Buying a unit-linked fund via an investment advisor or through your bank
Description
These are generally issued by life insurance companies such as Irish Life or New Ireland and have names such as Irish Life Multi Asset Portfolio Fund 2 or Bank of Ireland Evergreen Fund
- Should read 100% Equity Funds as the title of the post is about investing in the stockmarket.
The fund pools your money with everyone else's and buys a large portfolio of shares - maybe 1,000 shares. You are issued units in the fund. Every day the units are valued based on the values of the shares in the fund.
They collect the dividends and increase the value of the units as the dividends are received.
Methodology
You fill in the forms with your advisor or the salesperson in the bank, choose which fund to invest in, and then transfer the money to the company and they issue you with a certificate for your investment.
When you want to cash some or all of your investment, you just notify them and they issue you the current value of the fund less the taxation on it.
Costs
The costs of these investments are very high and they are not easy to find out. Here is what
Bank of Ireland says about their funds:
The costs of these investments can be very high but you can ask for a breakdown. If the breakdown isn't fortcoming, find a different intermediary/provider.
A 1% Government levy applies to all money invested
but is usually offset by a 101% allocation on your investment. An annual management fee will be applied, taken as a percentage of the policy value.
This can vary from circa 0.66% - 2%, depending on how
and with whom your money is invested. Early exit charges may also apply if you withdraw any of your investment during the first few years. A small fee also applies on partial withdrawals.
An annual management fee of 2% might not sound like a lot. But if the annual return on your investment before the charge is 5%, 2% represents a 40% charge. It is huge.
So, seek out the products with lower charges.
Taxation
When you exit the fund, the company will deduct 41% exit tax on any profits. There is nothing further to pay.
If you hold the fund more than 8 years, the fund will deduct 41% tax at that stage.
If you die when you hold the fund, the 41% tax will be deducted before the net proceeds are paid to your estate.
Advantages
Very little administration
Very widely invested so the fund should contain a few superstar performers.
Product provider takes care of all the taxation for you.
Disadvantages
Sometimes, very high charges and not always transparent.
- There could be initial charges and exit charges
- There would be an annual management charge - typically 1% which sounds small, but has a significant negative effect on your return. Some funds have much higher charges and some have much lower.
- There could be high transaction charges as they buy and sell the underlying shares. There will be portfolio transaction costs on the fund and these will vary from year to year. Much the same as other stockmarket investments. These costs are included in the unit prices/ fund performance figures of all product providers so there is an element of disclosure there.
Taxation is very high if you die while you hold them. Your estate will pay 41% exit tax compared to 0% Capital Gains Tax on directly held investments.
But, where Exit Tax is payable as a result of a claim on the death of a life assured, the amount of Exit Tax may be offset against any Inheritance Tax liability arising for the beneficiary of the plan on the plan proceeds. You can also set the plan up on a joint-life second death basis so that, on the death of the first policyholder, the policy doesn't mature to create an exit tax event.