Evidence suggests that paying over the odds for fund charges is the primary reason why people feel the money in their pension hasn’t grown like it should have done
In my last article entitled Does Your SIPP Break Even, I covered the importance of knowing exactly what you’re paying to run your SIPP.
As tens of billions of pounds of SIPP money is invested in stockmarket funds, let’s explore in a little more detail exactly how much your stockmarket funds could be costing you. You might be in for a shock.
None of this is new. I’ve just done a quick Google search and discovered that over recent years, there's been a ton of commentary on the subject, including these interesting articles from the Telegraph:2 August 2010 - More Than Meets The Eye To Fund Charges 14 May 2012 - Fund Fees: Investors 'Misled' By Omitting Performance Charges
Here’s A Brand New Revealing Article From FT.com
If you have any money invested in stockmarket funds in investments, ISAs or pensions, this article is a must-read!9 September 2013 - Hidden Fund Costs Are Hurting Investors
The article goes into detail about the charges levied by the UK’s largest fund platform provider. It’s doing pretty well, with a 28% rise in pre-tax profits in the last year, an impressive profit margin of 65.8%, and a 400% rise in the share price in the last five years. Not bad during a recession!
So who pays?
Its customers, of course.
They are largely people who make their own decisions without advice. When you look at the detail, they pay between 0.5% and 0.75% per year ‘for administration’.
By comparison with other providers, that’s expensive. Yet its customers rarely complain. It might simply be because the provider doesn’t declare this figure, stating on its website there is no charge for its platform services.
How To Check Your Charges
The whole area of charges on stockmarket funds is complicated to say the least. The most common, and arguably useless term bandied around is the Annual Management Charge. To the uneducated, that sounds like it’s the cost to run the fund on a yearly basis. Sadly, it isn’t.
A better measure of cost is the Total Expense Ratio, or TER. It’s a regulator-approved measure designed to offer a more accurate picture. It includes annual operating expenses that drag down the performance of your investment, such as:
- Annual Management Charge
- Legal Fees
- Administrative Fees
- Audit Fees
- Marketing Fees
- Directors’ Fees
- Regulatory Fees
- Other Expenses (whatever they might be!!!)
So how does the Total Expense Ratio from a random selection of 10 funds from the UK’s largest fund platform provider’s favoured 150 funds compare with the Total Expense Ratio of the same funds from the Wrap Platform of the UK’s largest insurer, Aviva?
The table below has been kindly supplied by one of the independent pension specialists on SIPPclub’s panel.
So there you have it. The Total Expense Ratio from UK’s largest fund platform provider is roughly 0.7% more expensive, per year. That’s in line with what FT.com found.
Whilst it doesn’t sound like a lot, if you have more than £100,000 invested in stockmarket funds, you could be throwing away thousands of pounds each year. That'll make a huge dent in your retirement benefits. Compounding that charge over the years adds up to massive money.
I’m pretty certain your money is better kept under your control. And you don’t have to feel guilty if you move your money away from the UK’s largest fund platform provider to a cheaper provider. After all, its founders are now billionaires. There's a surprise!
A Final Thought
The figures confirm that ‘self-managing’ investors are paying between 0.5% and 0.75% per year more than they need. Interestingly, the independent pension specialist who provided the above figures charges 0.75% per year.
It begs the question: “Why would you do it yourself, when you could get help, advice and support from one of the UK’s leading chartered financial planners and specialist pension advisers, for practically the same cost?”
If you’re going it alone with the UK’s largest fund platform provider, perhaps it’s time to think again!
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
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