Protect your assets from caning with our 10-point plan
Growing your wealth as inflation rises is a serious challenge. Most investors will feel that they are only walking to stand still. Because with inflation of 6.2 percent, investors have to repay at least this amount in order to preserve their assets.
This means that today, perhaps more than ever, it is important to review your investment costs and cut costs where you can. After all, every percentage point you pay in fees is another percentage point above inflation that you need to recoup to break even.
In the long run, the costs eat up your wealth. Say you invested £100,000, earned 6% a year for 25 years and had no fees. After 25 years you would have £430,000. Pretty good. But if you pay two per cent a year in fees, after 25 years you would have £260,000 – 40 per cent less.
Hit beyond your weight: It’s important to review what you’re paying for the investment and cut costs where you can
Of course, cheaper is not always better. Good advice and a well-performing investment can pay off several times over. But it’s worth making sure you’re getting value for your money rather than just paying inflated fees. Here’s our ten-point plan to ensure you keep your investment costs low and low:
1) Choose the right platform for you – and your portfolio
When you start investing, the first decision is which platform to sign up with – and unfortunately, many investors stumble at the first hurdle. Platform fees vary widely, so the value of the same portfolio on two different platforms can fluctuate by thousands of pounds in just a few years. Which platform is right for you depends on the size of your portfolio and your investment strategy.
Some, like 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 are usually better for smaller portfolios, while flat fees are better for larger amounts of money.
Instead of a platform, you may prefer a financial advisor to manage your portfolio for you. You’ll likely pay more for it, so make sure you’re getting value for your money. Shop around and compare advisors and decide whether you’d 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 choosing a platform or advisor. Also, think about customer service, investment offerings, and if you need any other support, e.g. B. in tax planning.
Our sister publication This is Money provides an excellent resource for comparing the major investment platforms at thisismoney.co.uk/platform.
2) Think about ISAs and pensions – and mitigate taxes
Once you have decided on a platform, you need to decide which type of investment product will best grow your wealth. If you choose a consultant, they should be able to do this for you. Pick the wrong product and you could end up with a hefty tax bill unnecessarily. Invest in Isa stocks and shares and all returns and withdrawals are tax-free. Opt for a self-invested personal pension (SIPP) and don’t pay tax on monies you put into your account (you get a refund of income tax you may have already paid on your contributions), although you may pay income tax if You come to withdraw it.
If you choose not to use either and opt for a general investment account instead, you will not benefit from any of these tax benefits and may also be subject to tax on dividend income and capital gains.
3) Avoid low value mutual funds
The next step is building a portfolio. There is no way to guarantee that you will choose the best funds to grow your wealth. However, there are tools you can use to ensure you have the best chance of making money over the long term.
The first compares a fund to its competitors. Even the best funds won’t always turn off the lights. But if you hold a fund that underperforms other, similar funds, alarm bells should be ringing.
Sites like Trustnet and Morningstar allow you to view the returns of all funds and compare them to their peer group as defined by the fund categories set by the Investment Association trade body. The next tool at your disposal is to evaluate the reports that all fund groups are required to publish on their website to show if they are adding value to their investors. Funds judge their value based on factors such as customer service, level of fees and investment returns. If even the fund itself admits it offers less than great value, it might be time to move your money.
4) Stay away from active funds that don’t deliver
A good actively managed mutual fund can be a great way to grow your wealth as it gives you access to a portfolio handpicked by an experienced fund manager.
However, actively managed funds tend to be many times more expensive than low-cost index funds, which track the market rather than trying to beat it.
So beware of so-called “closet” tracker funds. These claim to be actively managed and charge you the fees, but simply mirror the stock market and therefore offer nothing better than a cheap index fund. Investors get a cheap investment style at a premium price.
You can spot a closet tracker by reviewing the top ten positions in a fund that are published in regular monthly factsheets that are available online. If they look suspiciously similar to the top positions of the index they are trying to outperform, they could be a close tracker.
Roger Clarke, Financial Planner at The Private Office explains: “If you have a UK mutual fund, look at how its holdings compare to those of the FTSE All-Share Index, which tracks the UK stock market. If the underlying composition looks very similar, you may be in a UK Closet Tracker fund.’
5) Don’t pay too much for index funds
Index fund costs have fallen sharply in recent years. For example, the Fidelity Index World fund, which tracks an index of the world’s largest companies, costs just 0.12 percent per year.
But not all have reduced their costs. Any two index funds tracking the same market should be a great deal, so paying for the more expensive one doesn’t make sense.
6) Think before you start trading your portfolio
Buying and selling is an essential part of maintaining a healthy investment portfolio, but excessive trading becomes costly. Most investment platforms charge a fee for trading.
For example, Hargreaves Lansdown, the UK’s largest investment platform, charges £11.95 every time you buy or sell shares, listed mutual funds or exchange-traded funds.
This applies to up to nine trades a month – after that the fees drop. It is expensive. If you trade frequently you might want to switch to a platform with lower trading fees and also be careful how you trade.
Maike Currie, investment director of personal investing at wealth manager Fidelity International, says: “Be sure to research the cost of placing deals over the phone – these are often much higher as platforms seek to encourage customers to trade online.”
7) Check your company pension fees
Employees have no say in their company pension scheme – this is decided by the employer and his trustees.
However, you can control the investment costs. Check how your money has been invested and make sure the funds suit you and you are not paying more than you need to.
Currie says, ‘While the so-called standard investment option may be the most appropriate option for many workplace investors, they may have a higher fee than some of the index fund options offered by many occupational pension plans.’
She adds: ‘Reducing costs by switching to an index option could make sense for those who have long working lives ahead of them.’
8) Make sure the old pensions are in order
Don’t assume that pensions you’re no longer paying into are working quietly in the background to add to your retirement wealth; They could consume costs unnecessarily.
Track down old pensions and check their holdings. You should receive this information in a statement from your provider every year. If you don’t do this, make sure the system has your correct address on file – people often move and forget to let the old pensioners know.
If you’re not happy with the fund options on offer, you can move the entire pot through a pension consolidation service like Netwealth or Pension Bee.
9) Invest with your family
Some investment services are cheaper when multiple family members sign up. For example, Interactive Investor’s Friends and Family plan allows a client to give up to five people a free subscription to their service by paying a one-time fee of £5 per month.
Netwealth allows a customer to invite seven additional 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. AJ Bell will send you both a £100 gift voucher when someone signs up on your recommendation.
10) Bank tax breaks for pensions while you can
Contributions you pay into your pension are currently tax-free. However, this benefit can be changed or withdrawn at any time.
Pension tax breaks cost the Treasury £42.7 billion last year, so cash-strapped Chancellors are always eyeing cuts.
In particular, the generous relief of 40 percent for higher taxpayers was put to the test and could be reduced.
Similarly, Chancellor Rishi Sunak pledged last month to reduce the property tax rate from 20 percent to 19 percent in 2024.
For property taxpayers, the pension tax relief would go down by the same amount, so it may make sense to take advantage of it while – and if – you can.
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