By Ben Salisbury
How to minimize ISA charges
With returns on many investments low it is even more vital to minimise Isa charges to maximise financial gains from your savings and investments.
If you are investing in an Isa this tax year then it is vital that you know what the pitfalls are and what represents a good deal and how the type of fund or product you invest in affects the fees you will pay.
The golden rule is that you need to make sure that the ratio of charges you pay against tax benefits and income generation you receive is weighed in your favour as heavily as possible.
With typical returns at around four per cent, historically low, this is even more important.
In general there are no charges for investing in a cash Isa but a variety of different charges apply to investment or stocks and shares Isas and self-select Isas.
Many stocks and shares Isas have an initial charge which can be anything up to five per cent of your investment, though if you shop around or invest through a fund supermarket you can get these fees reduced or even waived.
Annual charges are another source of fees. These can be up to two per cent but again there are many variations and these can be nullified or reduced by investing through a fund supermarket.
If you are investing in a stocks and shares Isa or a self select Isa you will face dealing charges when you buy and sell stocks and shares within an Isa.
The cost of dealing can start from as little as £1.50 per trade and if you are planning to deal regularly you can negotiate a special deal with your provider.
Some self-select Isas charge an administration fee, so you need to factor this in when selecting who to invest with as well.
Watch out for performance fees, which some fund managers reward themselves with for reaching a certain agreed level of return. These are in addition to initial and annual charges and can often be set at a low rate that you could achieve simply by investing in a safe area such as cash.
How to cut charges
You can minimise charges if you are clear on the type of investor you plan to be. Having a clear idea of this will allow you to search for the most cost-effective method of managing your Isa investments and conducting your transactions in a way that suits your investment style.
Most investors can successfully negotiate to get initial charges on the majority of active funds waived or at least discounted.
The golden rule in most instances will be to avoid going direct to a fund provider. Fund providers pay commission to middlemen such as advisers and brokers. If you can cut out this layer of cost you will significantly reduce your Isa charges.
Most funds charge between four and five per cent and if you go direct to a fund provider you could be looking at paying a further 1-1.5 per cent annually. This is normally made up of a 0.25 per cent commission paid to the fund platform, a 0.50 per cent commission payment to the adviser and the balance goes to the fund manager.
Instead, search for a discount broker to save the extra 1-1.5 per cent in payments to middlemen and the fund providers cut. A discount broker may receive the small commission you would pay to the adviser and the broker if you went direct to a fund provider, but you will save on the balance that normally goes to the fund manager.
Isa fees and advice
If you feel you need hands-on help in running your Isa and in selecting the funds to invest in, then you need to be prepared to pay higher charges than if you manage the investment yourself using an investment platform.
If you don’t need advice then buying through an investment platform or discount broker is definitely the right choice because you could save yourself thousands of pounds over the years.
Choose an investment platform that rebates the adviser’s fee and the fee normally paid to an investment platform and watch out for annual fees and individual dealing fees, typically £10 - £15.
The worst culprits for charges
Fund of fund investments are supposed to provide an all-in-one investment solution and often look initially attractive as they come with just one fee or rate of commission.
These type of investments offer investors access to top individual fund managers.
However, within the charges are extra costs. The fund manager will apply its own charges as normal but the investor will also have to pay charges relating to the underlying funds that the fund manager chooses to invest in. Therefore, the investor can be hit with two sets of charges.
This means that fund of fund investments have to perform exceptionally well to make any real return once the fees aspect has been stripped out.
How to invest
Charges can be lowered if investors make a single deposit into their chosen funds rather than paying regular contributions, though this decision needs to be balanced against the risk of investing at the wrong time.
TER – Total expense ratio
When assessing who to invest with and what method to choose an investor needs to assess the total expense ratio or TER.
This is similar to calculating the total cost of a mortgage including fees rather than just selecting your mortgage based on the headline rate.
Ideally you want to be looking at a total expense ratio of under two per cent, preferably around 1.5 per cent.
Actively managed funds or passive funds?
Passive funds, ones that allow the investor to run and manage their own investments are becoming more popular as more people believe they possess the required knowledge to make money from investing by themselves.
Some analysts believe that too many actively managed funds charge too much in fees and deliver too little in return. This is accentuated by the general decline in returns in many funds since the financial crisis of 2008.
Perhaps the cheapest funds overall are funds that invest in tracker funds. The TER for this type of investment is low and is an effective passive low-cost solution.
Investors can opt for a mix of passive and actively managed funds in trying to get the right balance and highest return against the lowest fees possible.
The Retail Distribution Review
This is being introduced in 2013 and should ensure that fund charges become lower and easier to understand. Commissions to advisers and fund platforms will no longer exist. Some major investment companies such as Schroders have already launched actively managed funds with lower charges and it is likely that others will follow suit ahead of the changes.
Other ways to save
Keep an eye out for special offers, especially during March and early April in the build up to the Isa deadline and the end of the tax year. Some providers will waive initial charges. You can even get cashback from some providers!
Free ISA guide: Click here
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