Most UK investors never write a cheque for “fees”. They are taken out of the investment itself, a little at a time, which is part of why they are easy to underestimate. The useful exercise is to add them up and see what they do over a long holding period.
The layers a UK investor typically pays
Costs usually come from several places at once:
- The platform charge for holding investments in an ISA, a pension or a general account. This may be a percentage of the amount held, a flat fee, or a mixture.
- The fund’s ongoing charge (the “OCF”), which pays the manager and running costs and is deducted from the fund’s value. Passive funds that follow an index tend to charge much less than actively managed ones.
- Transaction costs inside the fund and any dealing fees, which are reported separately and are easier to miss.
- Advice or management fees, if a financial adviser or a managed portfolio service is involved.
- Currency charges, where investments are held in another currency and converted.
Funds and platforms are required to disclose their costs, and since July 2023 the FCA’s Consumer Duty has required firms to show that what customers pay represents fair value. Disclosure helps, but the numbers still have to be added together by the investor.
A worked example
The figures below are illustrative. They assume a steady 5% a year return before charges, monthly compounding, no tax and no change in charges. Real returns vary every year, and nothing here is a forecast.
| Scenario | 5% a year, no charges | 4% a year, after 1% of charges | Gap |
|---|---|---|---|
| £10,000 invested once, 25 years | £34,813 | £27,138 | £7,675 (22%) |
| £300 a month for 25 years | £178,653 | £154,239 | £24,414 (14%) |
| Both together | £213,466 | £181,377 | £32,089 (15%) |
A single percentage point of annual charges takes roughly a fifth from the lump sum and about a seventh from the regular-saving pot. The reason is compounding: each year’s charge reduces the base that grows in every later year. A smaller difference, such as 0.25 percentage points, has a smaller effect, but it does not vanish.
Is a higher fee ever worth it?
It can be, but investors should expect to be able to explain why. The FCA’s 2017 asset management market study reported finding no clear relationship between the charges a fund levied and how well it performed before charges. That does not mean every expensive fund is poor or every cheap fund is good. It does mean a high charge is a hurdle that the fund has to clear before the investor sees any benefit, and it has to clear it year after year.
A reasonable test is whether the extra cost buys something specific: advice that changes behaviour, a service the investor cannot easily do alone, or exposure that cheaper products do not provide.
Where UK wrappers fit in
Holding investments in a stocks and shares ISA (within the £20,000 annual allowance) or a pension does not reduce charges, but it removes tax on growth and income, which is a separate and often larger effect. Charges and tax are independent levers, and an investor can get either wrong.
For the same reason, comparing platforms on the headline percentage alone can mislead. A flat-fee platform can be cheaper for a large pot and more expensive for a small one, and an account that adds a dealing fee on regular investments can erode a monthly saver’s returns quickly. It is worth working out the cost at your own balance and trading pattern.
What to check
- Find the total ongoing cost for your actual holdings, combining platform and fund charges.
- Ask what you receive for any adviser or management fee.
- Re-check once a year, because platforms and funds change their pricing.
- Spread the pot sensibly. Cost is one consideration alongside how diversification works and what a long-term approach to investing involves.
This is general information, not investment advice. The value of investments can fall as well as rise, and you may get back less than you put in.
Sources: Financial Conduct Authority, Asset Management Market Study final report (2017) and Consumer Duty guidance; GOV.UK guidance on ISA allowances; worked figures calculated by Finance Reporter from the stated assumptions.
