What a fund’s yearly charge adds up to over twenty years

Investment returns are uncertain. Charges are not. Whatever markets do in a given year, the fund takes its fee, and so does the platform or pension scheme that holds it. That is why people who study long-term investing tend to say the same thing: you cannot control returns, but you can control costs.

This piece looks at one cost in particular, the fund’s ongoing charge, and shows with an illustrative table what different levels add up to over twenty years. It does not recommend any fund or type of fund.

What the ongoing charge is

A fund’s ongoing charge, often shown as the ongoing charges figure (OCF), covers the annual cost of running it: the manager’s fee, administration, custody, audit and similar costs. It is expressed as a percentage of the money in the fund and is deducted from the fund itself, a little at a time, so you never see a bill. The fund’s published price is already net of it.

It is not the only cost. A fund also incurs transaction costs when it buys and sells investments. If you hold it through an investment platform, a platform fee is usually charged on top, either as a percentage or a flat amount. Financial advice may carry an adviser charge. Older investments bought through an adviser before 31 December 2012 may still pay trail commission, which the Financial Conduct Authority says is typically 0.5% a year and may be included in the annual management charge.

Why a small percentage becomes a large sum

A charge of 1% a year does not cost 1% of your original investment each year. It costs 1% of the whole pot, including all the growth so far. As the pot grows, so does the charge in pounds. And every pound taken in charges is a pound that no longer earns returns in future years. The effect compounds, quietly, in the same way that returns do.

Modelled figures: the charge is deducted from the return each year (5% minus the charge), compounded annually. Real returns vary and can be negative; no fund is free to run.

In this example the difference between a 0.2% and a 1.5% yearly charge is over £11,000 on a single £20,000 investment, roughly half the amount originally invested. Nothing about the fund’s investments needs to differ for that to happen.

Doing the sums

Saving monthly rather than all at once gives the same picture. An illustrative £200 a month for twenty years (£48,000 paid in) at an example 5% before charges would grow to about £79,700 with a 0.2% yearly charge, about £73,000 at 1.0%, and about £69,200 at 1.5%. The gap between the cheapest and dearest is around £10,500. Modelled figures, monthly compounding.

When paying more can still make sense

A low charge is not the only thing that matters. Some approaches cost more to run, and some investors are happy to pay for a particular strategy, a particular manager, or a fund that covers a specialised area. The point of the table is not that the cheapest option is always best, but that the extra cost needs to be earned back, every year, before you are better off. Over long periods, that is a high bar.

The same applies to advice. A financial adviser’s fee is a cost, but good advice on tax, pensions and the order in which to use different savings can be worth more than it costs. What matters is knowing what you pay and what you get for it.

Where to find the figures

• The fund’s key information or product summary document, and its factsheet, show the ongoing charge and often the transaction costs.
• Your platform or pension provider’s charges page shows its own fee, which may be tiered or capped.
• The annual costs and charges statement that regulated firms send shows what you actually paid in pounds over the year, which is often more striking than a percentage.
• Older plans, such as pensions or bonds bought before 2013, may carry higher annual management charges or trail commission. The FCA explains how trail commission can sometimes be stopped or reduced.

The same arithmetic in a pension

Charges matter in pensions as much as in ISAs or general accounts, and for longer. In drawdown, where the money stays invested while you take an income, charges come out of the same pot that pays your retirement. A higher charge works like a slightly higher withdrawal rate, shortening how long the money lasts.

What the illustration leaves out

The table is deliberately simple. It uses the same return every year, when real markets move unevenly. It ignores inflation, which reduces what the final sum will buy whichever fund you choose. It ignores tax, which depends on whether the money sits in an ISA or pension, where growth is sheltered, or in a general account. And it treats the charge as the only difference between funds, when in practice funds also differ in what they hold and how much risk they take. None of that changes the central point: for two otherwise similar funds, the one that costs less keeps more of whatever return there is.

Who this matters for, and what to check

Anyone holding funds in an ISA, pension or general investment account, and anyone choosing investments for a child’s Junior ISA, which may run for eighteen years. Once a year, it is worth adding up three numbers: the fund’s ongoing charge, the platform or scheme fee, and any adviser charge. Then compare the total with the alternatives, bearing in mind that switching can have its own costs and, outside an ISA or pension, possible tax consequences.

The short version

A yearly charge is taken from the whole pot, including growth, so it compounds over time. In the illustration, a 1% charge reduces a £20,000 investment by more than £9,000 over twenty years compared with a charge-free fund, and 1.5% by more than £13,000. Look at all the layers of cost, compare them once a year, and make sure anything you pay extra for is something you actually value.