In the world of investing, costs are a crucial yet often overlooked factor that can significantly impact your long-term financial success. Markets can be hard to predict, but the one thing that investors can control is their costs.

To control your costs, however, you must first be able to understand how much you are paying. Even apparently small costs can add up to big losses over time. Tax can also eat into your returns, which is why it’s important to consider using tax-efficient accounts to save for retirement and other long-term goals.

Stay in control

Costs matter because every pound you pay in fees eats into your future returns. Investing costs might not look like big numbers, but if you're getting a return of 4% and paying 2% in charges, that's half of your returns gone. In the graph below, we show what £100,000 could look like after 30 years, with four different fee scenarios. For simplicity, we assume a hypothetical annual return of 6%, which is reinvested.

Higher costs can significantly depress your portfolio’s growth

The chart shows what £100,000 could look like after 30 years, with four different fee scenarios. It assumes a hypothetical annual return of 6%, which is reinvested. The vertical axis shows the portfolio value, with the numbers £100,000 and £600,000. The horizontal axis shows years from 0 to 30. The light green line depicts the lowest-cost scenario. The investor pays 0.1% in fees each year and ends up with a portfolio worth £557,383 after 30 years. In the dark green line, the investor pays 0.7% in fees and ends up with £465,899. In the gold line, the investor pays 1.3% in fees and ends up with £389,846. The grey line depicts the highest-cost scenario, where the investor pays 2.0% in fees and ends up with £317,081.

Notes: The portfolio balances shown are hypothetical and do not reflect any particular investment. In this example, the portfolio returns 6% annually, then investment costs are taken at the end of the year. The rate of return is not guaranteed. The final account balances do not reflect any taxes or penalties that might be due upon distribution.

Source: Vanguard calculations.

In the lowest-cost scenario, the investor pays 0.1% in fees each year; in the other three scenarios, the investor pays 0.7%, 1.3% or 2.0%. After 30 years, owning the lowest-cost portfolio means having a balance that is £240,302 higher than the one produced by the highest-cost portfolio, but also significantly higher than the other two scenarios. This stark contrast illustrates how even small percentages in costs can erode potential returns dramatically.

Lower costs can support higher returns

Meanwhile, Vanguard research has found that lower-cost funds have historically outperformed higher-cost funds after charges. In the chart below, we looked at all funds investing in shares (regardless of where they were available for sale) between 31 December 2012 and 31 December 2022. We then split the funds into four equal groups based on their costs from lowest to highest.

We found that those with the lowest fees had an average annualised1 return of 11% and those with the second-lowest costs returned 9.1% a year. However, the funds with the second-highest fees had an average annualised return of 7.5% and, finally, those with the highest costs returned only 6.5% a year.

How costs impact returns

The chart shows the performance of all funds investing in shares between 31 December 2012 and 31 December 2022. The funds are split into four equal groups based on their costs from lowest to highest. The vertical axis is named ‘Range of costs’ and the horizontal axis says ’10-year annualised return’. The gold bar depicts the highest-cost funds and shows a 10-year annualised return of 6.5%. The two grey bars show the second-highest-cost and second-lowest-cost funds, which have 10-year annualised returns of 7.5% and 9.1%, respectively. The green line depicts the lowest-cost funds, which have a 10-year annualised return of 11%. There is an arrow pointing to the green line with text saying: ‘Lower-cost funds have historically outperformed higher-cost funds after costs.’

Past performance is no guarantee of future returns.

Notes: We considered all equity funds available in Morningstar Direct from 31 December 2012 to 31 December 2022, regardless of where they were available for sale. In total, there were 8,192 funds. Each fund is represented by its oldest share class. Average annualised returns are calculated in GBP and net of expenses, excluding transaction costs and taxes. We relied on fees from the fund’s prospectus when they were reported; otherwise, we approximated the fee using the annual expense net ratio, which reflects the actual fee charged during a particular tax year. The average fees for each of the four bars in the chart were 0.57% (lowest cost), 1.20% (second-lowest cost), 1.62% (second-highest cost) and 2.47% (highest cost).

Sources: Vanguard calculations, using data from Morningstar, Inc.

Don’t forget tax

Taxes are another potentially significant cost that investors may face, which is why it’s important to consider investing in tax-efficient accounts. A simple way to do this is to invest in an individual savings account (ISA).

ISAs allow your money to grow free from the income tax you might pay on the dividends2 or interest you receive, as well as the capital gains tax (CGT) that could be applied on any profits that you make.

You may also benefit from tax relief on your contributions into a pension, but don’t forget that you won’t be able to access the money inside your pension until you’re 55 (rising to 57 from 2028). For every £80 you save into a pension, the government adds £20, boosting your contribution to £100. For higher and additional-rate taxpayers, you can claim back an additional £20 or £25, respectively, via your self-assessment tax return. You can see the impact that tax relief could have on the size of your pension pot in this earlier article.

The government offers these tax breaks because it knows the importance of long-term saving. The tax breaks are generous, so make sure you use them!

How costs work at Vanguard

At Vanguard, how much you’ll pay to invest with us depends on which service you choose. We offer a ‘do it yourself’ service where you build your own portfolio of funds yourself. We also offer a managed service, where we choose funds for you based on how you feel about risk.

For both services, there are fund management costs and an account fee. For those using our managed service, you’ll also pay a management fee.

The fund management costs are reflected within the price of the fund and include ongoing costs (day-to-day management costs and admin expenses) of 0.2% on average, fund transaction costs (such as dealing costs and taxes) and one-off costs such as a ‘bid-offer spread’3 for Vanguard exchange-traded funds (ETFs). You can read more about these fees here.

We have one low account fee of 0.15% of your investments, capped at £375 a year for accounts over £250,000. The account fee covers the costs of running our online service, customer support team and keeping your investments secure. You only pay one account fee, even if you have more than one account with us and it is based on the overall value of the investments held in your accounts.

The fee of 0.3% a year for our managed service covers the costs of assessing your attitude to investment risk, monitoring and rebalancing4 your investments and sending you annual updates.

Remember, every small saving in costs compounds over time, giving you a greater chance of achieving investment success.


1 An annualised return shows what an investor would earn over a period of time if the annual return was compounded (i.e. the investor earns a return on their return as well as the original capital).

2 Dividends are the payments some companies make to their shareholders out of their profits.

3 When you invest in a Vanguard ETF you'll incur a one-off cost due to something called the 'bid-offer spread'. This is because an ETF trades like a share in that there is an offer price (the price you can buy an ETF for) and a bid price (the price you sell the ETF for). The difference between the bid and the offer price is called 'the spread'.

4 Rebalancing means changing the mix of investments in your portfolio if they move out of line with the target mix for your risk profile.

How to get started

Learn more about investing with us.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results. Simulated past performance is not a reliable indicator of future results.

Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55.

Any tax reliefs referred to are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.

Important information

Vanguard Asset Management Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described, please contact your financial adviser.

This article is designed for use by, and is directed only at persons resident in the UK.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

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