New fund pricing rules explained
Over the past few months we've seen a plethora of announcements from fund providers who have made their pricing more transparent. New and very welcome regulations have just come into force to make sure investors know exactly how much they are paying for their investments.
While the impact to those investors who trade shares is negligible, for those investors who own funds, the new pricing has far-reaching implications.
These new announcements mean fund investors are finally aware just how much they have been paying to hold funds in the past and how much they will pay going forward. The opaque nature of funds had meant that some investors thought their account was free and were unaware it was actually being paid for by a percentage of the annual management charge being given back to the provider.
Flat fee or percentage charge
The new charges, which were introduced on 1 April, have resulted in fund platforms being able to charge investors in one of two ways - a flat fee or a percentage charge. The flat fee is a set amount you pay every year to run your account, with trading fees charged separately (though in some cases, like Interactive Investor, the admin fee gives you equivalent trading credit). Percentage-based fees add an additional percentage charge on to your investments and charge you based on the value of your holdings.
Some providers have chosen to levy the percentage fee on all your investments, including equities, while some providers levy them just on funds. In addition, most providers cap the total amount payable; and while some cap their charges at a relatively low level, with others the cap kicks in at silly levels. Typically, percentage-based providers have elected to make fund purchases free.
Unfortunately, the new pricing announcements don't come with a magic wand that works out which provider is the best one for you to hold your funds with but it's worth bearing in mind some general ideas. Do please note that you should do your own analysis to work out how much you are paying for your investments and whether you could be better off with a different provider.
Your first big decision will typically be choosing whether you pay for your funds by a flat fee or through percentage charges. Whether you're better off with a percentage-based provider or one charging a flat fee very much depends on how much you have invested. For example, larger investors who have more than around £20,000 are typically better off with a flat fee provider and those just starting out better off with the percentage fee model.
Another factor to consider is whether these charges are made at an account or customer level because if you're charged for having an Isa account separately to a Sipp or investment account, then this could leave you paying significantly more.
You also need to consider how often you trade. If you're very active and are making fund trades on a regular basis, then you should look at whether you could take advantage of cheaper regular investment plans, or alternatively consider a provider that doesn't charge you to trade funds.
Is price everything?
Absolutely not, security and service are paramount when it comes to your life savings. Security means your investments are held with registrars and are ring-fenced from your provider. Security also means any cash you have within the account is held in trust and is also independent.
Service is also an important factor but while many people assume this is defined by how quickly your provider might answer their phone, it is actually more important to be able to log in, fund and trade online securely and without difficulty - though it's also nice to know there is someone available on the phone to help if you have any queries.
Ideally, you should try to work out how much you're currently paying and what your options are elsewhere. If there's not that much in it and you're happy where you are, then sticking with your current provider is perfectly fine. If you do discover that you'd actually be much better off elsewhere, you could consider transferring.
It might seem a scary process but all it requires is 15 minutes' effort and then your new provider will do all the heavy lifting on your behalf.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.