Remember the personal savings allowance? Come on, cast your minds back!

Though I wouldn’t be surprised if it’s a struggle. Most of us haven’t had to worry about paying tax on interest income for ages.

A decade of ultra-low rates relegated fussing over how much we earned in interest into the same category as fretting over Bigfoot.

The personal savings allowance

All that’s changed with rising interest rates, however. Which in turn means the personal savings allowance is making a Mariah Carey-style comeback.

Higher interest rates mean you can now earn much more interest for your money on deposit. And that will mean more savers having to share their spoils with the taxman.

As a reminder, under the personal savings allowance:

• Basic-rate taxpayers can earn £1,000 per year in savings interest without having to pay tax.
• Higher-rate taxpayers can earn £500 per year.
• Additional rate taxpayers don’t get any personal savings allowance.

When rates were low, these allowances seemed quite generous. But rising rates change everything.

They mean that many of us will need to redo our sums.

For my part, though I’ve plucked up the courage to invest more in the stock market in recent years, I still maintain a rainy day savings account for short-notice access to cash.

I regularly contribute to this account and have thankfully have never had to dip into it. Partly because I’m frugal, but also because I’ve fortunately never suffered the hit to my income that my cash savings are earmarked against.

My savings pot has therefore steadily grown bigger, thanks to a stream of regular top-ups.

Of course, increasing the value of the pot in real (inflation-adjusted) terms has been pretty much impossible. And you don’t need to be Einstein to understand why.

When you’re getting no interest on your cash, even low inflation erodes your pot’s real terms value.

But times have changed. The Bank of England has been hiking rates to fight surging inflation – and that’s dragged up interest rates on savings, too.

Savings and inflation

UK inflation just hit 11.1%. That’s the highest level inflation has been at in over 40 years. And it’s been hot throughout 2022.

In response, the Bank of England has hiked its base Bank Rate every six weeks or so.

Only a year ago Bank Rate was a puny 0.1%.

Today it’s 3%.

Okay, so 3% is still a bit ‘meh’, historically. But the rise represents a massive change of direction.

Money is no longer cheap. Savings rates have shot up, as banks are competing for our money again.

This time last year:

• The market-leading easy-access savings account paid 0.66%1 variable.
• The top one-year fixed account paid a pitiful 1.35%.

Fast-forward 12 months:

• The top easy-access deal now pays 2.6% variable.
• The best one-year fix pays 4.36%.

That’s a colossal difference.

Yet before you crack out the champagne, it’s worth remembering even these higher savings interest rates are still well below the level of inflation.

It’s impossible to keep pace with inflation at the moment with cash, but at least looking to have your money in the best accounts helps soften the blow.

Higher interest rates and the personal savings allowance

While tax on savings interest isn’t anything new, the personal savings allowance is very much back in the spotlight thanks to these soaring rates.

For example, last years’ market-leading easy-access savings rate of 0.66% meant a basic-rate taxpayer needed to have roughly £152,000 saved in such an account before they breached their £1,000 savings allowance.

Even higher-rate taxpayers would have needed more than £75,000 stashed away.

With higher rates, however, far less is required to exceed the annual allowance.

Today basic-rate taxpayers need only £38,500-ish in the top easy-access account to breach their personal savings allowance on the interest they will earn.

Higher-rate payers will hit the buffer around the £19,000 mark.

	November 2021 Top easy-access savings: 0.66%	November 2022 Top easy-access savings: 2.6%
Threshold: basic-rate taxpayer	£152,000	£38,500
Threshold: higher-rate taxpayer	£75,000	£19,000

A £38,000 savings pot isn’t chump change, certainly. But it’s not really that big when you consider the standard advice is to save six months of your salary as an accessible emergency fund.

Come back cash ISAs, all is forgiven

I must admit, I’ve given cash ISAs the cold shoulder in recent years. It seemed more sensible to use my ISA allowance to passively invest in a shares ISA instead.

This year though, I’ve allocated the majority of my annual allowance to my cash ISA. This is solely because I’d probably breach my savings allowance on the interest I’d earn if I’d added more money to my standard savings account.

I say ‘probably’ because of the likelihood the variable rate on my easy-access savings account will increase over the next few months. There’s also a (smaller) chance I’ll be promoted at work, which would enable me to put away more cash. Assuming I avoid the temptations of lifestyle inflation!

The appeal of cash ISAs is that while interest rates are typically lower than those offered on normal savings accounts, anything you put in any ISA will be exempt from tax forever after.

This means your personal savings allowance isn’t affected by whatever you earn in your cash ISA.

However you’re limited as to how much you can put into an ISA each tax year. This allowance is currently £20,000 a year.

The best savings rates available

There’s a host of generous savings deals out there.

Easy-access savings

If you don’t want to lock your cash away – or you think interest rates on fixed accounts will soon be even higher – then an easy-access account might be best for you.

Right now you can earn 2.6% variable with Paragon Bank – though you can only make three withdrawals per year or the rate drops to 0.75%. If that’s not for you then app-only Atom Bank pays a slightly lower 2.55%.

Paragon requires a minimum deposit of £1. For Atom there is no minimum.

Fixed-rate savings

If you’re happy to lock away your money, then you can boost the interest rate on your cash. 

Investec currently pays the highest one-year fixed rate of 4.36%. You can open it with £5,000.

Higher rates are available with longer fixes, though locking away your cash for even more time may not be attractive given the backdrop of rising rates.

Cash ISAs

Are you close to exceeding your personal savings allowance? You may wish to open a tax-efficient cash ISA.

But do remember you can only stash up to £20,000 across all types of ISA in a given tax year.

The top easy-access cash ISA right now pays 2.75% variable, via Earl Shilton Building Society. You can open an account with just £10.

Alternatively, Principality BS pays a slightly lower 2.5% variable.

As for fixed-rate cash ISAs, Kent Reliance pays 4.4%, fixed for two years.

Note that you can withdraw cash early from a fixed-rate cash ISA – but you’ll be charged an interest penalty if you do so.

For Kent the early withdrawal penalty is 180 days interest, for instance.

All these accounts are covered by the Financial Services Compensation Scheme.

Are you thinking about the personal savings allowance? Have you opened a cash ISA this year? Share your thoughts and strategies in the comments below.

1. All interest rates on savings products in this article are AER, aka annual equivalent rate. [↩]

With the UK sliding into recession, war ruining Ukraine, and inflation stalking the High Street, now may not seem like a good time to invest.

Perhaps it’d be best to keep your financial powder dry? To wait for better days?

That makes perfect, intuitive sense – until you step back and look at the bigger picture.  

In the long run, equities go up

The bigger picture looks something like this: the most reassuring chart in investing…

Data from JST Macrohistory 1. November 2022.

The chart shows inflation-adjusted, UK stock market total returns2 surging through 150 years of upheaval and periodic catastrophe. 

Despite the regular, tragic punctuation of financial and human carnage, equities kept rising over the long-term. 

And whatever challenges we’re facing now, they’re unlikely to be as disastrous as the devastation wrought by the one-two punch of World War One and the Spanish Flu.

Or the Great Depression followed by World War Two. 

The UK’s worst stock market crash was the -73% real terms decline that played out over 32 months of misery from 1972 to 1974. 

You can see the gouge it tore in the graph above during the years of stagflation in the 1970s. 

But progress eventually resumed. Just as it did after the Dotcom Bust (-44%) and the Global Financial Crisis (-43%). 

Even the recent Covid crash barely registers in retrospect. 

Investing is one damn thing after another

Perhaps our current woes auger the next calamity? Maybe it would be best to batten down the hatches for now?

Time will tell. But the world is always troubled. 

Here’s a catalogue of threats that menaced investors in the years that followed the Global Financial Crisis: 

• 2010 – Greek bailout, The Flash Crash
• 2011 – EU debt crisis, double dip recession, US downgrade
• 2013 – The Taper Tantrum, US government shutdown
• 2015 – Chinese stock market crash
• 2016 – Brexit referendum, Trump election, Fed rate hike jitters
• 2018 – US-China trade war, quantitative tightening 
• 2019 – Inverted US yield curve, Great Stagnation warning
• 2020 – Covid, running out of Netflix shows in lockdown
• 2021 – Covid, Evergrande liquidity crisis, global energy crisis
• 2022 – Inflation surging, Russia invading Ukraine, deepening energy crisis, global downturn

Scares and setbacks continually close in on us like the walls of the Death Star’s trash compactor. 

In fact you could reach back into history and put together a list of cascading crises, dire prophecies, and apocalyptic warnings for almost any year. 

But there’s no point living like that.

On a personal level it would mean never stepping into a car, or dating, or going outside. 

Financially, it’d mean measuring your wealth in prepper stockpiles rather than in the stock market. 

To achieve anything like the (272,700%) growth of £1 shown on the chart, we must accept some risk and uncertainty. 

We can stay the course by keeping our eyes on the prize, not the temporary reversals.

Pain is why you are paid

Many of the market’s biggest opportunities have followed its most dramatic falls. 

Prices rocket when investors eventually realise they overreacted to the last shock. 

But human psychology guarantees you’ll fail to grasp those moments if you don’t upgrade your mental firmware from the basic fear and greed package. 

Greed sucks us into rising markets. Think 19th Century Gold Rush or 21st Century Crypto Bubble. We’re like moths to the money flame. 

Then we get burned. Fear takes over and instructs us to: “Freeze! Just chill for a while. Let’s wait and see what happens.” 

And then all of a sudden the market marches on without us. We miss most of the rally…

…until eventually greed overwhelms our fear again – dragging us back into the action because nobody wants to miss the last train to Fat Stacks City. 

This is the chimp version of scissors, paper, stone. Greed beats fear. Fear beats greed. We flip-flop in time to the market’s beat, but out of tune with the opportunity.

Playing the market this way only increases the risk of buying high and selling low. 

But wading in when your instincts scream: “Danger! Danger!” will increase your odds of buying low and selling high. 

As Warren Buffett puts it: “be fearful when others are greedy and greedy when others are fearful.”

Is now a good time to invest?

Now is as good a time as any to invest because for the vast majority of people it’s time in the market that counts, not timing the market. 

In retrospect, the historic traumas charted above proved brief downward squiggles on the great graph of historical returns.  

Progress is not inevitable, of course. But we shouldn’t lament the lack of guarantees either.

Uncertainty is the gunpowder that propels our future returns. It’s exactly because of the risk of loss that investors demand the prospect of higher returns from equities. 

No-one gets paid for betting on a sure thing. But buying a stake in the continued progress of humanity – and its main engines of productivity – has paid off for the past 300 years.

If you believe the arc of progress bends towards the good then owning a diversified portfolio of equities is a wise investment, alongside other useful asset classes.

Check out our guide on passive investing to see how to make it work. 

Take it steady,

The Accumulator

1. Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298. [↩]
2. We’re using UK stock market returns but the picture would be similar if you used the US or the World market. [↩]

This is our list of low-cost index funds and ETFs that’s kept updated to enable investors to find the cheapest index trackers available in the UK.

You can select from these funds to build a diversified portfolio that, as part of a passive investing strategy, will help you achieve your investing objectives. 

We focus on value and cost in this list because crushing charges is a core component of wise investing. Every pound you save in fees is a pound that snowballs over the years and speeds you towards your financial goals.

Our piece on management fees explains how even small savings add up to a big difference.

The growing recognition of the importance of investment fees has driven explosive growth in low-cost index funds and Exchange Traded Funds (ETFs) over the past 20 years.

These two types of index tracker are the best value investment vehicles available in the UK and the right choice for passive investors.

Low-cost index funds UK – the Total Cost of Ownership

Our cheapest tracker fund UK list is divided into the key sub-asset classes you may wish to invest in.

The picks per asset class are ranked by their Total Cost of Ownership (TCO).

The TCO is the sum of a fund’s transaction costs and its Ongoing Charge Figure (OCF).

Many outlets will only reveal a fund’s OCF (or Total Expense Ratio) but that misses out a significant chunk of cost embodied by its less well publicised transaction cost figure. 

Transaction costs are the fees and taxes that all investment funds inevitably incur when trading their underlying assets.

We think it’s important to include transaction costs when considering your shortlist because these charges can rival the OCF in particular sub-asset classes. 

Note: fund costs are a complex and confusing area so we’ve got a few more notes about fees after the main list below. 

In the meantime, let’s go grab some bargains!

UK large cap equity

Cheapest

• Vanguard FTSE UK All Share Index Unit Trust (GB00B3X7QG63) TCO 0.06% (OCF 0.06%, Transaction 0%)

Next best

• HSBC FTSE All Share Index Fund Institutional (GB0030334345) TCO 0.07% (OCF 0.02%, Transaction 0.05%)

• Lyxor Core UK Equity All Cap ETF (LCUK) TCO 0.1% (OCF 0.04%, Transaction 0.06%)

• Fidelity Index UK Fund P (GB00BJS8SF95) TCO 0.1% (OCF 0.06%, Transaction 0.04%)

• L&G UK Equity ETF (LGUK) TCO 0.12% (OCF 0.05%, Transaction 0.07%)

The L&G ETF has an ESG remit.

UK mid cap equity

Cheapest

• Amundi Prime UK Mid and Small Cap ETF (PRUK) TCO 0.05% (OCF 0.05%, Transaction 0%)

Next best

• HSBC FTSE 250 Index Fund C (GB00B80QG052) TCO 0.19% (OCF 0.1%, Transaction 0.09%)

• Vanguard FTSE 250 ETF (VMIG) TCO 0.22% (OCF 0.1%, Transaction 0.12%)

• Xtrackers FTSE 250 ETF (XMCX) TCO 0.24% (OCF 0.16%, Transaction 0.08%)

The Amundi index tracker is streets ahead of its rivals due to Morningstar’s report of zero transaction costs. We’ve requested verification from Amundi. 

UK small cap equity

There are no good low-cost index funds available for the UK small cap asset class. The iShares ETF listed below is more an expensive FTSE 250 tracker. Our other suggestions are active funds and are shown as a selection of what’s available rather than a comprehensive survey.

Cheapest

• Schroder Institutional UK Smaller Companies Fund (GB0007893984) TCO 0.53% (OCF 0.51%, Transaction 0.02%)

Next best

• iShares MSCI UK Small Cap ETF (CUKS) TCO 0.58% (OCF 0.58%, Transaction 0%)

• Baillie Gifford British Smaller Companies B Fund (GB0005931356) TCO 0.73% (OCF 0.73%, Transaction 0%)

• L&G UK Smaller Companies Fund (GB00B7LFF300) TCO 0.79% (OCF 0.78%, Transaction 0.01%)

UK equity income

Cheapest

• Vanguard FTSE UK Equity Income Index Fund (GB00B59G4H82) TCO 0.29% (OCF 0.14%, Transaction 0.15%)

Next best

• WisdomTree UK Equity Income ETF (WUKD) TCO 0.35% (OCF 0.29%, Transaction 0.06%)

• SPDR S&P UK Dividend Aristocrats ETF (UKDV) TCO 0.64% (OCF 0.3%, Transaction 0.34%)

Global equity – developed world and emerging markets (All-World)

Cheapest

• HSBC FTSE All-World Index Fund C (GB00BMJJJF91) TCO 0.13% (OCF 0.13%, Transaction 0%)

Next best

• iShares MSCI ACWI ETF (SSAC) TCO 0.20% (OCF 0.2%, Transaction 0%)

• Fidelity Allocator World Fund W (GB00B9777B62) TCO 0.21% (OCF 0.2%, Transaction 0.01%)

• Vanguard LifeStrategy 100% Equity Fund (GB00B41XG308) TCO 0.23%(OCF 0.22%, Transaction 0.01%)

• Vanguard ESG Global All Cap ETF (V3AB) TCO 0.31% (OCF 0.24%, Transaction 0.07%)

Vanguard LifeStrategy and Fidelity Allocator invest in other index trackers. Fidelity invests in REITs and small caps.

World equity – developed world only

Cheapest

• Amundi Prime Global ETF (PRWU) TCO 0.05% (OCF 0.05%, Transaction 0%)

Next best

• L&G Global Equity ETF (LGGG) TCO 0.11% (OCF 0.1%, Transaction 0.01%)

• Lyxor Core MSCI World ETF (LCWL) TCO 0.12% (OCF 0.12%, Transaction 0%)

• SPDR MSCI World ETF (SWLD) TCO 0.13% (OCF 0.12%, Transaction 0.01%)

• iShares Developed World Index Fund D (IE00BD0NCL49) TCO 0.12%(OCF 0.12%, Transaction 0%)

• Fidelity Index World Fund P (GB00BJS8SJ34) TCO 0.12% (OCF 0.12%, Transaction 0%)

The L&G ETF has an ESG remit.  

World ex-UK equity

Cheapest

• L&G International Index Trust I Fund (GB00B2Q6HW61) TCO 0.14% (OCF 0.13%, Transaction 0.01%)

Next best

• Vanguard FTSE Dev World ex-UK Equity Index Fund (GB00B59G4Q73) TCO 0.15% (OCF 0.14%, Transaction 0.01%)

• Aviva Investors International Index Tracking SC2 Fund (GB00B2NRNX53) TCO 0.25% (OCF 0.25%, Transaction 0%)

You can also pick ‘n’ mix using individual US, Europe ex-UK, Japan, and Pacific ex-Japan trackers.

World income equity

Cheapest

• Vanguard FTSE All-World High Dividend Yield ETF (VHYG) TCO 0.37% (OCF 0.29%, Transaction 0.08%)

Next best

• iShares MSCI World Quality Dividend ESG ETF (WQDA) TCO 0.38% (OCF 0.38%, Transaction 0%)

• Fidelity Global Quality Income ETF (FGQD) TCO 0.43% (OCF 0.4%, Transaction 0.03%)

• WisdomTree Global Quality Dividend Growth ETF (GGRG) TCO 0.43% (OCF 0.38%, Transaction 0.05%)

• Vanguard Global Equity Income Fund (GB00BZ82ZW98) TCO 0.58% (OCF 0.48%, Transaction 0.1%)

The Vanguard fund is active but gives you a non-ETF option.

World small cap equity

Cheapest

• UBS (Irl) ETF – MSCI World Small Cap Socially Responsible (WSCR) TCO 0.3% (OCF 0.23%, Transaction 0.07%)

Next best

• Vanguard Global Small-Cap Index Fund (IE00B3X1NT05) TCO 0.34% (OCF 0.3%, Transaction 0.04%)

• iShares MSCI World Small Cap ETF (WLDS) TCO 0.35% (OCF 0.35%, Transaction 0%)

• SPDR MSCI World Small Cap ETF (WOSC) TCO 0.47% (OCF 0.45%, Transaction 0.02%)

Emerging markets equity

Cheapest

• Amundi Prime Emerging Markets ETF (PRAM) TCO 0.1% (OCF 0.1%, Transaction 0%)

Next best

• Lyxor MSCI Emerging Markets ETF (LEMA) TCO 0.17% (OCF 0.17%, Transaction 0%)

• HSBC MSCI Emerging Markets Index ETF (HMEC) TCO 0.21% (OCF 0.15%, Transaction 0.06%)

• Fidelity Index Emerging Markets Fund P (GB00BHZK8D21) TCO 0.21% (OCF 0.2%, Transaction 0.01%)

• HSBC Emerging Market Sustainable Equity ETF (HSEF) TCO 0.29% (OCF 0.18%, Transaction 0.11%)

Multi-factor – Global

Cheapest

• JPMorgan Global Equity Multi-Factor ETF (JPLG) TCO 0.22%(OCF 0.19%, Transaction 0.03%)

Next best

• Invesco Quantitative Strategies ESG Global Equity Multi-Factor ETF (IQSA) TCO 0.3% (OCF 0.3%, Transaction 0%)

• Invesco Global ex UK Enhanced Index Fund Y (GB00BZ8GWR50) TCO 0.34% (OCF 0.23%, Transaction 0.11%)

• Franklin LibertyQ Global Equity SRI ETF (FLXG) TCO 0.4% (OCF 0.4%, Transaction 0%)

• Amundi ETF Global Equity Multi Smart Allocation Scientific Beta ETF (SMRU) TCO 0.41% (OCF 0.4%, Transaction 0.01%)

All factor investing is effectively straying into active management territory. Essentially, you hope that your chosen subset of the market can outperform. The important thing is to choose products underpinned by sound financial theory, a verifiable set of rules, and a commitment to low costs.

Regional ETFs are available. But we’ve stuck to global multifactor products for broad diversification.

Property – UK

Cheapest

• iShares UK Property ETF (IUKP) TCO 0.4% (OCF 0.4%, Transaction 0%)

Next best

• iShares MSCI Target UK Real Estate ETF (UKRE) TCO 0.43% (OCF 0.4%, Transaction 0.03%)

No index fund alternative.

Property – global

Cheapest

• iShares Global Property Securities Equity Index Fund D (GB00B5BFJG71) TCO 0.23% (OCF 0.17%, Transaction 0.06%)

Next best

• Amundi ETF FTSE EPRA/NAREIT Global ETF (EPRA) TCO 0.24% (OCF 0.24%, Transaction 0%)

• VanEck Global Real Estate ETF (TREG) TCO 0.26% (OCF 0.25%, Transaction 0.01%)

• L&G Global Real Estate Dividend Index Fund I (GB00BYW7CN38) TCO 0.27% (OCF 0.22%, Transaction 0.05%)

• Northern Trust Developed Real Estate ESG Index Fund (NL00150003F8) TCO 0.31% (OCF 0.28%, Transaction 0.03%)

There’s an unusual 1% exit fee on the Northern Trust fund. It’s also Dutch domiciled so watch out for withholding tax. 

All-commodities

Cheapest

• L&G All Commodities ETF (BCOM) TCO 0.15% (OCF 0.15%, Transaction 0%)

Next best

• iShares Diversified Commodity Swap ETF (COMM) TCO 0.26% (OCF 0.19%, Transaction 0.07%)

• iShares Bloomberg Enhanced Roll Yield Commodity Swap ETF (ROLL) TCO 0.28% (OCF 0.28%, Transaction 0%)

• WisdomTree Broad Commodities ETF (COMX) TCO 0.37% (OCF 0.29%, Transaction 0.08%)

Gold

Cheapest

• Amundi Physical Gold ETC (GLDA) TCO 0.12% (OCF 0.12%, Transaction 0%)

• Invesco Physical Gold A ETC (SGLP) TCO 0.12% (OCF 0.12%, Transaction 0%)

• WisdomTree Core Physical Gold ETC (GLDW) TCO 0.12% (OCF 0.12%, Transaction 0%)

• Xtrackers IE Physical Gold ETC (XGDU) TCO 0.12% (OCF 0.12%, Transaction 0%)

Gold trackers are Exchange Traded Commodities (ETCs).

UK Government bonds – intermediate

Cheapest

• Invesco UK Gilts ETF (GLTA) TCO 0.06% (OCF 0.06%, Transaction 0%)

Next best

• Lyxor Core UK Government Bond ETF (GILS) TCO 0.08% (OCF 0.07%, Transaction 0.01%)

• Vanguard UK Gilt ETF (VGVA) TCO 0.1% (OCF 0.07%, Transaction 0.03%)

• Fidelity Index UK Gilt Fund P (GB00BMQ57G79) TCO 0.1% (OCF 0.1%, Transaction 0%)

• iShares GiltTrak Index Fund (IE00BD0NC250) TCO 0.12% (OCF 0.1%, Transaction 0.02%)

UK Government bonds – long

Cheapest

• Vanguard UK Long-Duration Gilt Index Fund (GB00B4M89245) TCO 0.12% (OCF 0.12%, Transaction 0%)

Next best

• SPDR Bloomberg Barclays 15+ Year Gilt ETF (GLTL) TCO 0.16% (OCF 0.15%, Transaction 0.01%)

• iShares Over 15 Years Gilts Index Fund (GB00BF338G29) TCO 0.16% (OCF 0.16%, Transaction 0%)

UK Government bonds – short

Cheapest

• Invesco UK Gilt 1-5 Year ETF (GLT5) TCO 0.06% (OCF 0.06%, Transaction 0%)

• L&G UK Gilt 0-5 Year ETF (UKG5) TCO 0.06% (OCF 0.06%, Transaction 0%)

Next best

• Goldman Sachs Access UK Gilts 1-10 Years ETF (GIL5) TCO 0.07% (OCF 0.07%, Transaction 0%)

• iShares UK Gilts 0-5 ETF (IGLS) TCO 0.1% (OCF 0.07%, Transaction 0.03%)

• JPMorgan BetaBuilders UK Gilt 1-5 yr ETF (JG15) TCO 0.1% (OCF 0.07%, Transaction 0.03%)

The Goldman Sachs ETF has a longer bond duration than the other short-dated funds in this section, but it’s not quite an intermediate fund. 

UK Government bonds – index-linked

Cheapest

• Lyxor Core UK Government Inflation-Linked Bond ETF (GILI) TCO 0.08% (OCF 0.07%, Transaction 0.01%)

Next best

• Vanguard UK Inflation Linked Gilt Index Fund (GB00B45Q9038) TCO 0.13% (OCF 0.12%, Transaction 0.01%)

• iShares £ Index-Linked Gilts ETF (INXG) TCO 0.14% (OCF 0.1%, Transaction 0.04%)

• L&G All Stocks Index Linked Gilt Index Trust I (GB00B84QXT94) TCO 0.15% (OCF 0.15%, Transaction 0%)

UK index-linked funds may not be suitable for your portfolio due to embedded real interest risk. We’ve switched our Slow and Steady portfolio to a short duration global index-linked fund hedged to GBP. See below. 

Global inflation-linked bonds hedged to £

Cheapest

• Lyxor Core Global Inflation-Linked 1-10Y Bond ETF (GISG) TCO 0.22% (OCF 0.2%, Transaction 0.02%)

Next best

• iShares Global Inflation Linked Government Bond ETF (GILG) TCO 0.24% (OCF 0.2%, Transaction 0.04%)

• L&G Global Inflation Linked Bond Index Fund I (GB00BBHXNN27) TCO 0.27% (OCF 0.23%, Transaction 0.04%)

• Xtrackers Global Inflation Linked Bond ETF (XGIG) TCO 0.28% (OCF 0.25%, Transaction 0.03%)

• Royal London Short Duration Global Index Linked Fund M (GB00BD050F05) TCO 0.27% (OCF 0.27%, Transaction 0%)

All are short and intermediate options, hedged back to Sterling. The Royal London fund is active.

Global government bonds hedged to £

Cheapest

• Amundi Index JP Morgan GBI Global Govies ETF (GOVG) TCO 0.17% (OCF 0.15%, Transaction 0.02%)

Next best

• HSBC Global Funds ICAV – Global Government Bond Index Fund – BDHGBP (IE00BDFD2S67) TCO 0.22% (OCF 0.22%, Transaction 0%)

• iShares Global Govt Bond ETF (IGLH) TCO 0.25% (OCF 0.25%, Transaction 0%)

• Xtrackers Global Government Bond ETF (XGSG) TCO 0.29% (OCF 0.25%, Transaction 0.04%)

All hedged back to Sterling. The HSBC fund invests in emerging markets but the allocation is unknown as it is highly opaque for an index fund. Proceed with caution. 

Total global bonds hedged to £ (government and corporate)

Cheapest

• Amundi Index Global Aggregate 500M ETF (AGHG) TCO 0.09% (OCF 0.08%, Transaction 0.01%)

Next best

• iShares Core Global Aggregate Bond ETF (AGBP) TCO 0.1% (OCF 0.1%, Transaction 0%)

• iShares Global Aggregate Bond ESG ETF (AEGG) TCO 0.12% (OCF 0.1%, Transaction 0.02%)

• Vanguard Global Bond Index Fund (IE00B50W2R13) TCO 0.27% (OCF 0.15%, Transaction 0.12%)

• Vanguard Global Short Term Bond Index Fund (IE00BH65QG55) TCO 0.29% (OCF 0.15%, Transaction 0.14%)

All hedged back to Sterling.

Using cheapest index funds UK list

You can precisely identify the low-cost index funds you’re after by using the ISIN codes or ETF tickers we provide in brackets. (This piece helps explain fund names.)

We’ve given the code for the accumulation fund, GBP-priced version where available. Income distributing versions are usually offered too.

This piece explains the ins and outs of accumulation vs income funds.

• We’ve included an Environmental, Social, and Governance (ESG) index tracker option for each sub asset-class where available. 
• Actively managed funds are used when low-cost index funds are not available. Active funds are noted in the relevant sections.
• We don’t show platform exclusive index trackers as they’re generally not a good deal overall.

Cheap index trackers and costs – extra detail

The bid-offer spread is an additional cost you may incur that isn’t captured by the TCO figure above.   

This charge shouldn’t be significant for most passive investors anyway but you can gauge it by using the estimated spread published by Hargreaves Lansdown on its fund pages. 

The final significant cost you’ll pay are broker fees – we track those on our broker comparison table.

Watch out for FX fees charged by brokers on certain funds. This is something of a stealth cost that’s quite avoidable.

Some providers of synthetic ETFs publish a ‘swap fee’ on top of the TER. Just add the swap fee to the TER to get the Ongoing Charge Figure. This is how we’ve treated swap fees in the listing above. 

It’s worth knowing that a fund’s transaction costs can fluctuate quite a lot from period to period, especially if there’s excessive turnover in the fund’s index.

So don’t feel like you instantly need to switch if your fund’s transaction costs suddenly spike.

Keep your fund, and its main rivals, under review for up to a year before coming to any definitive conclusions about its competitiveness.  

Some index trackers register negative transaction costs but I’ve disregarded that from the TCO calculations above. That’s because negative transaction costs amount to an accounting technique that’s not sustainable over time.

Low-cost index funds UK – fees to ignore

Ignore a fund’s Annual Management Charge (AMC). The AMC is a very old-fashioned fee metric that excludes important fund costs.

This is why a fund’s AMC is typically lower than its OCF or TER.

Do not add the AMC to the OCF or TER.

The OCF and TER are interchangeable, so choose one of those costs (the highest) and add it to the fund’s transaction cost to calculate its TCO.

Treat negative transaction costs as zero.

Ignore entry and exit charges for index trackers where you see them mentioned in fund literature such as Key Investor Information Documents.

These fees do not apply to ordinary investors like you and I. They’re levied on institutional participants dealing directly with the fund provider.

The same goes if you see an eye-watering minimum purchase figure (such as £100,000) to buy into a fund.

Be guided by your broker’s minimum purchase amount.

Final thoughts on low-cost index funds and ETFs

There’s often little to distinguish index trackers that are closely matched in price. However we have previously written a few pieces to help you resolve tie-breaker situations:

• Comparing funds
• Why tracking difference is important
• How to choose index trackers
• Best global tracker funds
• How to choose a bond fund
• Best bond funds

If you’re looking for the cheapest place to buy and hold your low-cost index funds then take a look at our broker comparison table.

Our article on designing your own asset allocation will help you construct your own portfolio. If you want a quick shortcut, you can do a lot worse than checking out our best multi-asset fund picks for an instant portfolio solution.

We update this list periodically. Quoted TCOs may date, as fund groups fight their turf wars by undercutting each other (hurrah!) but this article should still prove an excellent starting point for your research.

If anyone comes across any better index tracker options I’d love to hear about them in the comments below.

Take it steady,

The Accumulator

Note: Some comments below may refer to an older collection of low-cost index trackers. Scroll down for the latest thoughts.