ISAs - Weighing up the charges

Some of the charges you will have to pay within an ISA are the same as those you would have to pay for the same investments if you were to hold them outside of the wrapper. Cash ISAs are basically bank or building society deposit accounts by another name and behave in the same way. The only charges you have to worry about are things like penalties for withdrawals and transfers and early closure fees.

On funds, there are usually initial charges, typically in the 3-5% range, annual management fees of around 1- 1.5% and perhaps switching charges if you want to move money from one fund to another.

Index tracker funds generally have lower charges, reflecting the fact no fund manager is having to make any active investment decisions. Exchange-traded funds (ETFs), which do a similar job but are traded on the market like shares, are mostly even cheaper to own.

Investment trust fees tend to be lower too, but because their price does not necessarily reflect the value of the underlying portfolio there is more of a risk to capital. The price of investment trusts depends on the market and they may trade at less than their net asset value per share (known as a ‘discount to NAV’) or more their net asset value per share (known as a ‘premium to NAV’).
When it comes to unit trusts and Oeics (open-ended investment companies), there are plenty of deals to be had from fund supermarkets and discount brokers who will reinvest all or part of their upfront and/or annual commission for you.


Fund supermarkets such as Fidelity’s Funds Network, Cofunds, FundsDirect and Hargreaves Lansdown’s Vantage bulk-buy funds so that they are able to offer substantial discounts on initial charges, though not necessarily on every fund that appears on their platforms.

Funds have a ragbag of other internal costs, such as administration, trustee and audit fees, which can act as a drag on investment performance. These are reflected in the total expense ratio (TER), which investors can use as a more accurate guide to costs than the basic annual management charge when comparing fees.

It really does pay to spend time searching out the best deals. Paying the full whack when you buy a fund – say, a 5% initial charge and 1.5% annual management fee, adding up to 6.5% – can take a large chunk out of the first year’s return, especially in the current economic climate. If you can get this figure down to, say, 2.5% in total, it could make the difference between a profit or a loss from your investment.

If you are investing directly in stocks and shares – including ETFs, investment trusts, gilts and corporate bonds – there will be a trading commission cost for each deal. Charges vary widely, but generally the cheapest way to trade is online execution-only (ie. where you make the investment decision without any advice from the broker), rather than via the telephone.

Some stocks, such as overseas or PLUS-listed shares, may only be traded over the phone. Stamp duty of 0.5% will apply to any purchases of UK-listed shares, with other such taxes applied by some overseas countries – Ireland, for example has a 1% stamp duty.

Check whether the ISA manager you are considering imposes other charges. These may include a set-up fee, annual account administration fee, management fees, charges for transfers in or contributions, cash withdrawal charges, account transfer or transfer out charges. There might also be a charge for reinvesting dividends or for dealing with corporate actions such as rights issues.

One of the things that sticks in the craw of many investors, particularly when they first get charged, is the ‘inactivity fee’ levied by some brokers if you don’t place a trade – buy or sell – within a certain period. This may be disguised as an administration fee that is not payable if you do trade, but it adds up to the same thing.

This is the price you have to pay for low dealing charges. Brokers will say that it costs them money to administer an inactive account and there has to be a charge to make up for the lack of commission. However, there is an upside as many brokers do now charge lower commissions to more- frequent traders.

On the plus side, you may receive some (though usually negligible) interest on cash held within a Stocks & Shares ISA and the ISA manager may pay loyalty bonuses to keep the business.

Comparing the charges from different managers for a full-blown Stocks and Shares ISA built around a portfolio of shares is not easy. One estimate of the admin fees on a £20,000 ISA invested directly in stocks and shares (rather than funds) as provided by six different leading firms showed a range of zero to £117.50 a year, including VAT.

Let’s have a look at how three different products – all Self -select ISAs offering a full range of investments – stack up when it comes to charges. The samples here are just to give you an idea of the fees you may be looking at: there is no set way of displaying them and every company does it differently, making a complete like-for-like comparison impractical. However, if you have a rough idea of how often you plan to trade, how much you plan to invest and the split between direct investment and shares, it should be possible to work out an approximate cost from information supplied by the various firms.

 

This ‘How to’ guide is produced by Shares Magazine and is only for general information and use, and is not intended to address particular requirements.

The value of investments and the income derived from them can go down as well as up. Past performance is not necessarily a guide to future performance.

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