"Which unit fund should I cash, the one in profit or in loss?"

Brendan Burgess

Brendan Burgess

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In general, you should avoid cashing unit linked funds which are worth less than you have paid for them, as any gain from now until they reach the initial investment will be free of tax.

I discussed this with a broker recently, who questioned my advice.

Assuming two funds invested with the same charges and the same investment sector in different companies, so the only issue to decide which to cash is the tax issue.

This applies to unit-linked funds only which are subject to exit tax. It does not apply to directly owned shares where losses can be carried forward against future gains.

|profit fund|loss fund
Current value|€100k|€100k
Initial investment|€60k|€160k
Profit(loss)|€40k|(€60k)
The investor needs € 84k now.
They won't need cash again for ten years by which time the fund will have increased in value by 60%

If you cash the profit fund now...
Profit| €40k
Tax at 41%|€16k
Net proceeds|€84k
After ten years
|loss fund
Value|€160k
Taxation|0
Proceeds|€160k


If you cash the loss fund now ...
As there is no tax to be paid, the borrower will be able to leave €16k in the fund

|Total|profit fund|loss fund
Current value||€100k|€16k
Value after 60% increase||€160k|€25k
Initial investment||€60k|€25k
Profit(loss)||€100k||0
Tax at 41%||€41k|0
Net proceeds|€144k|€119k|€25k

So it's better to cash the fund which is in profit.

In general, you should avoid cashing unit linked funds which are worth less than you have paid for them, as any gain from now until they reach the initial investment will be free of tax.
 
If the fund falls in value by the time the borrower cashes again, they would have been better cashing the loss making fund now.
 
Brendan,
Your strategy is correct assuming each Fund is housed in separate policies. If both Funds are included in the same Policy then the profit or loss is based on the total value.
 
Thanks Conan

I had made that assumption in my head. I have edited the first post to make that clear.

Brendan
 
Back of an envelope stuff here...

If both investments are the same, we are assuming they are invested in good funds and the only difference is they were invested at different times.

You should look at how many units you would need to sell to get the required income amount. Sell as few units as possible to get the money you need.



Steven
http://www.bluewaterfp.ie
 
SBarrett said:
Back of an envelope stuff here...


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
Click to expand...

Hi Steven

I think you need to turn that envelope around to the front.

The number of units does not seem at all relevant to the calculation.

The issue is whether to sell a fund which is in profit or sell a fund which is in loss.

My understanding was that it was better to retain the fund with unused losses, and my example backs that up.
 
Brendan Burgess said:
Hi Steven

I think you need to turn that envelope around to the front.

The number of units does not seem at all relevant to the calculation.

The issue is whether to sell a fund which is in profit or sell a fund which is in loss.

My understanding was that it was better to retain the fund with unused losses, and my example backs that up.
Click to expand...

I know, I thought later that it didn't matter as all the units would be valued the same. :eek:
 
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