Investment and Pension Charges: What They Really Cost

Investment and pension charges look tiny because they're quoted as a percentage, but they come out of your pot every year, so the gap between 0.4% and 1.2% can grow into tens of thousands of pounds over a working life. Add your platform or provider charge and your fund charges into one yearly percentage, compare that total, and cut it where you can. The exception is when switching would cost you employer contributions, valuable guarantees or exit penalties.

This guide is for anyone with a stocks and shares ISA, a SIPP, a personal pension or a workplace pension who wants to know what they actually pay and whether it's worth changing.

How a small charge turns into a large sum

A charge is taken from your whole balance, including the growth from earlier years, so its cost compounds in the same way your returns do. Take £20,000 already invested, £300 added every month for 25 years and a 5% yearly return before charges. The return is an assumption for illustration, not a forecast. The investment fees calculator gives:

Total yearly charges	Pot after 25 years	Lost to charges
None	£243,447	£0
0.30%	£230,871	£12,576
0.40%	£226,842	£16,605
0.75%	£213,354	£30,093
1.20%	£197,330	£46,117

You pay in £110,000 either way. At 1.2%, charges take £46,117, and you end up £29,512 worse off than at 0.4%. A 1.2% total is easy to reach without noticing: a platform charge plus an actively managed fund, or an older personal pension that still carries a high annual management charge.

Here's the part that's easy to miss. Charges are a percentage of your pot, but they are paid out of your return. If your investments grow 5% and you pay 1.2%, almost a quarter of each year's growth goes on costs.

The layers of charges you may be paying

If you invest through a platform or pension, you are probably paying at least two layers, and sometimes more:

• Platform or provider charge. Either a percentage of your pot or a flat fee.
• Fund charge. Funds publish an ongoing charges figure, taken from inside the fund, so it never appears as a separate deduction.
• Activity charges. Dealing fees, and costs such as telephone trades and foreign exchange.
• Interest on cash. What the platform pays, or keeps, on uninvested cash.
• Advice fees, if you use a financial adviser.

The Financial Conduct Authority's review of investment platform charges found the main platform charges could generally be identified and compared, but activity-based charges such as telephone trades, foreign exchange and interest on cash were sometimes harder to locate. The FCA says platforms must give existing and potential clients all costs and charges, total costs as both a cash amount and a percentage with a breakdown available, and illustrations of how costs affect returns. Ask for that total in pounds. It's the fairest comparison you can get.

Check cash too. The FCA listed as poor practice platforms that didn't clearly state the interest paid on cash, or hid it in legalistic terms and conditions. If you hold a large cash balance on a platform while you decide what to buy, that low or missing interest is a cost even though it never appears on a charges page.

Workplace pensions have extra protection. The Pensions Regulator explains that the default arrangements of qualifying schemes used for automatic enrolment are subject to a charge cap: if charges are a simple percentage of your pot, the limit is 0.75% a year. Transaction costs don't count towards it. Government charge cap guidance describes a default as the arrangement your contributions go into when you haven't made a choice. So if you pick your own funds, don't assume the cap still covers them; check what you're paying.

How to compare charges properly

Percentage and flat fees suit different pot sizes. A £120 flat yearly fee is 1.2% of a £10,000 pot but 0.12% of £100,000, so a flat fee usually wins for large pots and a percentage fee for small ones. Work out your own break-even point before choosing a platform.

• For ongoing charges, add your platform charge to the weighted fund charges, then compare two totals in the investment fees calculator using your real pot, contributions and time horizon.
• For one-off costs, such as dealing fees on a lump sum, use the ROI calculator. Growth from £10,000 to £13,000 over five years is 5.39% a year. Add £500 of costs and the annualised return falls to 4.36%.
• For your pension, reduce the growth rate by your total charges in the pension calculator, or use the compound interest calculator for a quick projection.

Priorities change once your costs are low. In the example above, cutting from 1.2% to 0.4% is worth £29,512. Cutting from 0.4% to 0.3% is worth about £4,000. The first change matters. The second matters far less than paying in more each month.

When lower charges aren't worth chasing

The honest difficulty is that cheaper usually means doing more yourself, and moving money has costs of its own. Hold off on switching in these cases:

• Your employer contributes. Never leave or opt out of a workplace pension to escape its charges. Employer contributions add to your pot straight away, and a small difference in charges is very unlikely to match them. Pick the cheapest suitable fund inside the scheme instead.
• Your old pension has guarantees or exit penalties. In its guidance for trustees, The Pensions Regulator flags that guarantees or other favourable treatment can be lost when money moves, and that penalties may be triggered. The same risks apply when you move your own pension, so ask your provider about both, in writing, before transferring. For a large or older pension, this is where paying for regulated financial advice makes sense.
• The advice genuinely changes your results. Help with tax planning or staying invested through a crash can be worth a fee. Ask for the total annual cost in pounds and compare it with what you would pay doing it yourself.
• Your pot is small and the platform charge is flat. Moving to a percentage-fee platform may save more than switching funds.

Your next steps

• Next 10 minutes: log in to your platform or pension and find the annual charge and the ongoing charges figure of your largest fund.
• Today: add them into one yearly percentage and run it against a cheaper total in the investment fees calculator.
• This week: ask your provider or platform for your total costs in pounds, and check for exit fees or guarantees before you move anything.

Sources

1. The Pensions Regulator: Cost and charge restrictions
2. Financial Conduct Authority: Findings from our investment platforms costs and charges review – good and poor practice
3. Department for Work and Pensions (GOV.UK): The charge cap: guidance for trustees and managers of occupational schemes