When you invest in a fund within your ISA or SIPP, you pay an ongoing charge. That charge varies dramatically depending on whether you choose an index fund or an actively managed fund. Index funds typically charge between 0.1% and 0.2% per year, whilst actively managed funds often charge 0.75% to 1.5% or more. Over decades, that difference compounds into tens of thousands of pounds. The question is whether the higher fee buys you better returns.

What Index Funds Offer

An index fund (also called a tracker fund or passive fund) aims to replicate the performance of a market index such as the FTSE 100, FTSE All-Share, or a global index like the MSCI World. The fund holds the same shares in the same proportions as the index it tracks. There is no fund manager making active decisions about which shares to buy or sell. The fund simply mirrors the market.

Because the strategy is mechanical, costs stay low. You pay for the administration, custody of assets, and regulatory compliance, but you do not pay for research teams, analysts, or a star fund manager. The Ongoing Charges Figure (OCF) for a FTSE All-Share index fund from Vanguard or iShares might be 0.06% to 0.15% per year. On a portfolio of GBP 50,000, that amounts to GBP 30 to GBP 75 annually (Which?, 2026).

Index funds guarantee you will not underperform the market (minus the small tracking error and fee). If the FTSE 100 rises 8% in a year, your index fund should rise by roughly 7.9% after a 0.1% fee. You accept market returns, nothing more and nothing less.

What Actively Managed Funds Offer

An actively managed fund employs a professional fund manager and a research team to select investments they believe will outperform the market. The manager might overweight certain sectors, pick undervalued shares, or avoid companies they consider overpriced. The strategy requires expertise, time, and resources, which is why the OCF typically sits between 0.75% and 1.5%, and sometimes higher for specialist funds.

For that fee, you are paying for the possibility of above-market returns. If the manager successfully identifies winning shares before the wider market does, the fund might deliver 10% or 12% in a year when the index delivers 8%. That outperformance, if sustained, could more than justify the higher cost. You are also paying for active risk management: a skilled manager might reduce exposure to sectors heading for trouble, potentially cushioning losses during a downturn.

The Evidence on Performance

The challenge for actively managed funds is consistency. According to research and data tracked by consumer guidance services, the majority of actively managed UK equity funds fail to beat their benchmark index over the long term, particularly after fees are deducted (MoneyHelper, 2026). Over a ten-year period, fewer than one in four active UK equity funds outperform a comparable index fund. The picture is similar for global equity funds.

Short-term outperformance does occur. A fund manager might have a strong three-year run. The difficulty is identifying which manager will outperform in advance, and whether that outperformance will persist. Past performance, as the standard disclaimer states, is not a reliable indicator of future results. A fund that topped the performance tables five years ago might languish in the bottom quartile today.

Foundational texts such as Principles of Finance explain that markets are reasonably efficient: publicly available information is quickly reflected in share prices, making it hard for any manager to consistently exploit mispricings after costs (OpenStax, 2026). This does not mean active management cannot add value, but it does mean the bar is high.

Fee Impact Over Time

A 1% difference in annual charges compounds significantly. Consider two investors, each starting with GBP 50,000 and adding GBP 500 per month for 25 years, with both portfolios growing at 7% annually before fees. The investor in an index fund charging 0.1% would end with roughly GBP 346,000. The investor in an actively managed fund charging 1.1% would end with roughly GBP 305,000. The fee difference alone costs GBP 41,000 over that period, even though both achieved the same gross return.

Read also: Ethical and ESG Investing in the UK: What to Look for in a Fund

If the active fund manager genuinely delivers 8% annual growth (before fees) whilst the index delivers 7%, the extra 1% gross return offsets the higher fee, and both investors end in similar positions. The active investor only comes out ahead if the manager beats the index by more than the fee difference, consistently, over decades.

Tax Considerations in the UK

Within an ISA or SIPP, fund fees matter more than ever because you cannot offset the drag against taxable income. Every percentage point lost to charges is a percentage point lost to your tax-free growth. Outside a tax wrapper, both index and active funds generate capital gains when you sell units, and both may distribute dividends subject to your dividend allowance and Income Tax. The fee structure does not change the tax treatment, but the lower cost of index funds means more of your money compounds over time rather than going to the fund provider.

Always verify current OCF figures with the fund provider or platform before investing, as charges can change. Check the Key Investor Information Document (KIID) or the newer Key Information Document (KID) for the fund’s ongoing charges and any performance fees (FCA, 2026).

Choosing Between the Two

If you believe markets are largely efficient and prefer a low-cost, low-maintenance approach, index funds offer a straightforward route to long-term wealth building. You accept market returns and avoid the risk of underperformance from a poor fund manager.

If you have confidence in a specific fund manager’s process, or you want exposure to a niche strategy (such as smaller companies, emerging markets, or a particular sector), an actively managed fund might justify the higher fee. Research the manager’s long-term track record, not just recent performance, and consider whether the strategy is genuinely differentiated rather than closet indexing (charging active fees for a portfolio that closely mirrors the index).

For most UK investors building a diversified portfolio inside an ISA or SIPP, the evidence suggests starting with low-cost index funds as the core holding. You might add a smaller allocation to active funds in areas where skilled managers have historically added value, but the bulk of long-term growth typically comes from staying invested, keeping costs low, and allowing compound returns to work over decades.

Disclaimer: This article provides general educational guidance and does not constitute regulated financial advice. Nexzoe is not authorised by the Financial Conduct Authority. Fund performance, charges, and tax rules can change; verify current rates and terms with an FCA-authorised financial adviser or the fund provider before making investment decisions. Consider your personal circumstances and risk tolerance, and consult an Independent Financial Adviser (IFA) for tailored advice.