Why your pensions and investments never seem to rise
By Nick McBreen
Investment of your money, in investment products, whether through your company pension, personal pension, ISAs, or insurance products is one of the more complex decisions that you can make.
It's no surprise that many of us place trust in a brand name given this complexity, but it's easy to see how much of your hard earned money can be lost if some basic measures are not taken care of.
When you invest, you have a few choices to make. Here, we'll give you some tips that could save you thousands of pounds against the many investment products available.
It goes without saying that you should seek the investment advice of an independent financial adviser rather than someone who is tied to just one company. Try using an adviser who charges a fee as they have no motivation to sell you anything, nor do they have any need to turn up every five years just to turn your investment products over for a new commission.
Pensions first: If you choose a pension provider (or already have one) consider the following: Some pension funds have a death benefit which is far less than the actual value of your pension. It's an old set up but a case we looked at recently involved a male client's pension fund with a value of nearly Â£110,000. The small print, however, said the death benefit was just the return of his premiums plus a small amount of interest. His beneficiaries would receive just Â£48,000 a cost of nearly Â£62,000. This situation is common in older schemes.
Other older schemes have excessive fees in two or three ways. Firstly the pension scheme will offer an apparent bonus at the beginning (normally called an extra allocation), which is nonsense and is taken back (and more) over the period of the pension. Secondly, older style pension plans have a charge for the actual pension product, followed by a charge for where your money is invested. Neither are cheap.
If you are buying these schemes in the old expensive retail world (through a bank or insurance salesman) these costs are also increased by the cost of the excessive commission for the person selling you the plan. In today’s world you can access the very best funds and save the 5.25% charge, as well as accessing the actual pension fund for near zero costs. Moreover, an adviser will also be sure to check that your existing scheme doesn’t fall foul of the above mentioned problems of early death benefits etc.
Now to investments and ISAs: The same applies here in terms of hidden charges. The old ‘trick’ used to sell investments where you are given an ‘extra allocation’ involves the insurance company/bank/financial adviser selling an investment bond which says you have 103% allocation. You wrongly believe this is a 3% bonus but instead it’s a golden handcuff. The 3% ‘extra’ plus the actual costs of the product which can be as much as 11% over the first five years will be taken back over those five years.
Another sneaky trick is to give you access to investment funds that are performing poorly and are cheaper, or indeed give you access to a fund which is effectively a poor copy. You might believe you are buying Fidelity Special situations for example, but actually you are buying a copy of it. The first time we uncovered this was back in 2008 where we observed a customer’s investment only to see that the customer buying the ‘version’ of Fidelity Special situations was 36% worse off over three years than the person buying the real fund.
These charges, whether hidden or not, have a dramatic effect and strain on the future value of your investments. If you talk to a specialist investment adviser, they can scan most products in a matter of minutes to see if they need altering or if you are losing out.
All this is without even approaching the subject of investment performance. In short, if we take the ‘active managed’ sector the best fund over five years returns 60.4%, the worst -0.5% and the average of the 114 funds is 21.5% (1). The choice of where your capital will be invested makes all the difference.
Source: (1) Trustnet
For a free one hour scan of your current pensions or investments call Worldwide on 0845 230 9876, e-mail firstname.lastname@example.org or take a look at our website www.wwfp.net.
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Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Nick McBreen.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up