Reduction in yield (RIY) is an industry standard figure given to show the effect the total charges applied to a policy will have on its potential rate of growth. It is a useful way of comparing the cost of one policy with another.
This article explains how we calculate RIY for investments on our platform.
Although the example below relates to a Stocks & Shares ISA, it is broadly applicable to the Collective Retirement Account (CRA), Collective Investment Bond (CIB) and Collective Investment Account (CIA). The FCA stipulates the basis for the calculation of RIY in the Conduct of Business Source Book (COBS) 13 Annex 4, section 3 for pension products and Conduct of Business Source Book (COBS) 13 Annex 3, section 3 for all other products.
The method prescribed by the FCA basically consists of 4 steps:
- Project forward at the growth rate allowing for all charges. This gives projected value PV1.
- Project forward at the same growth rate but this time not including any charges. This gives projected value PV2, which will be higher than PV1.
- Reduce the growth rate in calculation 2 until PV2 = PV1.
- Reduction in yield = growth rate in (1) – resultant growth rate in (3).
Whilst we calculate the RIY using the above method, this does not translate well in terms of explaining how a particular value comes about. For this a breakdown of the charges is more helpful. The following is an example that shows a breakdown of the charges.
The initial investment has a 3.0% fee applied to it, giving an initial fund value of £14,550.
Spreading this over the projection term of 10 years gives an annualised cost of 3.0%/10 = 0.30% pa
The ongoing charges = fund charges + product charges + adviser charges
= (fund TER – reimbursed rebate) + service/product charge + adviser servicing fee
From the funds list cut-out above, the fund TER = 1.62% and the reimbursed rebate = 0.98%.
Service charge for the ISA is 0.5% per annum for the first £25,000 of investment which will apply for this example.
This gives ongoing charges = 1.62% - 0.98% + 0.5% + 0.5% = 1.64%
Summing the ongoing charges with the annualised initial charges gives 0.300% + 1.64% = 1.94%
The FCA method has the effect of inflating all charges by the projection rate, which here is 5% pa.
The RIY is then calculated as:
Sum of charges x projection rate inflation = 1.94% x 1.05 = 2.037%
Rounded to 1 decimal place gives:
RIY = 2.0%