- Reducing ISA charges by 0.5% could boost your pot by more than £33,700 over 20 years, based on a £75,000 ISA portfolio and regular payments of £500 per month*
- Even a small 0.2% cost saving could mean £13,000 extra over the same period
- Here are five simple tips to keep more of your tax-free returns
Charlene Young, senior pensions and savings expert at AJ Bell, comments:
“ISAs are a great way to shelter your wealth from the taxman and annual HMRC statistics show that nearly £1 trillion is held across different ISAs in the UK, and 15 million adults paid new money into ISAs in the 2023/24 tax year.
“Although investing your cash gives you the best chance of growing your money above inflation in the long run, a higher cost investment strategy can eat into your returns. And just like investment returns, the impact of higher charges can compound over time.
“Shopping around for the best value Stocks and Shares ISA for 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 what you can do with it. Double check you know what you’re paying for versus the features you actually need and use.
“Reducing charges on an ISA portfolio worth £75,000 that you’re paying £500 per month into from 1% to 0.5% a year could mean £33,738 more in your pot after 20 years. Even a much smaller cost reduction of 0.2% a year could leave you £13,136 better off (based on 6% investment growth rate).
“The average contribution into a Stocks and Shares ISA was £7,594 in 2022/23 – the most recent tax year HMRC publishes the in-depth splits for – meaning the cost savings on offer could be even higher for people investing the full £20,000 each year.
Source: AJ Bell
“We’ve looked at five ways to trim your ISA costs and make the most of the tax wrapper before the end of the current tax year and into next.”
Five ways to cut your ISA charges
- Consider passive funds and ETFs
“Passive and tracker funds can come with charges of 0.1% per year or less, compared to around 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. AJ Bell’s Manager versus Machine report recently found that less than a quarter (24%) 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 0.36% which is much lower than the typical cost of an actively managed UK equity fund.”
- Use a regular investment service
“Lots of platforms offer an auto-investing option at a big discount when compared to dealing charges for ad hoc trades. Making an automatic regular monthly investment takes the emotion out of investing and can help you stay on track towards your long-term goals.
“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.”
- 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 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 investments and sticking to a plan on how often you review your portfolio will help.”
- 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.
“Platforms like AJ Bell also allow you to set up dividend reinvestment instructions for certain shares, including investment trusts and ETFs.”
- Combine your investment 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 let you 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 in the same ISA.
“Look for platforms that offer capped charges on shares and ETFs, and tiered charges for higher balances in funds.”
*ISA pot projections by growth rate and charges.
