Case Study - fixed fees on pensions

I saw a case this morning where someone was looking for a better deal with their pension planning.  It made me realise the power of fixed fees for pensions once again, so I thought it would be worth writing an article about it.

Background

In this case the background was relatively sparse.  The client had a pension portfolio of around £450,000 and was dissatisfied with their existing IFA, who was charging a fee of 0.75% per annum.  As far as percentage fees go, this is pretty modest given the current trend towards 1%, but it still translates to £3,375 a year, potentially increasing if investment returns are decent.

On a fixed fee basis, Aegis Financial Consulting would charge a flat £2,500 for managing a pension portfolio.  This represents an initial saving of £875 a year.

The Future of Fixed Fees

As mentioned, this is only the beginning of the saving.  If the balance stayed the same for the entire time being assessed, the saving would be the same every year, so looking over 10 years the difference would be £8,750 by taking the fixed fee route. 

But that’s not the full story.  The hope is that over time portfolios grow in value.  Assuming growth of 5% a year, 10 years growth would see that portfolio of £450,000 turn into around £735,000, with a commensurate increase in the fee from £3,375 to £5,500.  This widens the annual saving due to fees to around £3,000, which is a fair chunk of change.

Of course, this isn’t the full story either because we also have to factor in the effect of the fees on the growth of the portfolio.  For this we need to go further, creating a miniature cash forecast.  I’ve taken the liberty of creating a very simple projection over 10 years in Libre Office, then I transferred the data to Flourish for presentation.  The end result is as follows: