Pension planning - could you retire earlier?

By: Hannah Goldsmith

Date: 5 February 2018

Pension planning - could you retire earlier?How recently did you review the fees you're being charged on your retirement and investment plans? Many business owners could retire earlier than they think, if they take the time to carry out this review.

The financial services industry charges fees on all investments. The problem is that most people have no idea what these fees are, and little understanding of the impact they have on the value of their retirement fund. The challenge is in understanding how the fees work and how they're structured.

Power in your hands

As with other major purchases, you need to shop around. This is important because, whatever your age or how much money you have, high industry fees can delay the date when you can start your retirement.

The changes implemented in the Retail Distribution Review five years ago, and the update to the Markets in Financial Instruments Directive which came into force on 3 January 2018, mean that investors have more information available to them than ever before.

In turn, this means that investors now have the power to take back control of their money from the financial services industry, and do what’s right for them in their particular circumstances.

Two examples

Here are a couple of examples to illustrate what we mean.

Ali is aged 30 and has a smaller pension fund valued at £40,000. She wants to retire on her 65th birthday. The average annual return is 7% per annum over the investment period. The total financial services fees are 2.13% per annum, and no further contributions will be made.

The fund value is projected to be £203,968. As £40,000 was Ali’s money already, she has made a profit of £163,968. Her financial adviser would report how well she has done, and Ali may be content with her fund's performance. However - it has cost her £74,588 in financial service industry fees to make that £163,968.

Jo, like Ali, has exactly the same pension fund and average 7% return, but shops around and reduces her adviser fees to 1.1%. Because the fees do not cause such a drag on the returns, the fund value compounds, and at her retirement age has grown in value to £291,105. As Jo already had £40,000, a profit of £251,105 has been generated, but with a reduced industry cost of only £48,623.

Ali effectively gave away control of her money to the financial services industry, and achieved a fund value of £203,968 to live the rest of her life on, paying £74,588 in fees over the term. In contrast, Jo took back control of her money and achieved a fund value of £291,105 for exactly the same financial risk and with the same consumer protection.

Big impact

These examples clearly show that by shopping around, asking questions and understanding the impact of financial services fees, you can keep more of your investment for yourself - and achieve the retirement lifestyle you want.

Many business owners love running their businesses so much, they don’t spend much time thinking about retirement. But just as you are prudent in the way you look after your business, you should take the time to look after your post-business future as well.

Sponsored post. Copyright © 2018 Hannah Goldsmith, founder of Goldsmiths Financial Solutions.