When you’re caught up in the day-to-day pressure of running a business it can be hard to focus on your longer-term retirement planning. By investing a little time to review the fees being charged on retirement and investment plans many business owners could retire earlier. Hannah Goldsmith from Goldsmith Financial Solutions explains how this is possible.
The Financial Services Industry charges fees on all investment products – that’s how they get paid for the advice they offer and the work they do setting up and managing funds and portfolios. There is nothing wrong with that – but most people have no idea what these fees are, and they have virtually no understanding of the impact these fees have on the value of their retirement fund.
Go retirement plan shopping
Most of us shop around for other major purchases so, why don’t we shop around on fees for what is really important in our lives; our retirement lifestyle? After all, if you could get the same return on your money with the same consumer protection, but by shopping around you could retire sooner – why wouldn’t you?
Regardless of age or how much money you have, high industry fees can delay you reaching your ‘stop working’ day; the day you start your retirement. 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.
And therein lies the problem; if we do not know how much it is costing us in total Financial Services Industry charges and the impact that has on our long-term future wealth, why would we do anything about it, and how would we know what to do? 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.
Basic retirement fund return
Investor A 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 A’s money already, she has made a profit of £163,968. The Industry would report how well she has done and Investor A may be content with her advisor’s recommendations. However, it has cost Investor A £74,588 in Financial Service Industry fees to make £163,968.
Better retirement fund return
Investor B, like Investor A has exactly the same scenario but shops around and reduces her fees to 1.1%. Lower fees do not mean lower returns and investor B 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 B already had £40,000, a profit of £251,105 has been generated but with a reduced industry cost of only £48,623.
Investor A 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 B 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.
You can keep more of your investment for yourself and your future retirement lifestyle by being prudent and understanding the impact these Financial Services fees have. If you keep control of your money you’ll have options on when you choose to retire. And have more money to enjoy when you do!