Initial charge

Initial Charge is also known as a front-end charge or front-end load. This is the charge made on an investment product or insurance policy to cover the costs of selling the policy or product to you.

The Initial Charge will include the commission paid to brokers who are selling it. This charge is deducted from the sum invested.

Changes to the legal framework on insurance and investments in the early 1990s have meant that we all get a much clearer picture of just how much money goes in charges on the insurance policies and investment products that we buy.

Some insurance and pension products have such high front-end loads that virtually none of the money you pay in during the first year actually goes into your investment. Instead it pays for the policy to be set up and pays a juicy commission to the person who sold it to you.

In savings products unit trust companies often apply an initial charge of around 5 but they can vary from nothing up to as much as 7.5 depending on the fund. This means that for every £100 you put in only £95 is actually invested.

To put it another way the value of your unit trust will have to rise by 6 for you to see a 1 return on your original investment. However charges are a fact of life and chances are you will not be better off leaving your money in a savings account in a bank or building society.

It is better to pay 5 on a stockmarket -based investment fund which grows by 15 giving you a net return of 10 than a net return of less than 5 on a savings account.

Usually you will not be able to get a discount on the initial charge by buying direct from the product provider. You may have cut out the broker but theyll still charge you the full amount.

If you want to reduce the charge and raise the amount of your money which actually gets invested you need to look for a broker who offers a discount on the unit trusts initial charge or go to one who charges fees rather than commission and negotiate a rebate on the commission he or she earns on the product.

Some investment products have no initial charge - mainly the tracker funds which try to automatically match the performance of one of the stockmarket indices usually the FTSE-100 or the FTSE All Share .

2009-02-17 00:00:00 © Moneyextra.com