What are Unit Trusts?

The finance industry is full of jargon, so the following are some commonly used terms to describe the types of Unit Trusts that are available as pooled or collective investments.

A Unit Trust is a Legal Trust managed and promoted by a professional investment manager who buys shares in different companies which are represented by the allocation of units to investors.

The Trust’s investment manager pools the money of several investors into a diversified portfolio of stocks and shares which are held in the Trust as units. Because the number of shares represented in the form of units are variable (unlike Closed Ended Investments of Investment Trusts where the number of shares available are fixed), a unit trust is said to be an open ended fund as it expands by the issue of additional units or contracts by the cancellation (redemption) of units.

Another important distinction of unit trusts compared to closed ended collective investment funds of Investment Trusts is that they are not allowed to borrow capital or financially gear to invest. Closed ended investment funds are allowed do this. 

Units in a Units Trust can be purchased as a single premium (lump sum) or on a regular premium basis.

The units in a Unit Trust can be traded through the Trust Manager or through an authorised financial adviser.

The price of a Unit Trust is directly determined by the value of its underlying assets (i.e. the securities and cash held by the fund).

 

What are the types of Unit Trusts?

Unit Trusts and OEIC’s (open ended investment companies) are a form of medium to long term saving for the future. The Investment Management Association (IMA) classifies Unit Trusts and OEIC’s into over 30 different performance categories which are divided in five broad fund sectors which in total provide over 2,000 investment funds.

The Five broad fund sectors are:-

  • Funds principally targeting – Immediate Income
  • Funds principally targeting – Growing Income
  • Funds principally targeting – Capital Growth/Total Return
  • Funds principally targeting – Capital Protection
  • Funds principally targeting – Specialist Sectors

As expected each fund will have a level of risk or risk profile according to the objectives of the fund.  To ensure investors understand what the investment objective of the funds are likely to be within a given sector, a range of rules restrict the investment powers of authorised funds to spread its investments in asset classes in proportions appropriate to the fund sector it is in.  

 

Why should I invest in a Unit Trust?

The major reasons for recommending unit trusts are that they offer a spread of investments managed by a professional manager.

This choice of funds provides the investor a level of risk/reward to mach their appropriate investment profile.

The treatment of income and gains from unit trusts will depend upon the tax position of the investor and whether the income received are dividends distributed from equity unit trusts or interest distributed from non-equity unit trusts.

Dividends distributed from equity unit trusts: are taxed in the same way as income and gains from other shares. This means non tax payers cannot reclaim the tax credit and higher rate tax payers have to pay an additional 22.5% in tax on the gross dividend.

Interest distribution from non-equity unit trusts: are paid net of 20% income tax. Non tax payers can reclaim the full tax deducted, and higher rate taxpayers have to pay an additional 20% income tax.

Capital gains tax payable: on disposal will be dependent upon the position of the taxpayer at date of disposal. All gains payable will attract indexation and taper relief and personal annual CGT allowances.   

However if the Unit Trust is held within an Individual Savings Account (ISA), all income and capital gains are tax free.

 

How do I invest in a Unit Trust?

The first and most important step after you have decided you may want to invest in a unit trust is to have a discussion with us to provide you with independent financial advice.

Once we have agreed what the most suitable type of unit trust is for your particular circumstances we make an application on your behalf to pay a single premium or regular contributions into a selected fund based on how much you can afford your personal tax situation and the amount of fund required at maturity, at the acceptable level of risk you are prepared to take to match your needs.

 

Want to know more?

Talk to one of our qualified financial advisers on 01553 777600 or e-mail us at enquiries@ringassociates.co.uk

Also you may want to read the articles and associated links from the Financial Services Authority by accessing the following website at http://www.moneymadeclear.fsa.gov.uk/products/investments/types_of_investments.html

And download the free booklet ‘Introducing Investment’ from the Investment Managers Association at http://www.investmentuk.org/FactSheets/II/introducinginvestment.pdf

and the fund sectors and categories from the Investment Managers Association at http://www.investmentuk.org/