Growing your wealth as inflation soars is a tall order. Most investors will feel like they are running just to stand still. Indeed, if inflation is 6.2%, investors must make a return of at least that amount just to preserve their wealth.
This means that now, perhaps more than ever, it’s essential to check what you’re paying to invest and cut costs where you can. After all, every percentage point you pay in fees is another percentage point above inflation that you need to earn back just to break even.
In the long run, the costs eat away at your wealth. Say you have invested £100,000, earning 6% per annum for 25 years and have no fees. After 25 years you would have £430,000. Good enough. But if you paid 2% in fees per year, after 25 years you would have £260,000, or 40% less.
Punch above your weight: Checking what you’re paying for investing and cutting costs where you can is key.
Of course, cheaper isn’t always better. Quality advice and successful investments can pay for themselves many times over. But it will pay to ensure you get what you pay for rather than just handing over inflated fees. Here’s our ten-point plan to keep your investment costs low and medium:
1) Choose the right platform for you – and your wallet
When you start investing, the first decision is which platform to sign up for – and sadly, many investors stumble at the first hurdle. Platform fees differ wildly, so the same wallet on two different platforms can vary in value by thousands of pounds in a few years. Which platform is right for you will depend on the size of your portfolio and your investment strategy.
Some, like Hargreaves Lansdown and AJ Bell, charge a percentage fee based on the size of your portfolio, while others, including Interactive Investor, charge a flat fee. Percentage fees tend to be better for smaller wallets, while fixed fees are better for larger sums of money.
Instead of a platform, you might prefer to have a financial advisor manage your portfolio for you. You’ll likely pay more for it, so make sure you’re getting good value for money. Shop around and compare advisors, and decide whether you’d rather pay an upfront fee for advice or a percentage fee for ongoing management.
Of course, price is not the only factor to consider when choosing a platform or advisor. You will also want to think about customer service, the range of investments on offer and whether you need other support such as tax planning.
Our sister publication This is Money has a great resource comparing major investment platforms at thisismoney.co.uk/platform.
2) Think Isas and pensions – and reduce taxes
Once you’ve decided on a platform, you’ll need to decide what type of investment product will best grow your wealth. If you choose an advisor, they should be able to do this for you. Choose the wrong product and you could end up with an unnecessarily large tax bill. Invest in Isa stocks and shares and all returns and withdrawals are tax free. Opt for a self-invested personal pension (RSPP) and you won’t pay any tax on the money you put into your account (you get back any income tax you may have already paid on your contributions), although you may pay income tax when you come to withdraw it.
If you don’t use either and opt for a general investment account instead, you won’t get any of these tax benefits and you may also have to pay tax on the dividend income. and capital gains.
3) Avoid low-value investment funds
The next step is building a portfolio. There is no way to guarantee that you are choosing the best funds to grow your wealth. However, there are tools to give you the best chance of making money in the long run.
The first is to compare a fund to its peers. Even the best backgrounds won’t turn off the lights all the time. But if you own a fund that is underperforming other similar funds, that’s when the alarm bells should ring.
Websites such as Trustnet and Morningstar allow you to see any fund’s performance and compare it to its peer group, as defined by the fund categories defined by the trade body Investment Association. The next tool at your disposal is the assessment of the reports that all fund groups must publish on their website to reveal if they offer value to their investors. Funds judge their worth based on factors such as customer service, the importance of fees and investment returns. If even the fund itself admits it offers less than excellent value, it might be time to move your money.
4) Avoid active funds that don’t deliver
A good actively managed investment fund can be a great way to grow your wealth, as it gives you access to a portfolio handpicked by an expert fund manager.
However, actively managed funds tend to be several times more expensive than low-cost index funds that follow the market rather than trying to beat it.
So beware of so-called “hidden” tracker funds. These claim to be actively managed and charge a fee, but simply follow the stock market and therefore offer nothing better than a cheap index fund. Investors benefit from a discount style of investing for a high price.
You can spot a closet tracker by checking a fund’s top ten holdings, published in regular monthly fact sheets available online. If they look suspiciously like the major index stocks it is trying to outperform, it may be a closet tracker.
Roger Clarke, financial planner at The Private Office, explains: “If you have a UK investment fund, look at how its holdings compare to those of the FTSE All-Share Index, which tracks the UK stock market. If the underlying composition is very similar, you may be in a UK closet tracking fund.
5) Don’t pay too much for index funds
The cost of index funds has fallen in recent years. For example, the Fidelity Index World fund, which tracks an index of the world’s largest companies, costs just 0.12% per year.
Yet not all have reduced their costs. Two index funds that track the same market should be much more, so there’s no point in paying for the more expensive one.
6) Think before you start trading your portfolio
Buying and selling is an integral part of maintaining a healthy investment portfolio, but excessive trading becomes costly. Most investment platforms charge trading fees.
For example, Hargreaves Lansdown, the UK’s largest investment platform, charges £11.95 every time you buy or sell shares, exchange-listed investment funds or exchange-traded funds.
This applies for up to nine transactions per month, after which the fees decrease. It’s expensive. If you trade frequently, you might want to switch to a platform with lower trading fees and also pay attention to how you trade.
Maike Currie, chief investment officer of personal investments at wealth manager Fidelity International, says: “Make sure you know the cost of trading over the phone – this cost is often much higher as platforms want to encourage customers to transact online.”
7) Check the costs of your professional pension
Employees have no say in their employer’s pension plan – the employer and its trustees decide.
However, you can control the investment costs. Check how your money has been invested and make sure the funds are right for you and you’re not paying more than necessary.
Currie says: “While the so-called default investment option may be the most suitable option for many workplace investors, it may have higher fees than some of the index fund options offered by many workplace pension plans.
She adds, “Cutting costs by going with an indexed option could be wise for those with a long working life ahead of them.”
8) Make sure old pensions are in good condition
Don’t assume that the pensions you no longer contribute to work quietly in the background to grow your retirement wealth; costs could erode them unnecessarily.
Track down old pensions and examine their holdings. You should receive this information annually in a statement from your supplier. If not, check that the scheme has your correct address on file – people often move house and forget to tell former pension recipients.
If you’re unhappy with the fund options on offer, you can move the whole pot around using a pension consolidation service such as Netwealth or Pension Bee.
9) Invest with family
Some investment services are cheaper if multiple family members sign up. For example, Interactive Investor’s Friends and Family plan allows a customer to offer five people a free subscription to their service by paying a one-time fee of £5 per month.
Netwealth allows a customer to invite seven other family members or friends to join their Netwealth network and receive reduced fees.
Some platforms also offer an incentive if you recommend a friend to join you. AJ Bell will send you both a £100 gift voucher if someone signs up on your recommendation.
10) Bank tax relief on pensions while you can
The contributions you make to your pension are currently tax-free. However, this benefit can be modified or withdrawn at any time.
The pensions tax break cost the Treasury £42.7billion last year, so cash-strapped chancellors are still keeping tabs on its cut.
The generous 40% relief for higher rate taxpayers in particular has come under scrutiny and may be reduced.
Similarly, Chancellor Rishi Sunak promised last month to cut the basic tax rate from 20% to 19% in 2024.
For base rate taxpayers, the pension tax relief would decrease by the same amount, so it may be a good idea to take advantage of it while – and if – you can.
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