Small inforgraphic made to help visualize and understand the lengthy explanation about the impact of fees on returns.
Imagine a 30-year old man has just received an inheritance and wants to put some of it to work in the market. He invests his full New ISA (NISA) allowance of £15,000 in an actively managed large-cap UK equity fund which delivers an average annual return of 6% before tax. If he leaves his lump sum to grow for the next 35 years, the pot should be worth £115,291. But the impact of fees and charges on the value of the investment is significant, even without factoring transaction costs into the equation – these costs take out a chunk worth £31,273, leaving our investor with just £84,018. The power of compounding is working in reverse here as costs chip away at the long-term returns.
If our investor puts his money into an exchange-traded fund replicating the performance of the FTSE 100, however, which has an ongoing charge of 0.1% and delivers the same annual return as the active fund, the total cost of investing is just £3,967. This means the investor’s savings pot is worth £111,324 at age 65. That’s a difference of 33%. If our investor adds some low cost funds into his pension fund as well as his NISA, he could achieve salary independence and a comfortable retirement a lot sooner than he expects.