Question
Can you please elaborate with regards to the difference in annual fund charges when applying through Cavendish Online versus applying directly to pension companies? How much of a saving could be made overall?Answer
Because stakeholder pensions tend to pay lower sales commissions than unit trusts there's usually less of a saving to be made via discount brokers. Nevertheless, it can still be worthwhile.
As the mechanics of stakeholder pension discounts are often a bit different to unit trusts, let's compare the two:
Unit trusts
Whether you invest directly with a fund provider, via a financial adviser or a discount broker like Cavendish Online, a unit trust's annual charge will normally be the same, e.g. 1.5%.
However, fund providers typically pay an annual sales commission of 0.5% from the 1.5%, so if you can get some of this back it will have a similar affect to reducing the annual charge.
Buy direct from the fund provider or via a financial adviser and they'll usually keep the 0.5%, although the adviser should provide advice in return, which might be of benefit.
Buying through certain discount brokers allows you to reclaim some, or all, of the 0.5%. You won't get any advice, but if you're comfortable making your own investment decisions it could save you a lot of money over time. (see our ISA Discounts Action Plan for a list of discount brokers).
Unfortunately it's not generally possible for discount brokers to actually reduce fund annual charges, so they'll usually rebate the annual commission to you in cash - either directly to your bank account or into a fund supermarket cash account (if relevant). This leaves you with the hassle of re-investing the money (assuming you want to), but if you do the net result will be similar to a reduced annual fund charge
How much difference might this make?
Let's assume you invest £10,000 for 10 years in a fund charging 3% initially and 1.5% a year, paying 3% initial commission and 0.5% annual commission - average annual return of 6% before charges.
Buy direct from the provider and the projected final value is £15,064.
Buy via a discount broker who rebates all commissions in return for a one-off £25 fee (e.g. as charged by Cavendish Online) and the projected final value is £16,248.
So the difference in this example is a £1,184 saving over 10 years from using a discount broker.
Stakeholder pensions
Stakeholder pensions are not allowed to levy initial charges and annual charges are capped at 1.5% for the first 10 years then 1% thereafter. This reduces the scope to pay sales commissions, which tend to be no more than around 0.3% a year. As a result few financial advisers are willing to give advice on stakeholder pensions as it's not profitable for them to do so. And the savings via discount brokers are generally lower than for unit trusts.
However, unlike unit trusts, stakeholder pension providers convert the waived commission into lower annual pension fund charges, which makes life simpler.
For example, Scottish Widows charges 1% a year on its stakeholder pension if you apply directly, falling to 0.8% a year if you apply online.
Purchase the same pension via Cavendish Online and the annual charge falls to 0.64% for regular contributions and 0.55% for single contributions (in return for a one-off £35 fee).
But there are restrictions: to benefit from these discounts the minimum investment must be at least £120 (net) per month or a £4,000 (net) lump sum - and the discount will reduce if less than 15 years until retirement. Go direct to Scottish Widows and you can invest from £20.
[I'd guess Scottish Widows applies these restrictions to reduce the risk of them being out of pocket after paying commission]
To give an idea of how much these discounts might save let's assume a £150 per month gross contribution over 30 years with an average 6% annual return before charges.
Buying directly from Scottish Widows online (0.8% annual charge) gives a final projected value of £127,239.
Buying via Cavendish Online (0.64% annual charge and £35 one-off fee) gives a final projected value of £130,717.
This gives an estimated saving of £3,478 - well worthwhile provided you meet the criteria for receiving a discount.
Can you please elaborate with regards to the difference in annual fund charges when applying through Cavendish Online versus applying directly to pension companies? How much of a saving could be made overall?Answer
Because stakeholder pensions tend to pay lower sales commissions than unit trusts there's usually less of a saving to be made via discount brokers. Nevertheless, it can still be worthwhile.
As the mechanics of stakeholder pension discounts are often a bit different to unit trusts, let's compare the two:
Unit trusts
Whether you invest directly with a fund provider, via a financial adviser or a discount broker like Cavendish Online, a unit trust's annual charge will normally be the same, e.g. 1.5%.
However, fund providers typically pay an annual sales commission of 0.5% from the 1.5%, so if you can get some of this back it will have a similar affect to reducing the annual charge.
Buy direct from the fund provider or via a financial adviser and they'll usually keep the 0.5%, although the adviser should provide advice in return, which might be of benefit.
Buying through certain discount brokers allows you to reclaim some, or all, of the 0.5%. You won't get any advice, but if you're comfortable making your own investment decisions it could save you a lot of money over time. (see our ISA Discounts Action Plan for a list of discount brokers).
Unfortunately it's not generally possible for discount brokers to actually reduce fund annual charges, so they'll usually rebate the annual commission to you in cash - either directly to your bank account or into a fund supermarket cash account (if relevant). This leaves you with the hassle of re-investing the money (assuming you want to), but if you do the net result will be similar to a reduced annual fund charge
How much difference might this make?
Let's assume you invest £10,000 for 10 years in a fund charging 3% initially and 1.5% a year, paying 3% initial commission and 0.5% annual commission - average annual return of 6% before charges.
Buy direct from the provider and the projected final value is £15,064.
Buy via a discount broker who rebates all commissions in return for a one-off £25 fee (e.g. as charged by Cavendish Online) and the projected final value is £16,248.
So the difference in this example is a £1,184 saving over 10 years from using a discount broker.
Stakeholder pensions
Stakeholder pensions are not allowed to levy initial charges and annual charges are capped at 1.5% for the first 10 years then 1% thereafter. This reduces the scope to pay sales commissions, which tend to be no more than around 0.3% a year. As a result few financial advisers are willing to give advice on stakeholder pensions as it's not profitable for them to do so. And the savings via discount brokers are generally lower than for unit trusts.
However, unlike unit trusts, stakeholder pension providers convert the waived commission into lower annual pension fund charges, which makes life simpler.
For example, Scottish Widows charges 1% a year on its stakeholder pension if you apply directly, falling to 0.8% a year if you apply online.
Purchase the same pension via Cavendish Online and the annual charge falls to 0.64% for regular contributions and 0.55% for single contributions (in return for a one-off £35 fee).
But there are restrictions: to benefit from these discounts the minimum investment must be at least £120 (net) per month or a £4,000 (net) lump sum - and the discount will reduce if less than 15 years until retirement. Go direct to Scottish Widows and you can invest from £20.
[I'd guess Scottish Widows applies these restrictions to reduce the risk of them being out of pocket after paying commission]
To give an idea of how much these discounts might save let's assume a £150 per month gross contribution over 30 years with an average 6% annual return before charges.
Buying directly from Scottish Widows online (0.8% annual charge) gives a final projected value of £127,239.
Buying via Cavendish Online (0.64% annual charge and £35 one-off fee) gives a final projected value of £130,717.
This gives an estimated saving of £3,478 - well worthwhile provided you meet the criteria for receiving a discount.
Read this Q and A at http://www.candidmoney.com/questions/question376.aspx
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