Individual Savings Accounts (ISAs) are a great way to shelter your wealth from the taxman, with statistics from HMRC showing that over 12.4 million adults in the UK paid money into an ISA from 2022 to 2023.
Although investing can give you the best chance of growing your money above inflation in the long run, a higher cost investment strategy can eat into the personal return you receive. And just like investment returns, the impact of higher charges can compound over time.
Shopping around for the best deal to meet your needs – just like you might in other areas of your daily life – can make a huge difference to the future value of your tax-free investment pot and your future lifestyle.
Reducing charges on a £100,000 ISA portfolio from 1% to 0.5% a year could mean £26,400 more in your pot after 20 years. Even a much smaller cost reduction of 0.2% a year could leave you £10,300 better off.
| ISA pot value (at start) | Growth rate (gross) | Pot value after 20 years | ||
|---|---|---|---|---|
| 1% costs pa | 0.50% costs pa | 0.80% costs pa | ||
| £100,000 | 5% | £219,112 | £241,171 | £227,695 |
| £100,000 | 6% | £265,330 | £291,776 | £275,623 |
| £100,000 | 7% | £320,714 | £352,365 | £333,035 |
Source: AJ Bell
Five ways to cut your ISA charges
1. Consider passive funds and ETFs
Passive and tracker funds can come with charges of 0.1% pa or less, compared to 0.75% for a typical actively managed fund.
Index funds won’t outperform the market, whilst some active managers will do just that over the long term, even after charges. But research by AJ Bell recently found that less than a third (31%) of actively managed funds have beaten a passive alternative over the past 10 years. If you’re on the other side of the coin, you might be left wondering what you’re paying for.
To cut costs, consider replacing persistent underperformers with tracker funds, or use a combination of the two approaches across different markets or regions. For example, you might still want to use an active fund in a more specialist or niche area of your portfolio, like emerging markets.
You might find a successful investment trust can offer what you need from a particular sector at a lower cost than a traditional equity fund. For example, for UK equity exposure, the City of London investment trust has an ongoing charge of 0.37% which is much lower than the typical cost of an actively managed UK equity fund.
2. Use a regular investment service
AJ Bell offers an auto-investing option for a discounted fee, compared to dealing ad hoc. You’ll be charged £1.50 per trade, regardless of the type of investment you’re buying.
Making an automatic regular monthly investment takes the emotion out of investing and could also benefit your returns over the long term. Markets can be up one month and down the next but avoiding trying to time the market can help you smooth those ups and downs thanks to something called pound cost averaging.
Learn more about regular investing
3. Don’t overtrade
There are often good reasons to change investments, but if you’re constantly tinkering with them, you’ll soon rack up extra charges.
Costs could include a difference in the buying and selling price of funds and shares (the spread), ad hoc dealing charges and potentially UK stamp duty too.
Being disciplined with the number of times you check your portfolio and sticking to a plan on how often you review your portfolio will help.
4. Consider fund accumulation units if you’re not drawing income
If you’re buying funds, you can choose between ‘income’ or ‘accumulation’ units. Whilst income units will pay out the income as cash, accumulation units will instead reinvest the income into the fund itself, increasing the price of each unit or share.
Accumulation units can save money if you’d otherwise be reinvesting fund income as you won’t need to pay additional dealing charges, and you’ll have less portfolio admin to do.
5. Consolidate your ISAs
Bringing your ISAs under one roof is another way to cut down on admin and time costs, but you could also save money in the long term.
You’ve always been able to have more than one ISA per tax year and changes in 2024 mean you can now pay into multiple ISAs of the same type in a single tax year.
But over time this can lead to duplicate fees and dealing charges. For example, if you’re buying the same share in two different investment ISAs, you’ll be paying two dealing charges rather than just one if they were consolidated.
Platforms like AJ Bell also offer capped charges on shares and ETFs, as well as tiered charges for higher balances in funds.
Check you’re getting value
A final word on value. Cheapest doesn’t always mean best, and a good value deal includes other features such as ease of use and top customer service alongside low charges. Double check you know what you’re paying for versus the features you need and use.
Important information: These articles are for information purposes only and are not a personal recommendation or advice. Remember that the value of investments can change, and you could lose money as well as make it. ISA and tax rules apply and could change in the future.
An AJ Bell Stocks and shares ISA is an easy, efficient way to invest. It’s completely tax free, so more of what you make stays in your pocket.
We do the heavy lifting when you move your portfolio to us.
Written by:
Charlene Young
Pensions and Savings Expert
Charlene Young is AJ Bell’s Pensions and Savings Expert. She joined AJ Bell in 2014 from a wealth management firm where she worked with private clients and small businesses as a financial planner.
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