One of the most popular questions I am asked via my second opinion service is “Why isn’t my pension growing?” Often, the answer is the fees being paid. This post focuses on how charges impact returns.
Unpeeling the Onion:
Pensions have layers of fees, whilst on their own they may appear small, but together they can eat away at your returns. Many of the older-style pensions I see have a structure similar to this:
So on a pension investment of £250,000, the fees could equate about to 4% (£10,000) a year or more plus the Trustee fee. These fees are charged whether your investment goes up or down. Let’s see why this is important…
The Effect of Charges
There are 4 main types of assets an investor can hold. They are cash, fixed-income securities, property, and equities (shares). Of these equities have provided the highest long-term returns. Most investment professionals would agree a portfolio holding all its assets in equities is high risk. Global equities between 1972 and 2021 averaged a return of 10.56% a year. (Source: Ibbotson & Associates 2021). Using the above example charges, the following chart (fig. 2) shows the impact of charges on a pension fund valued at £250,000 held for 20 years, which is almost £1,000,000.
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Important Notes:
Fig. 1 Charges exclude establishment fees which can be up to 10% of the amount invested. Ongoing fees are based on market averages and are not representative of a specific product or product provider. Fig 2. assumes an annual compound return before charges of 10.56% over 20 years, this is the average return reported on page 206 by Ibbotson & Associates in their 2021 report on Stocks, Bonds, Bills, and Inflation (SBBI). Annual compound return after charges is assumed to be 6.56% (10.56 – 4%) over 20 years. The effect of charges on performance is a reduced return of £970,771. These returns are not guaranteed. The value of investments can fall as well as rise which means you may receive less than you invest. Past performance is no guide to future returns.