23 October 2010

Investment charges in the News

I have come across several news items this month which talk about investment charges. There was a rather ill-informed Panorama programme on pensions and on how much money people were supposedly losing. and there was a MoneyMail supplement "revealing" the extent of the problem.

The fact is that it is important to look at the charges on an investment or pension. Over the long term they can have a significant impact on the growth (or otherwise) of your investment. And it is the annual charges which are the most significant, even though they are likely to be smaller than any initial charge. If you invest £10,000, the difference between growth at 5% and 4% (with an extra charge for example) is approaching £1,500 over 10 years.

Nevertheless, investment companies do have a right to make a profit as well as having costs.

Investors can fall into one of two camps - either they think any charges are a bad thing, and stick to a poorly performing bank account (remind yourself who gets the profit from that!), or they ignore the charges. Neither is the best approach.

A realistic look at the numbers for two different options - invest or don't - will normally indicate what is the best option for you. The key thing is that the charges have to be clear, and while there is room for improvement that has improved a lot in recent years.

15 October 2010

Pensions Change (again)

For something that, by its nature, is long term, pensions have an amazingly large number of legislative changes. The changes announced this week are pretty significant for many people coming up to retirement, but fortunately are pretty sensible, given the financial situation of the country. (The change may just affect some people who are already retired if they have large pension funds not "crystallised", but that is less common.)

The headline was about the Annual Allowance which has reduced to £50,000 per year (from £255,000). In other words that's the limit to the "value which can be added" to all your pensions in a year.

You may think that that doesn't apply to many people, but where someone is a high earner and has a final salary ("defined benefit") pension, there may be a danger of hitting the limit. Also, where someone is in the habit of putting lump sums into their pension when their business has cash available, perhaps, they too could be limited.

There is also a reduction in the Lifetime Allowance - that's the maximum value of all your pension benefits you are allowed to have at retirement before there is an additional tax charge.

As ever, there are details to be considered (like the fact that a year is not necessarily 12 months long!, and that any unused Annual Allowance can now be carried over), but overall it could end up costing some people a five-figure sum in the near future!

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