Five ways to trim your ISA costs

ISAs are great way to shelter your wealth from the taxman. And if you’re in it for the long run, investing can give you the best chance of growing your money above inflation. But a higher cost investment strategy can eat into the personal return you receive. Just as returns and time spent in the market can compound over time, so can the effect of higher charges.

Take an investor with an ISA pot worth £100,000, growing at 7% before charges. Cutting total costs by 0.25% a year from 1% to 0.75% could mean £16,800 more in their tax-free pot after 20 years. Here are five tips to help you trim ISA investment costs and make sure you keep as much of your tax-free returns as possible.

1. Consider passive funds and ETFs

Passive and tracker funds come with very low charges, usually 0.1% or less for plain vanilla trackers. This compares to charges of around 0.80% for a typical actively managed fund.

Passive funds won’t outperform their indices, and some active fund managers have delivered over the longer time horizons versus their passive counterparts. But many underperform, which might leave you wondering what you’re paying for.

If you’ve got some active funds that are underperforming long term, you could consider replacing them with tracker funds to reduce portfolio costs. If you’re building your ISA portfolio, you might consider a combination of passive and active – perhaps choosing tracker funds in markets where active managers are less likely to outperform, like the US, and choosing active funds in more specialist areas where active management has historically been shown to add value, like emerging markets or smaller companies.

2. Use a regular investment service

Most platforms will give you a chunky discount on dealing charges if you set up an automatic instruction to buy the same fund or share each month rather than trading ad hoc.

Drip feeding money into investments on a regular basis could also benefit your returns over the long term. Because you’re automatically buying at different times each month, when markets may be higher or lower, you’ll end up smoothing out those ups and downs over time.

3. Don’t overtrade

There’s often a good reason to change your investments. But if you’re chopping and changing very often, you’re in danger of building up extra costs that will eat into the performance of your ISA portfolio and wiping out any returns.

Every time you switch investments, you’ll need to think about the difference between the buying and selling price of funds and shares (the spread), plus dealing charges and potentially UK stamp duty too.

4. Consider fund accumulation units if you’re not drawing income

When buying funds, you can choose between ‘income’ or ‘accumulation’ units. You’ll be able to tell which you’re buying by the fund name, which will be followed by “inc” (income) or “acc” (accumulation). The difference is in how they handle the dividends or interest generated by the fund.

Income units will pay out the income as cash. For accumulation units, this income isn’t paid out to you directly, but reinvested into the fund itself. This has the effect of raising the price of each unit, generating extra growth and increasing the value of your investment. If you’re going to be reinvesting fund income rather than drawing it, then accumulation units will usually save you money as you won’t need to pay additional dealing charges, as well as being far more convenient.

5. Consolidate your ISAs

Bringing your ISAs together on one platform doesn’t just save you time and effort on your own admin, but it might save you money too. Platforms like AJ Bell offer capped charges on shares and similar investments, and tiered charges for higher value ISA investing in funds. You’ll avoid duplicate fees too – if you’re buying the same share in two different investment ISAs, you’ll be paying two dealing charges instead of one if you’d consolidated them.

Whilst trimming costs can boost your pot, cheapest doesn’t always mean best, and you should ensure you’re getting value from your ISA and investment platform. That includes customer service as well as charges, so check you understand what you’re paying for versus the features you need and use.

ISA pot projections by growth rate and charges

Source: AJ Bell