People could save “tens of thousands of pounds” in the long term by making a few checks on their investment ISA, experts have said.
According to calculations by investment platform AJ Bell, reducing ISA costs by just 0.25 percent could increase its value by up to £16,800 over 20 years.
Charlene Young, pensions and savings expert at AJ Bell, said: “ISAs are a great way to shelter your wealth from the taxman. And if you’re in it for the long run, investing can give you the best chance of growing your money above inflation.
“But a higher cost investment strategy can eat into the personal return you receive. Just as returns and time spent in the market can compound over time, so can the effect of higher charges.
“Take an investor with an ISA pot worth £100,000, growing at seven percent before charges. Cutting total costs by 0.25 percent a year from one percent to 0.75 percent could mean £16,800 more in their tax-free pot after 20 years.”
Here, Ms Young shares five tips to help people trim their ISA investment costs and make sure to keep as much of their tax-free returns as possible.
Consider passive funds and ETFs
According to Ms Young, passive and tracker funds come with lower charges – usually 0.1 percent or less for “plain vanilla” trackers. This compares to charges of around 0.8 percent for a typical actively managed fund.
Ms Young said: “Passive funds won’t outperform their indices, and some active fund managers have delivered over longer time horizons versus their passive counterparts. But many underperform, which might leave you wondering what you’re paying for.
“If you’ve got some active funds that are underperforming long term, you could consider replacing them with tracker funds to reduce portfolio costs.”
Those building their ISA portfolio might consider a combination of passive and active funds. Ms Young said: “Perhaps choosing tracker funds in markets where active managers are less likely to outperform, like the US equity market, and choosing active funds in more specialist areas where active management has added value, like emerging markets or smaller companies.”
Use a regular investment service
According to Ms Young, most platforms will give a sizeable discount on dealing charges if people set up an automatic instruction to buy the same fund or share each month rather than trading ad hoc.
She said: “Drip feeding money into investments on a regular basis could also benefit your returns over the long term. Because you’re automatically buying at different times each month, when markets may be higher or lower, you’ll end up smoothing out those ups and downs over time.”
Don’t overtrade
Chopping and changing investments often leave people in “danger” of building up extra costs that will eat into the performance of the ISA portfolio, wiping out any returns.
Ms Young said: “Every time you switch investments, you’ll need to think about the difference between the buying and selling price of funds and shares (the spread), plus dealing charges and potentially UK stamp duty too.”
Consider fund accumulation units if not drawing income
When buying funds, people can choose between ‘income’ or ‘accumulation’ units. The difference is in how they handle the dividends or interest generated by the fund.
Ms Young said: “Income units will pay out the income as cash. For accumulation units, this income isn’t paid out to you directly but reinvested into the fund itself. This has the effect of raising the price of each unit, generating extra growth and increasing the value of your investment.
“If you’re going to be reinvesting fund income rather than drawing it, then accumulation units will usually save you money as you won’t need to pay additional dealing charges, as well as being far more convenient.”
Consolidate ISAs
In some scenarios, bringing ISAs together on one platform may also help people save some money.
Ms Young said: “Platforms like AJ Bell offer capped charges on shares and similar investments, and tiered charges for higher value ISA investing in funds.
“You’ll avoid duplicate fees too – if you’re buying the same share in two different investment ISAs, you’ll be paying two dealing charges instead of one if you’d consolidated them.”
However, Ms Young added: “Whilst trimming costs can boost your pot, cheapest doesn’t always mean best, and you should ensure you’re getting value from your ISA and investment platform.
“That includes customer service as well as charges, so check you understand what you’re paying for versus the features you need and use.”
