It’s fine to pay fees to professionals to grow your SIPP portfolio, but be aware a modest 1 per cent annual charge could end up costing you hundreds of thousands of pounds
How A Small Annual Fee Could Cost Your SIPP Portfolio A Small Fortune
A Simple Way To Your Grow Your SIPP Portfolio
I was recently emailed by Mark Winter, a reader of SIPPclub’s blog, who in response to the article entitled Citizens Advice Unearths Shocking Pension Practice said:
Yes, the fees stack up to outrageous amounts once compounded. I just reduced a client's portfolio fees from £188k to £10k without changing the portfolio.
Naturally, I was intrigued, so after several email exchanges with Mark, I decided to investigate further.
SIPPclub has been banging on for years that fees and charges can have a significant impact in reducing the value of your SIPP portfolio. We believe it’s so important for you to get to grips with what your SIPP is costing you in total, the first of our favoured Calculators enables you to work out exactly how fees and charges could be suppressing your net return.
Not surprisingly, the Financial Conduct Authority also understands the importance of this. It requires product providers to show how the total charges applied to a policy will affect its potential growth rate. It’s called reduction in yield and it’s a useful way of comparing the cost of one policy with another.
SIPP Portfolio Charges Analysis
I ran Mark’s figures on our favoured calculator. £1,000,000 invested over 10 years earning 7 per cent per year with a 1 per cent annual fee (which could be fund charges, adviser costs, management fees and more) compared with a low cost index tracker with an annual charge of 0.05 per cent. I arrived at the same conclusion as Mark, as you can see from the illustration below.
Slashing the cost of running your SIPP portfolio from £188,095 to £9,814 saves an incredible £178,281 and effectively boosts your SIPP portfolio value by an additional 17.8 per cent of your original investment.
There’s no doubt an extra £178,281 would be worth having!
Whilst I had the calculator open, I ran some different figures. I picked a more modest investment growth rate of 5 per cent per year but over a longer period of 20 years, which is more in line with the period SIPP portfolios are invested. The figures are even more staggering, entirely due to the ravaging effects of compound interest.
You’ll see from the illustration below that slashing the cost of running your SIPP portfolio from £483,147 to £26,407 saves a mind-blowing £456,740, effectively boosting your original SIPP portfolio value by an extra 45.7 per cent.
That's more than a small fortune. Several Lamborghinis perhaps!
Interestingly, this same analogy is made in the Investing Demystified series of videos (Video One) but the example used shows how it’s possible to buy a fleet of Porsche cars with the charges saved.
SIPP Portfolio: Active Or Passive?
Whilst cutting your charges to the minimum is a sure-fire way of keeping more money in your SIPP Portfolio, it’s perfectly fine to pay high charges to fund providers, wealth managers and advisory firms, providing they deliver a decent return to cover the cost of the services.
If you’re unsure how your SIPP portfolio is doing, whether it’s actively managed or passively left to do its own thing, it’s well worth carrying out a thorough Pension Review.
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
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