Everyone knows they need to make strenuous efforts to save for their retirement, but not everyone is aware of how fund charges can have a serious detrimental impact on their cash.
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All pension savers need to understand how to pick the right investments to help their savings grow and understand how charges can affect that savings pot.
Even if there is a small increase in an annual charge, it can add up to a serious amount of money over the coming years.
The reason for this is that the charge is generally a percentage of the cash that has been invested, so as the saver’s pot increases, so does the amount they have to pay every year.
To help illustrate the costs involved, imagine that someone has various savings and pensions accounts and has managed to save up £100,000 which they then want to move into a self-invested personal pension (SIPP).
Fall in value
If they are 40 years old and looking at 25 years more work, then there’s plenty of time for their pension fund to grow significantly.
The damage charges inflict can be calculated by pretending the pot will grow at 6% a year – though no fund or account is paying anywhere near that at the moment – so the pot will grow to £446,500 without charges.
However, with investment charges of 0.5% – and charges vary according to the fund involved – that would mean the investor forking out £65,000 in fees to the fund manager.
Obviously, double that to a more realistic charge of 1% and the investment pot is hit by nearly £180,000.
Don’t forget also that as charges rise, the investment returns will fall, since the charge comes out of the profits.
DIY investing
The main point to consider is that the higher the charge should mean the saver should see a higher return because they are paying for investment management expertise to generate above average returns.
Do-it-yourself investing is growing in popularity and should an investor put their money into a low-cost fund which is tracking the FTSE All Share index then they would be paying around 0.5% in fees.
By paying the higher charges, an investor needs to be confident that their pension fund manager can pick shares and stocks which will beat the FTSE All Share index over a five-year period.
Investors putting their money into an investment trust or a unit trust would be paying an annual charge of 1% but then they will be seeing, hopefully, returns of 6% a year which makes their charge acceptable.
Once an investor gets to the level of 2% or more, they really do need to see decent returns on their investment to make that a worthwhile payment.
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