Growing your wealth is a serious challenge in the face of rising inflation. Most investors will feel that they are just running for office. Because if inflation is 6.2 percent, investors will have to pay at least that much to save their assets.
This means that now, perhaps more than ever, it is important to examine what you are paying for the investment and to reduce costs wherever you can. After all, every percentage point you pay a fee is another percentage point above inflation which you only have to get back for a break.
In the long run, costs will consume your resources. Say you have invested £ 100,000, earning six percent a year for 25 years and you have no fees. After 25 years, you will have 430,000. Pretty good. But if you pay a two percent fee a year, you will have £ 260,000 – 40 percent less after 25 years.
Punch on your weight: Check what you are paying for the investment and cut costs wherever you can
Of course, cheap is not always good. Good quality advice and well-performing investments can pay off several times more for themselves. But it will pay off to make sure you are getting value for money instead of just handing out the inflated fee. Here’s a ten-point plan to make sure you keep your investment low and meaningful:
1) Choose the right platform for you – and your portfolio
When you start investing, the first decision is which platform to sign up for – and sadly many investors have stumbled upon the first hurdle. Platform fees vary widely so the same portfolio on two different platforms can change 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 investment strategy.
Some, such as Hargreaves Lansdown and AJ Bell, charge a one percent fee based on the size of your portfolio, while others, including the interactive investor, charge a flat fee. Percent fees tend to be good for small portfolios while flat fees tend to be good for large amounts of money.
Instead of a platform, you can choose a financial advisor to run your portfolio for you. You will probably pay more for it, so make sure you get a good price. Shop nearby and compare advisors and decide whether you would pay an advance fee for advice or a percentage fee for ongoing management.
Of course, price is not the only consideration when choosing a platform or advisor. You will also want to consider whether you need other assistance such as customer service, range of investment in the offer, and tax planning.
Our sister publication This is Money has an excellent resource that compares to the major investing platforms at thisismoney.co.uk/platform.
2) Think of Isas and pensions – and alleviate taxes
Once you have chosen a platform, you need to decide which type of investment product will maximize your assets. If you choose a mentor, they will be able to do it for you. Choose the wrong product and you can unnecessarily land yourself with a big tax bill. Invest in a stock and shares and all returns and withdrawals are tax free. Choose a self-invested personal pension (SIPP) and you will not have to pay any tax on the money you have in your account (you will get back any income tax you have already paid on your contribution), although you can pay income tax when you arrive. To withdraw
If you do not use any of these and instead go for a simple investment account, you will not benefit from any of these tax benefits and you may have to pay tax on dividend income and capital gains.
3) Avoid bad value investment funds
The next step is to build a portfolio. There is no way to guarantee that you are choosing the best fund to increase your wealth. However, there are tools to ensure you have the best chance of making money in the long run.
The first is to compare a fund with its peers. Even the best funds don’t always shine. But if you hold a fund that other, similar funds are performing less, then the alarm bell should ring.
Websites like Trustnet and Morningstar allow you to view the returns of any fund and compare them with their equivalent group, as defined by the fund category determined by the Trade Body Investment Association. The next tool in your decision is to evaluate the reports that all the fund groups must publish on their website to see if they value their investors. Funds judge their value based on factors including customer service, the size of the fee, and the return on investment. Even if the fund itself admits that it offers less than the excellent price, it may be time to transfer your money.
4) Stay away from active funds that do not distribute
A well-managed investment fund can be a great way to grow your assets because it gives you access to a portfolio picked by an expert fund manager.
However, actively managed funds tend to be several times more expensive than low cost index funds that track rather than try to lose market share.
So beware of so-called ‘toilet’ tracker funds. These claim to be actively managed and charge a fee, but only track the stock market and therefore do not offer anything better than cheap index funds. Investors get a bargain basement investment style for a premium price
You can find a close tracker by checking the top ten holdings of a fund published in the regular monthly fact sheet available online. If they look suspiciously similar to the top holding of the index, it could be a closet tracker.
Roger Clark, a financial planner at The Private Office, explains: ‘If you have a UK investment fund, look at how its holdings compare to the FTSE All-Share Index, which tracks the UK stock market. If the underlying make-up looks very similar, you can stay in the UK Closet Tracker Fund. ‘
5) Do not pay extra for index funds
Expenditure on index funds has declined in recent years. For example, the Fidelity Index World Fund, which tracks an index of the world’s largest companies, spends only 0.12 percent a year.
Yet not everyone cut their costs. Any two index funds that track the same market should be much higher, so there is no point in paying for the more expensive one.
6) Think before you start trading in your portfolio
Buying and selling are integral to maintaining a healthy investment portfolio, but overtraining becomes costly. Most investment platforms charge a fee for trading.
For example, Hargreaves Lansdowne, the UK’s largest investment platform, charges £ 11.95 each time you buy or sell shares, stock market-listed investment trusts or exchange traded funds.
This applies to up to nine trades per month – after which the fee is reduced. It’s expensive. If you trade often, you may want to go to a platform with lower dealing fees and be careful about how you trade.
Mike Currie, investment director at Fidelity International, asset manager, says: “Make sure you know how much it costs to deal on the phone – often too much because the platforms want to encourage customers to trade online.”
7) Check your workplace pension fees
Employees have no say in the workplace pension provider – it is up to the employer and its trustees to decide.
However, you can control investment costs. Examine how your money has been invested and make sure the funds are right for you and that you are not overpaying.
Curry said: “While the so-called default investment option may be the most suitable option for investors in many workplaces, their fees may be higher than some of the index funding options that offer pension arrangements in many workplaces.”
He added: “Switching to an indicator option and reducing costs may be wise for those who have a long career ahead of them.”
8) Confirm the size of the old pension ship
Don’t assume that the pensions you no longer pay are working silently against the backdrop of increasing your retirement wealth; Costs can cause them to decay unnecessarily.
Track down old pensions and verify their holding. You should receive this information in a statement from your provider each year. If you do not, check that the scheme file contains your correct address – people often go home and forget to tell the old pensioners.
If you are not happy with the funding options offered, you can remove the entire vessel using a pension consolidation service like NetWealth or Pension Bee.
9) Invest with your family
Some investment services are cheaper if a few family members sign up. For example, friends and family plans of an interactive investor can offer a customer a free subscription to their services by paying a monthly fee of up to five.
NetWealth allows a customer to invite up to seven family members or friends to join their NetWealth network and benefit from a lower fee.
Some platforms also offer an incentive if you refer a friend to join. If someone signs up for your recommendation, AJ Bell will send you a £ 100 gift voucher.
10) Bank tax relief on pension whenever you can
Contributions you make to your pension are currently tax-free. However, this benefit may be changed or revoked at any time.
Pension tax relief cost the exchequer £ 42.7 billion last year, so cash-strapped chancellors are always looking to reduce it.
Generous 40 percent of relief, especially for high-rate taxpayers, has been verified and can be reduced.
Similarly, Chancellor Rishi Sunak last month promised to reduce the basic tax rate from 20 to 19 percent in 2024.
For basic rate taxpayers, pension tax relief will be reduced by the same amount, so taking advantage can mean – and if – you can.