The investment costs map: Above-the-line costs

In my blog "The investment costs map: where costs can occur in the investment process" I described where and when pension investment costs can occur. In this blog, the second in the mini series, I will set out what costs can occur “above the line”.

Firstly, a couple of things to remember from the first blog. The “line” is where the unit price is calculated. Costs that are above the line are explicit (i.e. you can see them being deducted AFTER you have multiplied your number of units by their price) although they are not always contractually specific. Also, costs have both quantum and duration – incurring different amounts at different times.

The most common above-the-line charge is the annual management charge or AMC. This is applied from the moment the asset manager receives the money, until the day it leaves them. The AMC, however, is not the only above-the-line cost.

Others include:

  • Allocation charges – these are rare these days, but you can still find them. The charge is usually a percentage of the assets (say 1%) paid to the manager, which is deducted before they are invested (i.e. before units are bought)
  • Contribution charges – these exist in some defined contribution (DC) schemes and are allowed for in the charge cap regulations. The charge, similar to an allocation charge, is a sum of money (say £1 for each monthly contribution) deducted before the contributions are invested
  • Flat fee charges – these also exist in some DC schemes and are allowed by the charge cap regulations. The charge is a sum of money (say £10 a year) deducted by selling units from time to time
  • Exit charges – these are the opposite of allocation charges in that they are a percentage of assets paid to the manager as units are sold and the proceeds taken elsewhere. Exit charges are restricted in DC schemes
  • Other contractual charges – your investment contract may permit other above-the-line charges – for example, for portfolio valuations
  • Other items from the “TER”: the TER is the AMC plus some other bits.

Not all of these charges always apply (pure investment contracts rarely have exit charges, for example). All of them, however, require monitoring. The toughest, and most important, to monitor are the other contractual charges. Make sure you are charged only what the contract permits, that you are not charged extra for inclusive services, and that the amount you pay is correct.  

Here’s what the map looks like with these costs built into it.

Costs Map

In the remainder of this mini-series of blogs I’ll populate the other areas of the map. I’ll cover:

  • Below-the-line costs
  • DC specific cost issues
  • The weaknesses in the transaction costs proposals.

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