I wrote an article back in April 2014 on pension charges, explaining the relation between allocation rates and the management charge on your contract. That wasn’t the whole of it, there are also trading costs that usually aren’t disclosed that have to be added on. That is why I am going to explain the Total Expense Ratio (TER).
It is the total cost of running and managing your fund. It consists of the annual management fee as well as additional expenses such as trading costs, legal fees, auditor fees and other costs that have to be met in running the fund you are invested in.
Total Expense Ratio = Total Cost of Funds/ Total Fund Assets
It varies on the fund and the provider used. Equity funds cost more than bonds and cash. How often your fund manager trades will have a big effect on the cost. Don’t think that investing in an ETF will eliminate trading costs. The fund manager still has to replicate the index you are tracking on a regular basis, so there will still be trading costs, albeit, less frequently.
I have an example of the TER from one life company below to give you an idea of the total cost that you are paying on your pension or investment.
It is deducted in two ways:
What is vital when you are investing in a fund is that you look at the charges applied to it. Are higher fees justified in higher returns? In a lot of cases, they are not, it’s just another layer of charges that is taken out of your fund.
If you have any questions, you can contact me directly at firstname.lastname@example.org