Pooled Invetments

A pooled investment allows an individual to invest in a large portfolio of assets with many other investors. The risk is therefore reduced…

… due to the wider spread of investments in the portfolio. Various funds are available, based on:

• income or growth needs, such as: - income funds providing high dividends
  • capital growth funds
  • balanced funds which aim to achieve a mix of both
• geographical allocation, such as:
  • UK funds
  • international or specific regional funds (eg Far East)
• specialist funds which invest in a specific type of company, such as a property or technology fund.

The main vehicles for pooled investments are:

• unit trusts
• open-ended investment companies (OEICS)
• investment trusts
• insurance company funds.

The first three can nearly always be bought within an Individual Savings Account (ISA), if desired. Units or shares are usually listed on the London Stock Exchange and you can buy or sell units or shares at any time, subject to any dealing delays. The Financial Services Authority (FSA) regulates UK funds.

If income is not required, accumulation units can often be bought, which reinvest the net dividend in the investor's holding.

Unit trusts

Structure

Investment houses, banks and insurance companies, amongst others, offer these. Investors' money is pooled and invested in a number of different shares or bonds. A fund manager chooses which stocks to buy and manages the fund.

The fund is split into units. The unit price varies according to the value of the underlying investments. Fund managers can vary the number of units in issue to meet demand.

Charges

There are usually two prices: a buying price and a lower selling price. The buying price includes an initial charge and the difference between the two prices is typically 5%. There is an annual management charge, typically 1.5% of the value of the investment.

Tax

Dividends received by UK resident individuals carry a non-refundable tax credit of 10%. Interest payments suffer tax at source of 20%, which can be reclaimed if the individual is a non-taxpayer. Whether the payment is interest or dividend will be clearly shown on the counterfoil. Further tax on either dividends or interest is due only if the investor pays tax at the higher rate. Income is taxed in this way whether it is taken or accumulated in the fund.

On sale, there may be capital gains tax (CGT) due on any profits made. If a capital loss arises, it is usually possible to offset this against other gains.

OEICs

Structure

These are similar to unit trusts, although they do differ in some ways including the fact that they are companies with boards of directors.

Investors buy shares in OEICs. The money invested is pooled to buy a range of stocks and shares, in a similar way to unit trusts. The OEIC managers can vary the number of shares in issue to meet demand.

Many unit trusts have been converted to OEICs because it is considered to be a more modern structure and can be more efficient to run.

Charges

Unlike unit trusts, there is only one price for shares in OEICs, which varies with the value of the underlying investments. The price is usually set once a day. This does not include any charge made for buying, which is quoted separately and is typically 5 to 6%.

There is an annual management charge usually set at 0.5 to 2%.

Tax

The position is the same as for unit trusts.

Investment trusts

Structure

Investment trusts are quoted stock market companies that pool investors' money and invest it in other companies. They differ from unit trusts or OEICs in that the trust cannot increase the number of shares to satisfy demand and the trust can also borrow money.

As the trust cannot vary the number of shares in issue to meet demand, the share price depends on whether people are buying or selling the shares, as well as the value of the underlying assets. Consequently, the share price may be higher or lower than the value of the underlying investments, meaning you either pay a premium for the shares or effectively buy them at a discount.

This factor, together with the trust's ability to borrow money, means that these investments are generally higher risk than unit trusts or OEICs.

Charges

If you buy direct from the provider there may be a small initial charge. If you buy through a stockbroker you will incur dealing costs and stamp duty.

Annual management charges range from 0.1% up to 1.5%. Specialist funds or an ISA wrapper may cost more.

Tax

The tax implications for a UK resident individual are the same as for any quoted company and much the same as for unit trusts.

Insurance company funds

Structure

These are the funds in which your money is invested if you buy a regular premium life policy; they are also available for lump sum investments. Investors' money is pooled into one or other of two main types of fund; with-profits or unit linked.

With-profit funds

These invest in shares, bonds and property. They aim to smooth out the returns from stock markets by holding back some of the growth in good years to tide you over in the leaner years. They generally pay annual bonuses, which vary. You may also get a terminal bonus at the end of the investment period. Both types of bonus are dependent on the performance of the underlying funds and are not guaranteed.

On encashment, a market value adjustment may be applied. This means the amount of money you receive on encashment could be reduced in times of adverse market conditions. The ability to apply a market value adjustment is generally discretionary on the part of the investment company. Some with profits funds give specific dates when money can be withdrawn without a market value adjustment being applied. The value is not guaranteed and you could lose money on this type of investment.

Unit-linked funds

These invest in various assets such as shares, fixed interest, property and cash. The unit price is directly linked to the value of the investments held in the fund.

Charges

Charging structures can be complex and varied, however, there is generally an initial charge, typically up to 6%. There can also be exit charges for surrender in the early years and annual charges typically 0.5% to 1.5%.

Tax

Non-qualifying policies are taxed in a particularly way. Any income or gains received from the policy are subject to income tax at your marginal rate after giving a savings rate tax credit if the policy is issued by a UK based insurer. The gain itself may put you into the higher rate tax bracket but this can be mitigated if the policy has been held for more than one year. Also, if no more than 5% per year (for up to 20 years) of the original investment amount is withdrawn, then the tax liability is deferred until final surrender.

The proceeds from a qualifying policy (determined by reference to a complex set of rules, but basically a regular premium policy capable of running for ten years or more) are usually tax-free in the hands of the investor.

The annual capital gains tax allowance cannot be used against profits made on these policies and neither can taper relief.

Who should I contact?

If you would like advice on any of the points covered in this factsheet or any other financial planning issues please contact the person at Grant Thornton who normally deals with your financial planning affairs or the local office below.