How to keep a lid on ISA charges

Laith Khalaf
24 March 2021

•    Saving just 0.2% in annual charges can give you £12,320 more in 20 years on a £100,000 ISA portfolio
•    5 ways to reduce charges in your ISA
•    ISA case studies available

Laith Khalaf, financial analyst at AJ Bell, says:

“Investing in an ISA has never been easier, or cheaper, but it still pays for investors to keep a lid on costs wherever they can. It’s important not to throw the baby out with the bathwater, sometimes it can be worth paying more to get more, for instance for quality active management which delivers outperformance. But there are a number of ways investors can lower the charges they pay on their ISA, and over time those savings can add up to a significant pot of money.

“Looking at a £100,000 ISA portfolio growing at 7% gross a year, reducing charges from 1% per annum to 0.8% per annum would result in a pot of £333,040 in twenty years’ time compared to £320,720. That’s £12,320 more in your pocket. Focusing on charges to the exclusion of all else isn’t a good idea, but it’s still worth making sure you’re getting value for money from your ISA portfolio.’ 

5 ways to reduce charges in an ISA

1. Use tracker funds and ETFs

There has been tremendous growth in the number of passive funds available to investors in the last ten years, and these come with very low charges, usually around 0.1% or less for plain vanilla index trackers. This compares to charges of around 0.75% for a typical actively managed fund. Unlike an actively managed fund, passive funds come with no prospect of outperformance, and some active fund managers have demonstrated the ability to outperform over long time frames, even after charges. 

However, many have not, so if you’ve got some funds which have continually failed to perform, consider replacing them with tracker funds to reduce portfolio costs. You might also consider using a combination of active and passive funds together, perhaps choosing tracker funds in markets where active outperformance is more challenging, like the US equity market, and choosing active funds in areas where this approach has worked best, such as in the smaller companies universe.

2. Don’t overtrade

Every time you switch into and out of investments, there are costs to doing so, in the form of bid-offer market spreads, and potentially dealing commission and stamp duty, depending on what you’re trading. There are sometimes very good reasons to sell out of one thing and buy into another, but doing so repeatedly without good cause will be a drain on your ISA portfolio because of the charges you’re racking up.

3. Consider investment trusts

While there are a range of charging structures available for both actively managed unit trust and investment trusts, there are a few more bargains to be had in the latter camp when it comes to charges. A typical actively managed fund charges in the region of 0.75%, but some highly successful investment trusts are available for significantly less. Scottish Mortgage is the obvious example, with an annual ongoing fee of just 0.36%. City of London investment trust also comes with a slim 0.36% annual charge, and Monks investment trust is available for just 0.48% per annum. Those are pretty attractively priced fees for an actively managed equity portfolio.

4. Consolidate ISAs

If you have ISAs scattered all over the place you may find you can reduce fees by consolidating them in one place. That may be a result of moving to a lower cost platform, or simply avoiding trading duplication. If you hold BP shares in two separate ISAs and decide to sell out, then you will find yourself paying two lots of dealing commission. Holding your ISAs in one place will also make them easier to manage as a portfolio.

5. Keep it simple

As a rule of thumb, simpler investment products investing in mainstream markets tend to be cheaper than esoteric investments. This is evident in both active and passive fund markets. For instance, the iShares Core FTSE 100 ETF costs just 0.07% per annum, while the iShares MSCI Brazil ETF carries a Total Expense Ratio of 0.74%. You shouldn’t let the charges tail wag the investment dog, and if you want to gain exposure to an area, and it fits in your portfolio, that should be the driving reason for investment decisions. But it pays to be aware of the additional costs likely to come from investing in more niche areas, as well as the risks, and so not to over-complicate your portfolio without good reason.

Laith Khalaf
Financial Analyst

Laith Khalaf started his career in 2001, after studying philosophy at Cambridge University. He’s worked in a variety of roles across pensions and investments, covering both the DIY and the advised sides of the business. In 2007, he began to focus on research and analysis, and has since become a leading industry commentator, as well as a regular contributor to the financial pages of the national press. He’s a frequent guest on TV and radio, and for several years provided daily business bulletins on LBC.

Contact details

Mobile: 07936 963 267
Email: laith.khalaf@ajbell.co.uk

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