Investment fees

Many investors overlook investment fees. These are charges paid each year to the investment fund manager, and are typically a percentage of the annual growth. The money is taken directly from your funds without a bill being sent to you, so it may be difficult to keep track of how much you are actually being charged.

Though the amount may seem small, investment fees can vary considerably between providers. Therefore it’s important to make sure you are not paying more than you need to.

Are you paying too much in investment fees?

Whatever kind of investment you hold – investment funds, with-profits funds, investment bonds, endowments or a personal pension – you will be charged an annual management fee. In many cases, this fee does not represent the best value out there. It is common for investors to find they are paying twice or even three times as much as they need to be. Over the years, this can amount to thousands of pounds being lost unnecessarily.

Working out the cost of high fees

Here’s an example. Sally is 40, and holds £50,000 in an investment fund with a 7 per cent annual growth rate. If she leaves it untouched, then by the time she is 65 the fund will be worth £241,000 – assuming annual charges of 0.5 per cent. However, if annual charges are 1.5 per cent, she will end up with only 190,000. A 1 per cent difference in management fees would have cost her £50,000.

This problem may affect a lot of investors and/or pension savers who have held products for some time, as many products sold a decade or more ago had much higher fees. Similarly, fees may have risen over the years – and it’s easy to ignore a letter than says fees are rising by just 1 per cent. However, as the example shows, even a 1 per cent change can translate into a life-changing amount of money.

How an adviser can help

This is why it’s important to keep tabs on your investments regularly. Talk to an independent financial adviser (IFA) and ask them to check up on the management fees you are paying – both on your investments and your pensions. Then ask if they can find you investments with similar performance that have lower fees.

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Questions to ask a financial adviser:

  • How much am I paying in fund management fees?
  • Should I consolidate my investments or pensions to pay just one set of fees?
  • Are there similar investments available with lower fees?
  • Will the performance of lower-cost investment funds be as good?
  • How much could I save annually by switching to a lower-cost fund?