Fund Fees: How a Small Annual Charge Eats a Third of Your Pot

Investors spend hours choosing funds and minutes checking what those funds charge. The charge is the more predictable of the two: future returns are unknown, but the fee is contractual and applies whether the fund performs or not.

Why a small percentage is not small

An annual fee is levied on your entire balance, not on your contributions or your gains. As the balance grows, the amount taken grows with it, and every unit taken also stops compounding for the rest of your investing life.

Over a working lifetime of thirty to forty years, the difference between a fund charging a fraction of a per cent and one charging well over one per cent commonly amounts to a substantial share of the final pot. The exact figure depends on returns and contributions, but the direction never changes, and the effect is largest for the youngest investors because their money has the longest to compound.

The charges to look for

1. The fund's ongoing charge. The headline annual figure, covering management and administration. Published for every fund and directly comparable.
2. The platform or provider fee. Charged separately for holding the investment. Sometimes a percentage, sometimes flat; the flat kind is much better once your balance is large.
3. Transaction costs. The cost of the fund buying and selling its own holdings. Not in the headline figure, and much higher in frequently traded funds.
4. Exit, transfer and dealing fees. Rare in modern products but still present in older pensions, and worth checking before you move anything.

What you should be paying

A broad index tracker is available at a small fraction of one per cent, and it is the benchmark against which any other charge should be justified. Paying more is not automatically wrong, but it should buy something you can name.

• Active management only earns its fee if it beats a comparable index after charges, over a long period. Most do not, and past performance does not identify the ones that will.
• Advice is a real service with real value for complex situations, but it should be priced and reviewed as advice, not bundled invisibly into a product charge.
• Legacy products are the usual home of high fees. Old workplace pensions and inherited investments are where the worst charges hide.

The one thing you control

You cannot control returns, and you cannot control how markets behave over the decade you happen to be saving in. You can control what you pay, and it is the only input to the outcome that is known in advance. Before checking whether a fund has performed well, check what it charges, whether the platform charges again on top, and whether an equivalent index fund would do the same job for a fraction of the price. That comparison takes ten minutes and is worth more than most investment research.