US Edition
Runaway inflation has eaten away at the value of millions of pensions in the last year – and savers could be compounding the issue by wasting hundreds of pounds on unnecessary fees charged by the stockbrokers who hold their cash.
Consumer prices have risen by 10.4pc in the last year, according to the Office for National Statistics, drastically reducing the real value of savers’ nest eggs. High fees can have an equally devastating impact on the retirement prospects of millions of people.
Analysis published last year by wealth manager Netwealth warned that retirees could effectively lose 11 years of their savings to the combination of high fees and inflation. It said a person retiring with a £750,000 pension pot and making £30,000 of withdrawals a year would typically see their savings last for 37 years in retirement, based on 2pc inflation and spending the equivalent of 0.65pc on annual fees.
However, if both fees and inflation were 1 percentage point higher, at 3pc and 1.5pc, their savings would be expected to run out after just 26 years – a difference of more than a decade.
For those using self-invested personal pensions – or “Sipps” – ensuring they are using the best-value broker for their circumstances is crucial.
So-called platform fees are typically charged based on the size of a saver’s portfolio with additional fees usually charged to customers making trades – buying or selling funds and shares within their Sipp.
Regular traders should use brokers that have minimal trading costs while those “set and forget” savers who rarely tinker with their holdings should instead look for companies offering the lowest platform fees. Remember, the fund managers charge another fee on top.
Chris Bredin, of consultancy the Lang Cat, said: “When choosing a platform to invest with, it is crucial for investors to understand how their trading activity will impact the charges they pay.
“Not all stockbrokers will charge for fund trading, but where they do, costs can quickly add up and eat into your returns so it’s important to consider this when making a choice.”
Weekly trader
Savers making regular adjustments to their portfolio will typically have the highest costs, as many platforms charge for each transaction made in a Sipp.
Figures compiled by the Lang Cat showed a saver with a £100,000 pension making the equivalent of one trade a week – either buying or selling a fund – would be charged £250 a year by Close Brothers’ self-directed service, the cheapest of the firms surveyed.
For bigger pension pots, a saver with £250,000 would be best served using Interactive Investor, where the fee would be £467 per year. The same fee would be charged by Interactive Investor on pots of £500,000 or more, given the broker has a flat £12.99 monthly fee for its Sipp-only customers, regardless of the size of their portfolio. Individual trades cost £5.99 a time.
However this flat fee structure can make Interactive Investor more expensive than rival brokers for smaller portfolios. For a pension of £25,000, the best value broker would be Fidelity, which would apply charges of £90 a year to this customer.
Monthly tweaker
Rather than making weekly alterations to their Sipp, customers may instead choose to limit their trades to once a month.
For customers in this category, the best provider for those with a £100,000, £250,000 or £500,000 nest egg is Interactive Investor, the Lang Cat said. The broker’s monthly fee once again makes it the cheapest option for those with bigger portfolios. A customer making one trade a month would typically spend £228 a year with Interactive Investor.
A customer with a £25,000 pension pot making one trade a month would also be charged £228 by Interactive Investor. Whereas the same saver using the rival broker AJ Bell would be charged £81 a year, given that company’s percentage based fees.
Set and forget
For savers who make minimal changes to their investment portfolio and limit their number of trades to four a year, equivalent to one a quarter, the impact of trading fees is much reduced. Instead it is the platform fees that will typically account for most of the saver’s outgoings.
Sipp customers with a £100,000, £250,000 or £500,000 portfolio would be best served using Interactive Investor. Its £12.99 monthly fee and £5.99 dealing charge would result in annual charges of £180. For those with a smaller £25,000 nest egg, the best-value provider would be AJ Bell, which would charge total fees of £69 a year.