How Charges Affect Investment Returns?

Terry98

I read yesterday that the Government intend to cap pension charges to 1% per annum http://www.telegraph.co.uk/finance/personalfinance/pensions/10313935/Cap-to-protect-pensions-from-hidden-fees.html

Could someone point me to an online calculator where I can work out how much I would save if my current pension charges were reduced from 1.5% to 1% over say a 20 year term.

AlwaysLearnin

Over 20 years the pension pot will vary considerably, with different rates of return, increasing (hopefully) contributions etc, making accurate calculation of the saving almost impossible.

If you wanted a ball park figure, using constant/average rate of return and contribution rate, you could perhaps use the FV function in excel? The 'Rate' variable could be your predicted rate of return less the charges - you could put these numbers in other cells and play about with them.

http://office.microsoft.com/en-gb/excel-help/fv-HP005209099.aspx

Perelandra

This might be a useful tool:

http://www.hl.co.uk/pensions/interactive-calculators/pension-calculator

I would take the figures in the Telegraph article with a pinch of salt... those make a lot of assumptions about an individual's contributions over their lifetime which won't be "right" for you.

As a sidenote, I notice that Steve Webb doesn't mention the raid on pensions that Brown made, which had a much larger impact on pensions than this "capping" policy will make....

Terry98

Thanks for your replies.

Compound interest is not one of my strong points to put it mildly

Say a pension statement gives this info for a 40 year old with 25 years to pension paying 1.5% charges. As a ball park figure how much would the £50k grow to using 1% charges.

If your investment grow at 5%
Your pension would be £100k
but allowing for inflation of 2.5%
Your total pension pot would be £50k

BLB53

On the figures above, at 1.5% your pot would grow to £118K and £51K would be taken in charges.

At 1.0%, the pot would grow to £133K with £36K taken in charges.

Check out candid money calculators http://www.candidmoney.com/calculators/

dunstonh

Could someone point me to an online calculator where I can work out how much I would save if my current pension charges were reduced from 1.5% to 1% over say a 20 year term.

Is your current pension charging 1.5%?

Since 2001, the benchmark for new retail pensions has been 1%. You can exceed that but with justification (typically using external funds). However, pensions currently retailed are typically much cheaper than that on default/internal funds. e.g. 0.3%-0.4% typical.

Perelandra

dunstonh wrote: »

Is your current pension charging 1.5%?

Since 2001, the benchmark for new retail pensions has been 1%. You can exceed that but with justification (typically using external funds). However, pensions currently retailed are typically much cheaper than that on default/internal funds. e.g. 0.3%-0.4% typical.

This is the other thing I dislike about the Telegraph article.

What proportion of pension funds are at the 1.5% mark that Webb was talking about? I expect it's a relatively low percentage anyway.

Linton

Terry98 wrote: »

I read yesterday that the Government intend to cap pension charges to 1% per annum http://www.telegraph.co.uk/finance/personalfinance/pensions/10313935/Cap-to-protect-pensions-from-hidden-fees.html

Could someone point me to an online calculator where I can work out how much I would save if my current pension charges were reduced from 1.5% to 1% over say a 20 year term.

Assuming that the investments were identical except for the charges:

% gain from reduction = ((0.99/0.985)^20 - 1)*100 = 10%

Look at the 10 year returns from various funds (trustnet will tell you). A 10% gain is very small compared with the gain you could make by investing in Sector A rather than Sector B, let alone one fund compared with another. So I suggest you should focus first on what you are investing in, then consider how you can get it a minimum cost.

Terry98

Many thanks for the further replies.

Panic over. I have just found out all the charges were up front and in the first year so there is no ongoing IFA commission.

I have just had a look at Trustnet. The only thing I now have to worry about is how well my fund is doing against others when I get my yearly statement.

dunstonh

Panic over. I have just found out all the charges were up front and in the first year so there is no ongoing IFA commission.

IFA commission and charges are two different things. The article you linked was about charges. Not commission.

Terry98

dunstonh wrote: »

IFA commission and charges are two different things. The article you linked was about charges. Not commission.

OK I think I have got it now thanks.

I presume this is what they are talking about
https://www.aviva.co.uk/pensions-and-retirement/pension-charges.html