What charges do you pay to invest?

Though in theory investing is all about making money, there’s no getting away from the fact that you will have to pay some charges to do it. You’ll usually pay those charges to your investment account provider, the manager of the funds you’re invested in and sometimes even the government.

Charges can differ between providers and are a key area you should think about when choosing who to invest with. To help you get to grips with them, today we’ll walk through the different types of charges you can get, where they crop up and how they work.

Small jargon alert!

Just a heads up, when it comes to the charges to invest, the language used can sometimes feel needlessly complex. To make matters even more complicated, different providers often have different naming conventions for charges (or fees!) which do the same thing. This makes it a little tricky when comparing providers and deciding who to go with. But don’t worry, hopefully that’s where this article can help clear things up.

Provider’s charges

‘Provider’s charges’ is possibly the easiest way to encapsulate all the charges you’ll pay your provider to have your investment account with them and to buy and sell your investments using their platform.

The main charge coming from your provider will be their custody charge. This can also be called platform charge or account charge – depending on who you’re with (we’re going to stick with custody charge for clarity).

Though they can be called different things their purpose is the same: it’s the basic charge you pay to hold investments in your account with them. It’s usually stated either as a percentage of the value of the investments in your account – as is the case with AJ Bell and Dodl – or some providers charge a flat rate instead.

Custody charges: percentage rates vs flat rates

You may not have seen charges given as percentages before but it’s quite usual for providers to charge like this and this can work out a lot cheaper than flat rates depending on how much you use the service. Helpfully many providers now offer a way for you to calculate how their percentage charge works out for the value of investments you’d have with them.

This lets you see roughly what you’d be charged before signing up. Both AJ Bell and Dodl have handy calculators on their websites designed for exactly this.  

But for some people the certainty of a flat rate is preferable because you know exactly how much you will be charged each month. Though easier to wrap your head around initially, it’s important to check you won’t be left out of pocket by going for a provider with this kind of charging structure.

Dealing charges

Here’s another one to watch – some providers might also charge you every time you buy or sell an investment in your account. These are known as dealing charges or fees.

Once again (sorry!) dealing charges can go by many other names: trading charges/fees, transaction charges or commission. Remember if you’re frequently buying and selling investments, dealing charges can add up quickly.

Foreign exchange charges  

This is one for those who go further afield with their investing and buy shares outside the UK market for example if you buy shares in some of those big US companies. In this case you’ll pay your provider a foreign exchange charge to convert your pounds into the currency the investment is traded in.

You may also pay a foreign exchange charge when a foreign investment you hold pays you a dividend as this will need to be converted to pounds before it’s paid to you.

Watch out for sneaky extra charges

Do just keep your eyes peeled for any small-print charges when comparing providers. The good news is that they’re less common (the regulator has clamped down on hidden costs and exit fees) but they do still exist, and can be a shock if you didn’t realise they were hiding there. Here are a few of the sneaky culprits:

• Subscription charges
• Paperwork charges
• Transfer out charges
• Other ‘exit fees’ to cut ties with a provider

How to spot provider’s charges

The provider’s website is usually your best bet. Most will have a dedicated page or section of their website, or downloadable PDF, which covers the charges you could get if you choose to open an account and invest with them.

Something to watch out for here is that different accounts with the same provider may have slightly different charges, for example a pension account might be more expensive  It’s not always the case but best not to assume all accounts have the same charges (unless it’s a Dodl account that is!)

Investment charges

The investments you choose will have their own charges too and, when you’re a DIY investor (i.e not using an adviser or robo-advisor provider), they’re usually not included in your provider’s charges. The main ones to look out for are ongoing charges for funds, and stamp duty for shares.

Fund charges  

Funds have ongoing charges which cover the day-to-day costs of running and managing the fund it’s deducted directly from the value of your investment it’s kind of like your income tax going out before you get your salary (although it’s not nearly as much as that!). Ongoing charges tend to be anywhere between 0.1% – 1%, depending on the fund you choose. On top of the ongoing charge is the fund’s transaction costs. These are odd little charges as they can sometimes be 0% or even a negative amount! Put as simply as possible, they’re the charge which represents the overall costs of buying and selling the investments within the fund over a year. They can be negative if the fund manager has used some clever pricing mechanisms to offset these costs.

You’ll be able to see both the ongoing charge and transaction costs in the fund’s key information document. 

Stamp duty

You’ll pay the government’s stamp duty reserve tax (catchy, we know!) when you buy UK shares electronically, but you won’t pay it when selling your shares. It's currently set at 0.5% of the value of the shares you’re buying and is deducted at the same time you buy them. Your provider will sort this all out for you and send it off to the government.

Any other charges to know about? 

There are government charges if you use an account not as its intended to be used. The main one to warn you about is the lifetime ISA 25% government withdrawal charge. You pay this if you withdraw money from your lifetime ISA for any reason apart from to buy your first home or for retirement at age 60 so you need to be sure you’re definitely going to use it for one of those! 

Feeling charges-confident?

Hopefully this article has helped to clarify what and how you pay to invest. With clear charges info at hand, you can feel confident and in control when investing.

Be sure to do your own research and compare what’s out there. Dodl and AJ Bell make this easy with their upfront costs and charges info – but do look around and find the best deal for you.

It’s worth remembering here that, though charges are important they’re not everything. Make sure the provider and investments you choose offer everything else you need them to.