Investing is, of course, about making money. But there’s no getting away from the fact that you have to pay some money to do it. Investment charges are usually levied by your account provider, the manager of the funds you’re invested in, and sometimes, even the government.
As charges can differ between providers, they’re a key factor when deciding who to invest with. To help you get to grips with charges, let’s look at the different types you’ll encounter, where they crop up, and how they work.
Episode 11: The costs of investing
Join our experts as they delve into the costs of investing. This episode covers all the need-to-knows about charges, so you don’t get caught out.
Listen to our Investing Essentials podcastAccount fees
This one can also be called a platform charge or account charge – depending on who you’re with. But we’ll stick with ‘account charge’ here to keep things simple.
Simply put, the account charge covers all the fees you’ll pay your provider to hold your investment account with them.
Though it can be called different things, the account charge works the same way from provider to provider. It’s what you pay them to hold investments in your account. The charge is usually stated as a percentage of the value of the investments in your account – as is the case with AJ Bell – or some providers charge a flat rate instead.
Percentage rates vs flat rates
You may not have seen charges given as percentages before. But it’s quite common for providers to charge this way, and can work out a lot cheaper than flat rates – depending on how much you use the service.
Helpfully, many providers now offer a way for you to calculate how their percentage charge works out for the value of investments you’d have with them. This lets you see roughly what you’d be charged before signing up.
For some people, the certainty of a flat rate is preferable because you know exactly how much you’ll be charged each month. Though easier to wrap your head around initially, flat rates could leave you out of pocket. So it’s important to check what you’ll pay before opting for a provider with this charging structure.
Dealing fees
Some providers might also charge you every time you buy or sell an investment in your account. This is known as a dealing charge or dealing fee.
Dealing charges, too, can go by many other names: trading charges, transaction charges or commission. Remember that if you’re frequently buying and selling investments, dealing fees can add up quickly. Learn more about the costs of frequent trading.
Foreign exchange fees
If you go further afield with your investing and buy shares outside the UK, you’ll pay your provider a foreign exchange charge. This charge is for converting your pounds into the currency the investment is traded in.
You may also pay a foreign exchange fee when an investment you hold pays you a dividend. That’s because the dividend needs to be converted to pounds before it’s paid to you.
How do you spot charges?
Provider’s charges
To work out what you‘ll pay, the provider’s website is usually your best bet. Most will have a dedicated page or section of their website, or downloadable PDF, which covers the charges you could pay if you choose to open an account and invest with them.
Investment charges
The investments you choose will also have their own charges. And when you’re a DIY investor (not using an adviser or robo-advisor provider), these charges aren’t usually included in your provider’s charges. There are two main ones to look out for: ongoing charges for funds, and stamp duty for shares.
Fund charges
Funds have ongoing charges which cover the day-to-day costs of running and managing the fund. These charges are deducted directly from the value of your investment. Think of it as a bit like your income tax being deducted before you receive your salary (although it’s not nearly as much). Ongoing charges tend to be anywhere between 0.1% – 1%, depending on the fund you choose.
On top of the ongoing charge is the fund’s transaction costs. These can sometimes be 0%, or even a negative amount. Put as simply as possible, this charge covers the overall costs of buying and selling the investments within the fund over a year. It can be negative if the fund manager has used pricing mechanisms to offset these costs.
You’ll be able to see both the ongoing charge and transaction costs in the fund’s key information document.
Stamp duty
You’ll pay the government’s stamp duty reserve tax when you buy UK shares electronically. But you won’t pay it when selling your shares.
This tax is currently set at 0.5% of the value of the shares you’re buying, and is deducted at the same time you buy them. Your provider will sort this all out for you and send it off to the government.
Are there any other charges to know about?
When comparing providers, you should keep your eyes peeled for any small-print charges. The good news is that they’re now less common (the regulator has clamped down on hidden costs and exit fees). But they do still exist, and it can be a shock if you’re hit with one. Here are a few examples:
- Subscription charges
- Paperwork charges
- Transfer out charges
- Other ‘exit fees’ to cut ties with a provider
There are also government charges if you use an account not as it’s intended to be used. The main one to warn you about is the Lifetime ISA 25% government withdrawal charge. You’ll pay this if you withdraw money from your Lifetime ISA for any reason apart from to buy your first home or for retirement at age 60. So you need to be sure you’re definitely going to use it for one of those purposes.
Our article covers CGT allowances, rates and how you might be able to prevent a capital gains tax bill.
No matter how, why or where you want to invest, we're here to make investing feel good. Get started today.
Related content
- Fri, 23/02/2024 - 17:03
- Fri, 23/02/2024 - 16:33
- Fri, 23/02/2024 - 15:28
- Fri, 23/02/2024 - 11:59
- Wed, 21/02/2024 - 08:53