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Why fees matter in your long term investment and pension savings


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In the world of investing it can be difficult to work out what fees you are actually being charged. Even if you are able to work out all your costs by either trawling through the company’s website or replying on your advisor to be completely transparent, it is near impossible to visualise how these impact the value of your investments over time.

 

Platform fees, management fees, fund costs, FX fees and spread costs all add up. With a traditional wealth manager or independent financial advisor these are likely to exceed 2% a year.

 

The chart below illustrates how small differences in fees can lead to massive divergence in the size value of an investment over time. Here we look at a typical 30-year-old’s pension.

 

investment fees.png

 

During the accumulation phase we have assumed a starting pension pot of £50,000, monthly deposits of £500 and an annual growth rate of 5%. At retirement at the age of 65, the person takes a lump sum equal to 25% of their final pension pot and subsequently takes £35,000 as income each year.

 

IG Smart Portfolios have a tiered fee structure; meaning as your portfolio grows, you pay less. The blended fee for a £50,000 is 0.92%, while on a £250,000 portfolio it falls to 0.68%.  Further discounts are given if you use regularly use our other products. More info here.

 

The chart above takes our blended fee into consideration (blue line). Comparing our total cost of investing to a provider that charges 2% (orange line) leads to the following outcomes.

 

  • Your final pension pot grows to £725,000 based on IG fees, compared to £515,000 with costs of 2%
  • The amount you can take tax-free at retirement would be £53,100 greater, provided you opt to take 25% of the balance
  • In retirement your pension would last 7 years longer; giving you an income of £35,000 until age 84, instead of age 77 if you had paid the higher fees

 

Let's get the discussion going :) Does anyone have any questions either myself or  can help with? Ask below and we'll get back to you as soon as possible to help you get the most out of your investments. 

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So this chart is more based on the portfolio thing you offer rather than a regular share dealing account in an ISA packet? But I assume the same kind of thing applies either way?

 

In my head I’m thinking it’s a bit like the reverse of ‘compound interest’, but fees rather than the interest gain?

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Exactly. We have both the regular Share ISA and also a 'Smart Portfolio'. 

 

To cater for investors who are looking to accumulate wealth over the long term, we offer a fully flexible Stocks & Shares ISA. However, with IG there are two ways you can invest your £20,000 allowance.

 

If you want to have the freedom to choose your own shares, exchange-traded funds (ETFs) or investment trusts; you can use our Share Dealing platform. You’ll be able to create a unique portfolio and each trade costs just £8, reduced to £5 if you placed just one spread bet or CFD trade in the previous calendar month.

 

Instead, if you are looking for a ready-made portfolio that’s actively managed by industry experts you can use your ISA allowance to invest in an IG Smart Portfolio. These are based on portfolios designed by BlackRock, the largest asset manager in the world. We estimate that the total cost for one of these portfolios is just 0.93% a year, which falls as the size of your portfolio increases and with further discounts available for clients who use our other products.

 

Many of our ISA clients choose to spread their ISA allowance between these two types of accounts, trading their best ideas in our Share Dealing platform whilst having the peace of mind that the core of wealth is being professionally managed at a low cost in an IG Smart Portfolio.

 

The main point of the chart above, which applies like you said to both Stocks and Shares fees, and our managed portfolio fees, is that if you bundle these all up together over the space of 30 years or so (or even less) then you're likely to see a noticeable and tangible effect on your total valuation. 

 

Put another way imagine in year 1 you do 10 trades in a share dealing account and with IG this costs you £50. With an alternative provider this could cost somewhere in the region of say, £120. You therefore not only save £70 on that deal alone at the time, but you also have that £70 invested for the long run. If you then take your 5% yearly gain (as an example), over the course of your investment history you're going to be significantly better off - that £70 would have a 4x odd increase on those compound percentage gains. 

 

It really is worth looking at :) 

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wrote:

Speaking of fees - any progress on DRIPs?

Hey  - thanks for your question. So I've had a word with our non leveraged trading project manager on this and he's confirmed  that this is now an improved project in the global workflow, however unfortunately there is no development team who has capacity to do the work right now. It should be done sometime this year but likely to be at the later part of the year. This is of course subject to change, but I thought I would update you. 

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Although I can imagine it’s out of your control , and I know there are probably other cash generative projects to appease the share holders, there is a certain amount of irony on the two parts of the business on this...

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