Don’t overpay for your Isa
YOU NEED TO keep a close eye on the fees and charges you pay for setting up and running your funds, as these can quietly eat away at your returns. Many people these days invest in stocks and shares Isas via online fund platforms run by the likes of Alliance Trust, Bestinvest, Fidelity FundsNetwork and Hargreaves Lansdown.
These typically save you money by waiving the initial investment fund charge of around 5 per cent that you pay if buying direct from the asset manager, and also offer the convenience of managing all your funds from a single site.
However, private investors pay almost £500 million a year in hidden platform fees, depleting their retirement pots.
The average investor will lose £141 a year by failing to using the cheapest service, and in some cases a lot more, according to comparison site BrokerCompare. info, which lets you compare different platform charges.
Director Stuart Millson says even seemingly low fees can roll up over the years.
“Many people have no idea how much they pay in fees every year, and how much investment growth they lose as a result.” It is worth paying a quick visit to BrokerCompare to see whether you have signed up to the best value platform.
You can personalise your search according to how much you hold in funds or shares, how often you trade, and how long you plan to hold the account.
Next, compare the annual management fees you are paying on the underlying investment funds in your stocks and shares Isas. Look out for something called the total expense ratio (TER), which adds up the various fees so you can compare charges on different funds.
You should be able to find this on your platform, or by searching for funds on sites such as TrustNet. com or MorningStar.co.uk.
If you invest £10,000 in a fund with a TER of 1.5 per cent and it grows at 5 per cent a year you should have £19,898 after 20 years. However, in a fund with a lower TER 0.5 per cent you should end up with £24,117, assuming the same growth, giving you an extra £4,219.
Thanks to compound interest, the benefits of finding a cheaper fund accelerate over time. After 30 years you would have £28,068 on the more expensive fund but £37,453 on the cheaper alternative, a difference of £9,385. Clearly, charges matter. Figures from CityWire.co.uk show that some top-rated managers with strong past performance can also offer some reasonably priced funds.
Royal London Short Duration Credit, for example, which invests in UK government and corporate bonds, has a TER of just 0.33 per cent.
Terry Smith’s hugely popular Fundsmith Equity has a TER of 0.97 per cent, while Neptune India charges 1.01 per cent and TB Amati UK Smaller Companies charges 1.02 per cent.
Exchange traded funds (ETFs), which passively follow a benchmark index, are your cheapest option.
For example, iShares Core FTSE 100 Index has a TER of just 0.07 per cent, which would turn £10,000 into £42,363 after 30 years, assuming 5 per cent growth before charges, an incredible £14,295 more than a fund with a TER of 1.5 per cent. Vanguard S&P 500, which tracks top US stocks, charges 0.15 per cent. Justin Modray, director of Candid Financial Advice, says too many investors fail to look at platform and underlying fund charges, and their independent financial adviser’s fees if they use one.
“You need to check the total annual cost of advice, platform and fund charges combined. If they exceed 2 per cent alarm bells should start ringing, and you should aim to pay a lot less on larger portfolios.”
Simon Massey, wealth management director at MetLife UK, says savers should also check the interest on their existing Isas and look to transfer to a better deal. “Thanks to low interest rates, the need for Isa transfers has never been stronger.”