Charges deducted from Capital or Income

Asghar wrote: »

However when the charges/fees are deducted from capital, 100% of the income the fund receives is invested back into the fund and reflected in the unit price. The manager then takes the 1% charge from the number of units you hold, so if you had 100 units, then after the 1% charge you will end up with 99 units.
That you will notice, though the value of your 99 units should be the same, as the fund price itself will be 1% higher.

As Coldiron says, that's not how it works with the sort of funds the OP is looking at. The manager does not simply confiscate your units to pay for the running costs of the fund. So you keep your 100 units.

The value of the units declines as the fund pays out costs and expenses and also when it pays out dividends to its owners. If it's taken its fees off its annual income stream (rather than its capital performance) to determine the remaining net income which it's going to pay out to investors as dividends, it will pay out fewer pounds of dividends and retain more pounds in the fund and so the net asset value of the fund will remain higher than if it had charged its fees to capital (everything else being equal).

Some old insurance-based or pension funds might have a more archaic charging method where you pay for the fund fees with units or you receive extra units by way of a management fee rebate; there can be some complexities embedded within your statements. But with the transparent way that retail OEICs / ICVCs / UTs operate, you are not going to find that happening with the funds or (investment trusts) you buy through HL.

TheShape wrote: »

OP mentioned 'the charges'. Do we know whether the OP is talking about fund charges or platform charges?

Platform charges may be paid either from cash (either paid in or perhaps generated from income) in the account or by HL selling some of the units to cover the charge.

You're right, we don't. All of us above had assumed it was in relation to the fund charges from the fund manager.

On HL's 'at a glance' page for each fund, the 'other information' data box has an item "charges deducted from:" which is whether the fund manager takes their costs out of the income or capital flows into the fund. As the pop-up box next to that item suggests, "Some funds take charges from their capital and distribute all their income, which can reduce the capital growth potential. Other funds take their charges from the fund's income". It was that bit, that we assumed the OP meant.

It's possible of course that he means the charges that HL levy for providing the platform / admin service. They run multiple virtual/theoretical cash accounts for you within the ISA - which is something that helps some customers stay on top of what's going on with their affairs but just confuses others .

When you contribute to the ISA or put money into a fund or sell out of a fund, it puts the money in or takes the money out of your virtual 'capital' cash account. When you get income distributed back to your HL ISA account from your investments as (e.g.) interest or dividend or property income distributions, it puts it that money into your virtual 'income' cash account; and when you want to withdraw the ongoing income back to your own bank account you could take it out of that income cash account.

But in reality if you try to buy an investment for £1000 with your total cash and there isn't enough in your 'capital' account, it will just grab the relevant shortfall from your 'income' account. Or if you want to withdraw £100 from your 'income' account representing last quarter's dividend income, but actually there's only £90 in there because of fees or some other investment you did, it will take the difference from your 'capital' account to make up your £100 withdrawal requirement. So really it is all just one big cash account to do with as you like, especially if you are using a tax wrapper anyway so that income or capital events have no tax consequences for you anyway. Some HL customers get annoyed that if you want to find out everything that's gone on in your account history you have to look at / download the income stuff and the capital stuff separately - because to their mind, really it is all one big account.

However, some people want or need this preservation of capital and income events being separately listed and maybe they are planning to set it up to automatically distribute the contents of the income account to themselves each month or quarter or year. They might then be interested in how HL propose to grab their fees for running the ISA, and HL offer a variety of options in that regard.

E.g., they can take the money you owe them each quarter from your income cash account in priority to your capital cash account, and then your non-ISA account ; your capital cash account in priority to your income cash account, and then your non-ISA account ; your capital account only (not your income cash account) and then your non-ISA account; or, your non-ISA fund-and-share account and then your income cash-account in priority to your capital cash account. (http://www.hl.co.uk/my-accounts/fee-collection-options)

Each of those gives you a different result in terms of what would be left in your respective 'income' or 'capital' cash accounts (or other non-ISA account with HL). It doesn't make much difference whether you go income or capital as it only affects recordkeeping and not your tax bills, but if you had a plan to distribute some spending money to yourself periodically out of the ISA's "income" cash account each month, the amount you could take before that virtual account was empty, would depend on whether the HL fees had been first taken out of there or mostly/ entirely from the "capital" account.

Paying your HL ISA platform fees out of some other account entirely (e.g. a HL non-ISA fund and share account) is quite attractive as it means you are not using up your precious £20k ISA allowance by paying for fees out of the ISA. But if you're not using up your £20k allowance each year anyway, many people will not care and just stick to the default option.