It's one thing to say that fees compound over time; it's another to actually see the numbers laid out over a realistic investing horizon. This article works through a single hypothetical £100,000 portfolio held for 30 years — a plausible length of time for a pension or long-term ISA holding — under several different combined fee levels, to illustrate just how much of a difference "fee drag" can make to the final outcome.
What fee drag actually means
Fee drag refers to the cumulative effect of ongoing charges — platform fees plus fund OCFs, as discussed in the companion article on calculating the total all-in cost — reducing the growth rate an investor actually experiences, year after year, compared with the underlying gross investment return. Because charges are deducted regardless of whether markets rise or fall, and because they're deducted every single year rather than as a one-off, their effect compounds in exactly the same way that investment growth itself compounds — just in the opposite direction.
The assumptions behind this worked example
To keep the maths clear and comparable, this example uses a single hypothetical £100,000 lump sum, with no further contributions or withdrawals, growing at an assumed hypothetical 6% a year before any charges, over exactly 30 years. These figures are illustrative only, chosen to make the effect of fees easy to see — they are not a prediction or promise of any real investment's future performance, which will vary and could be higher or lower than this assumption, including negative in some years.
The worked calculation across different total fee levels
| Total annual cost (platform + fund OCF) | Net annual growth rate | Value after 30 years (hypothetical) | Total cost paid over 30 years vs. a 0.20% baseline |
|---|---|---|---|
| 0.20% (low-cost platform + tracker fund) | 5.80% | ≈£556,000 | — |
| 0.50% | 5.50% | ≈£497,000 | ≈£59,000 more |
| 1.00% | 5.00% | ≈£408,000 | ≈£148,000 more |
| 1.50% | 4.50% | ≈£336,000 | ≈£220,000 more |
| 2.00% (high platform charge + expensive active fund) | 4.00% | ≈£277,000 | ≈£279,000 more |
The gap between the cheapest and most expensive hypothetical scenario here is striking: roughly £279,000, or exactly double the final value, purely as a result of a difference in ongoing charges of 1.8 percentage points a year, with an identical assumed gross return in every scenario. This is the mathematics of compounding working against the investor rather than for them — a small, steady annual drag applied consistently for three decades.
Why the effect isn't linear
It might be tempting to assume that doubling the fee simply doubles the cost — but because fees are deducted from a compounding balance, the effect is more pronounced than that. Money that would have gone toward future growth (and then itself generated further growth) is instead deducted early and permanently, meaning the "lost" growth compounds away just as the "kept" growth would have. This is why the gap between the 0.20% and 1.00% scenarios above (£148,000) is more than double the simple difference in the annual fee percentage might suggest.
What changes the size of the effect
Time horizon
Fee drag is far less dramatic over shorter periods. Re-running the same 0.20% versus 2.00% comparison over 10 years instead of 30 produces a much smaller gap in cash terms, simply because there's been less time for the compounding effect to build. This is one reason fee levels matter especially for pension savings, which are often held for multiple decades.
Ongoing contributions
This example uses a single lump sum for clarity, but many real portfolios — particularly pensions built through regular monthly contributions within the £60,000 annual allowance for 2025/26 — add new money throughout the period. Regular contributions generally reduce the proportion of the final pot exposed to fees for the full 30 years (since later contributions have had less time to compound, in either direction), but the underlying principle that lower ongoing costs compound to a meaningfully larger net outcome over long periods remains the same.
Actual investment returns
This example deliberately uses the same assumed gross return (6%) in every scenario, purely to isolate the effect of fees. In reality, gross returns will vary considerably year to year and cannot be known in advance — which is precisely why cost, one of the few genuinely predictable variables, is often given significant weight when comparing similar investment options.
Applying this thinking to real decisions
- Calculate the current total annual cost of a portfolio (platform charge plus weighted average fund OCF), as set out in the companion article on platform fee plus fund fee total cost.
- Consider the likely time horizon — a pension likely to be held for 20–40 years is more sensitive to fee differences than a short-term savings goal.
- Use a compounding calculation (or a reputable online compound interest calculator) with a chosen illustrative growth rate to see the approximate long-run effect of the current cost level, and compare it against a lower-cost alternative.
- Treat any such projection as an illustration of the mathematics of fees, not a forecast of actual future portfolio value, since real returns will differ from any assumed rate.
Extending the model: a monthly contribution scenario
To show how the effect plays out for a more typical saver, consider a second hypothetical scenario: rather than a single lump sum, an investor contributes £300 a month into a pension for 30 years, with no starting balance, again assuming a hypothetical 6% gross annual growth rate before charges.
| Total annual cost | Net annual growth rate | Value after 30 years (hypothetical, £300/month contributions) |
|---|---|---|
| 0.20% | 5.80% | ≈£277,000 |
| 1.00% | 5.00% | ≈£241,000 |
| 2.00% | 4.00% | ≈£202,000 |
Even with regular contributions rather than a single lump sum, the gap between the lowest and highest fee scenario here is roughly £75,000 — smaller in absolute terms than the lump-sum example (since later contributions have had less time to be affected by compounding fee drag), but still a substantial sum, illustrating that the effect is meaningful under a realistic savings pattern and not just a lump-sum thought experiment.
Why small percentage differences are so easy to underestimate intuitively
Human intuition tends to process percentage differences (such as "1% versus 2%") as inherently small, since both numbers look small in isolation. What's harder to intuitively grasp is that these percentages apply every single year to a growing balance, over a very long period, and that the "lost" amount in early years would itself have gone on to compound in later years had it not been deducted. This is arguably the single most useful mental model an investor can take from this kind of worked example: a fee is not simply "a bit less growth this year" — it is a permanent, compounding reduction to the base the rest of the portfolio's growth builds upon, for every year that follows.
A note on what this example does not show
This worked example isolates the cost variable deliberately and does not attempt to model or compare actual fund performance, since past and assumed returns are not reliable predictors of the future. It also does not account for inflation, which would reduce the real (inflation-adjusted) value of every figure shown here to some degree. The purpose is narrower and more specific: to show, mathematically, how a difference in ongoing charges compounds over a long holding period when everything else is held constant.
What this means for reviewing an existing portfolio
For an investor who already holds a portfolio built up over some years, this kind of calculation can be usefully run in reverse: taking the actual current total annual cost (platform fee plus weighted average fund OCF, as covered in the companion article on calculating this figure), and projecting forward the remaining likely holding period, to see roughly what a realistic lower-cost alternative might be worth over that remaining time. This is generally a more useful and motivating exercise than looking at the fee percentage in isolation, since a number like "0.8 percentage points a year" is far easier to dismiss as trivial than a concrete pound figure calculated over a realistic multi-decade horizon, even though the two are simply different ways of expressing the same underlying cost.
Putting the numbers in context alongside other financial priorities
None of this is meant to suggest that cost should override every other consideration in building a portfolio — diversification, an appropriate level of risk for the investor's time horizon, and consistent long-term contributions typically matter at least as much, if not more, than shaving a further fraction of a percent off ongoing charges. The purpose of a worked example like this one is simply to make a genuinely abstract idea — "fees compound" — concrete enough to weigh sensibly alongside those other priorities, rather than to suggest cost minimisation is the single most important decision an investor will make.
Key takeaways
- Fee drag is the compounding effect of ongoing charges reducing an investor's net growth rate every year, and it accelerates over longer time horizons.
- In this hypothetical £100,000 example, a fee difference of 1.8 percentage points a year resulted in roughly double the final portfolio value over 30 years.
- The effect of a given fee difference is more pronounced than simple percentage subtraction suggests, because fees reduce the base amount available to compound in future years.
- Longer holding periods, such as multi-decade pension saving, are more sensitive to fee levels than short-term investments.
- All figures in this kind of calculation are illustrative assumptions used to isolate the mathematics of cost, not predictions of actual future investment performance.