Watch out for those initial charges when you choose your ISA

Avoiding early charges can reap large rewards - but there may be a catch

If you are trying to select an individual savings account (ISA) to invest in ahead of the end of the financial year, comparing initial charges is easy to do even if you are not a financial expert.

If you are trying to select an individual savings account (ISA) to invest in ahead of the end of the financial year, comparing initial charges is easy to do even if you are not a financial expert.

Research published today shows that if you do not pay an initial charge on your ISA, the difference in the long-term performance of your fund can be dramatic. If you invested rather than paid the average initial charge of 3.94 per cent on an ISA, representing £39.40 on a £1,000 investment, over 20 years you would have accumulated over £1,000, say findings by the independent ratings agency Lipper.

Lipper, which was commissioned to do the research by Virgin Money, also found that the boost to your investment could be significant, as it improves the chances your investment will outperform the FTSE All-Share index.

This is because, without an initial charge, your investment is likely to start growing from when you take it out, rather than after the few months needed with other investments when the first bit of growth only makes up for the charge.

However, the argument's flip side is that costs usually met by initial charges have to be paid in another form. This can be through higher annual management charges. For example, a tracker fund that is free of initial charges but which has annual charges of around 1 per cent, is expensive compared to funds with a low initial fee and negligible annual charges.

In addition, many investment experts say trackers - which follow share prices in the index and involve very few active decisions by fund managers - are not the best types of investment when markets are underperforming. It may be better to pay the extra costs and opt for an actively managed fund.