Growing your wealth while inflation is soaring is a serious challenge. Most investors will feel like they are running just to stand still. That is because if inflation is 6.2 per cent, investors need to make a return of at least that amount just to preserve their wealth.
This means that now, perhaps more than ever, it is essential to check what you are paying to invest and cut the cost where you can. After all, every percentage point you pay in fees is another percentage point above inflation that you need to gain back just to break even.
Over the long term, costs eat away at your wealth. Say you had £100,000 invested, earning six per cent a year for 25 years and you did not have any fees. After 25 years, you would have £430,000. Pretty good. But if you paid two per cent a year in fees, after 25 years you would have £260,000 – 40 per cent less.
Punch above your weight: It is essential to check what you are paying to invest and cut the cost where you can
Of course, cheaper is not always better. Good quality advice and well-performing investments can pay for themselves several times over. But it will pay to ensure you’re getting value for money rather than simply handing over bloated fees. Here’s our ten-point plan to make sure you’re keeping your investing costs lean and mean:
1) Pick the right platform for you – and your portfolio
When you start to invest, the first decision is which platform to sign up to – and sadly many investors stumble at the first hurdle. Platform fees differ wildly so the same portfolio on two different platforms could vary in value by thousands of pounds within a few years. Which platform is right for you will depend on the size of your portfolio and investment strategy.
Some, such as 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 portfolios while flat fees are better for larger amounts of money.
Instead of a platform, you may prefer a financial adviser to run your portfolio for you. You’ll likely pay more for this, so make sure you’re getting good value. Shop around and compare advisers, and decide whether you would 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 picking a platform or adviser. 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 an excellent resource comparing the major investing platforms at thisismoney.co.uk/platform.
2) Think Isas and pensions – and mitigate tax
Once you have chosen a platform, you will need to decide what sort of investment product will best grow your wealth. If you opt for an adviser, they should be able to do this for you. Pick the wrong product and you could needlessly land yourself with a large tax bill. Invest inside a stocks and shares Isa and all returns and withdrawals are tax free. Opt for a self-invested personal pension (SIPP) and you will pay no tax on money you put into your account (you get back any income tax you may already have paid on your contributions), although you may pay income tax when you come to withdraw it.
Should you use neither and instead go for a general investment account, you will not benefit from any of these tax perks and you may also have to pay tax on dividend income and capital gains.
3) Avoid poor value investment funds
The next step is constructing a portfolio. There is no way to guarantee that you’re picking the best funds to grow your wealth. However, there are tools to ensure you give yourself the best chance of making money in the long-term.
The first is comparing a fund to its peers. Even the best funds will not shoot the lights out all of the time. But if you are holding a fund that is underperforming other, similar ones, that is when alarm bells should be ringing.
Websites such as Trustnet and Morningstar allow you to see the returns of any fund and compare them to their peer group, as defined by fund categories set by trade body the Investment Association. The next tool at your disposal is assessment of the reports which all fund groups must publish on their website to reveal whether they offer value to their investors. Funds judge their value based on factors including customer service, size of fees and investment returns. If even the fund itself admits it offers less than excellent value, it may be time to move your money.
4) Steer clear of 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 hand-picked by an expert fund manager.
However, actively managed funds tend to be several times more expensive than low-cost index funds which track the market rather than try to beat it.
So beware so-called ‘closet’ tracker funds. These claim to be actively managed and charge the fees of one, but simply track the stock market and therefore offer something no better than a cheap index fund. Investors get a bargain basement investment style for a premium price.
You can spot a closet tracker by checking the top ten holdings in a fund, published in regular monthly factsheets available online. If they look suspiciously similar to the top holdings of the index it is trying to outperform, it may be a closet tracker.
Roger Clarke, a 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 make-up looks very similar, you may be in a UK closet tracker fund.’
5) Don’t overpay for index funds
The cost of index funds has plummeted in recent years. For example, the Fidelity Index World fund, which tracks an index of the largest companies in the world, costs just 0.12 per cent a year.
Yet not all have cut their cost. Any two index funds that track the same market should be much of a muchness, so there is no point in paying for the more expensive one.
6) Think before you start trading in your portfolio
Buying and selling is integral to maintaining a healthy investment portfolio, but overtrading gets costly. Most investment platforms charge a fee for trading.
For example, Hargreaves Lansdown, the UK’s biggest investment platform, charges £11.95 every time you buy or sell shares, stock market-listed investment trusts, or exchange traded funds.
This applies on up to nine trades a month – after which fees drop. It’s expensive. If you do trade frequently, you may want to move to a platform with lower dealing fees and also be careful about how you trade.
Maike Currie, investment director of personal investing at wealth manager Fidelity International, says: ‘Make sure you find out what the cost is for placing deals over the phone – often this is much higher as platforms want to encourage customers towards online trading.’
7) Check the fees on your workplace pension
Employees have no say over their workplace pension provider – it is decided by the employer and its trustees.
However, you can control investment costs. Check how your money has been invested and make sure that the funds suit you and that you are not paying more than necessary.
Currie says: ‘While the so-called default investment option may be the most appropriate option for many workplace investors, these can have a higher fee than some of the index fund options that many workplace pension arrangements offer.’
She adds: ‘Bringing the costs down by switching into an index option could be sensible for those with a long working life ahead of them.’
8) Ensure old pensions are shipshape
Don’t assume that pensions you no longer pay into are quietly working away in the background to grow your retirement wealth; costs could be needlessly eroding them.
Track down old pensions and scrutinise their holdings. You should receive this information every year in a statement from your provider. If you don’t, check that the scheme has your correct address on file – people often move home and forget to tell old pension providers.
If you’re not happy with the fund options offered, you can move the whole pot using a pension consolidation service such as Netwealth or Pension Bee.
9) Invest with your family
Some investing services are cheaper if a number of family members sign up. For example, Interactive Investor’s friends and family plan allows a customer to give up to five people a free subscription to their service by paying a single £5-a-month fee.
Netwealth allows a customer to invite seven other family members or friends to join their Netwealth network and benefit from lower fees.
Some platforms also offer an incentive if you refer a friend to join up. 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
Contributions you make into your pension are currently tax free. However, this perk could be changed or withdrawn at any time.
Pensions tax relief cost the Exchequer £42.7billion last year, so cash-strapped Chancellors always have an eye on lowering it.
The generous 40 per cent relief for higher rate taxpayers in particular has been under scrutiny and could be reduced.
Similarly, Chancellor Rishi Sunak last month promised to reduce the basic rate of tax from 20 to 19 per cent in 2024.
For basic rate taxpayers, pension tax relief would fall by the same amount, so it may make sense to take advantage while – and if – you can.
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