Types of investment charges
In brief: Investment fees compound over time — a 1% annual charge on a £250,000 pot costs roughly £115,000 over 20 years, not £50,000, because you lose growth on the growth you've already lost.
Investment fees typically come in two layers:
Platform fees are charged by the provider who holds your investments — the SIPP provider, ISA manager, or investment platform. These are usually expressed as an annual percentage of the amount held, often with tiered rates (higher percentages for smaller balances, lower for larger ones) or flat monthly fees above certain account sizes.
Fund fees are charged by the fund itself — the manager who runs the underlying investments. These are expressed as an Ongoing Charges Figure (OCF) or Total Expense Ratio (TER) and are deducted from the fund's assets before returns are reported. The quoted fund return you see is already net of the fund's own charges.
In practice, the total annual cost of an investment is the sum of platform fee plus fund fee. A fund with a 0.15% OCF held on a platform charging 0.25% costs approximately 0.40% per year in total.
Percentage vs. flat fees
Many platforms cap their percentage fee or switch to a flat fee above a certain account balance. For example, a platform might charge 0.25% on the first £250,000 and a flat £375/year (the equivalent of 0.15%) above that threshold.
For large balances, flat fees can be meaningfully cheaper in percentage terms. For smaller balances, percentage fees are often lower than the flat fee equivalent.
Retirement modelling tools typically represent fees as a single annual percentage of the account balance. This works well for percentage-based platforms and as an approximation for flat-fee platforms where you can calculate the percentage equivalent at your expected balance.
The compounding effect of fees
Fees reduce your investment return each year. What makes this significant is that it compounds over time: a reduced balance in year one means less growth in year two, and so on.
The effect is substantial over long periods:
- A £250,000 pot growing at 5% nominal for 20 years becomes approximately £663,000.
- The same pot growing at 4% (after 1% annual fees) becomes approximately £548,000.
- That 1% annual fee costs approximately £115,000 over 20 years — not £50,000 (£250,000 × 1% × 20), because the compounding effect means lost growth on lost growth.
This illustrates why even apparently small differences in annual fees matter so much when your retirement could span 20–30 years.
Total Charge for Care (TCC) and advice fees
If you pay a financial adviser through a platform arrangement, the adviser's fee is often also expressed as an annual percentage or a flat amount deducted from the account. This would need to be included in your overall annual cost estimate.
In a retirement projection, the annual fee field can be used to represent the combined annual cost — platform fee, fund fee, and any ongoing adviser charge — as a single percentage.
How annual fees are calculated in projections
The fee is applied to the net return calculation:
net return = gross growth rate - annual fee (%)
This is then applied to the post-withdrawal, post-transaction balance at the end of each simulated year. The fee is subtracted from the growth rate, not applied as a separate deduction — this ensures the compounding interaction between growth and fees is correctly captured.
For example, with a 4% growth rate and a 0.5% annual fee, the engine grows the balance by 3.5% each year (not 4% minus a 0.5% flat deduction applied separately).
Setting the fee in your projection
When adding a SIPP, ISA, or GIA asset to a retirement projection, you typically enter an annual charge percentage. This represents the total annual cost of holding that asset, including both platform and fund charges.
If you are not sure of the exact figure, your platform or pension provider is required to provide an annual charges illustration. The key term to look for is the Reduction in Yield (RiY) figure, which expresses the total annual cost as an equivalent percentage drag on returns.
These projections are for modelling purposes only. They do not constitute financial advice. Please consult a qualified financial adviser before making financial decisions.