact on a £100,000 initial balance and annual investments of £10,000, assuming 5% growth every year over a 30-year investment time frame.
|Rate of return||5%||5%||5%|
|Total portfolio fees||0.5%||1||1.5%|
|Net rate of return||4.5%||4%||3.5%|
|Investment value in 30 years||£984,603||£885,189||£796,906|
As the table shows, shaving 1% off your annual portfolio fees can deliver a £187,000 boost to your pot in three decades’ time – a life-changing amount of money. Even a 0.5% reduction every year could put an extra £100,000 in your pocket.
The sizeable disparity is due to the compounding effect of charges over time. The longer your investment time frame, the more you’ll benefit from lower fees.
Elsewhere, independent research by the lang cat consultancy uncovered the benefits of keeping platform costs low. Using the same assumptions as above, your choice of platform could add an extra £85,000 to your pension portfolio in 30 years’ time.
- To find out how you can be £85,000 better off with ii’s flat fees, click here.
Ultimately, what represents fair value rests with you as the investor. It’s about whether you think paying a bit more will get you closer to your financial goals.
In some cases, you may feel it’s justified. You might believe an active a manager is worth their salt and can beat the market or feel that seeking professional advice will bring some much-treasured peace of mind.
But if the extra costs fail to deliver better results, your future may pay the price.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.