Unit Trusts

Guide to unit trusts

What is a unit trust?

Unit trusts let you pool your money with thousands of other investors and spread it across a large number of investments to reduce your risk. Dealing costs are shared and all the administration and paperwork is done for you, at a tiny fraction of the expense of doing it yourself. As there is no limit to what you can invest unit trusts are a good option if you have already used up your annual stocks and shares ISA allowance (£20,000).

Balancing risk and return

With stock market investments, the return you get is usually linked to the level of risk you're prepared to take. Over the longer term, investors more comfortable with greater risk can typically look forward to greater returns.

What is a fund?

When you open a unit trust with us you pick which of our funds (or a combination of them) you want to invest in. Each fund has a different objective and invests in different assets.

Your money is pooled together with other investors and spread across lots of different investments. That means you are spreading and reducing your risk. The dealing costs are shared and all the admin and paperwork is done for you, at a fraction of the expense of doing it yourself.

What are bonds?

Government Bonds are IOUs issued by governments. When you buy a bond you’re loaning money to that government, and in return you receive a steady stream of interest. The value of the bond can also rise and fall before the bond matures.

Corporate Bonds instead of lending money to a government, you are lending money to companies. Again, you receive regular interest, but the value of the bond will rise and fall with market conditions.

Higher yielding bonds these bonds are issued by companies or governments with lower credit ratings. They pay higher rates of interest, but there is greater risk of non repayment, so the risk is higher.

What are gilts?

Gilts are a particular type of bond, but instead of loaning your money to a company, you're loaning it to the UK Government. This makes them one of the more secure forms of investment although their value can still be affected by changes in interest rates and inflation.

What are shares?

A share buys you a small portion of a company. The value of your shares go up or down depending on how the company is performing, and general market conditions. Investing in shares offers a greater potential return than investing in cash savings or bonds but with a greater level of risk to your money too.

We have five types of shares in our funds

UK shares are companies within the 600+ companies on the FTSE All-Share Index. They are generally considered less risky than overseas and emerging market shares.

Overseas shares come from developed economies like the US and across Europe. Investing in overseas shares spreads your risk across different countries and gives you a chance to benefit from the potential of stock markets around the world.

Global shares shares from companies from around the world, including both developed (such as the UK, US and Europe) emerging markets (such as China, India and Brazil).

Global property shares shares of companies from around the world which manage portfolios of properties, including industrial and commercial properties.

Emerging market shares come from countries with fast-growing economies that are not yet as strong as those in the UK or US. Examples of emerging markets include China and Brazil. Investing in emerging markets comes with a higher level of risk but also has the potential for better returns than developed markets.

Are dividends on my investment subject to tax?

The Dividend Allowance means that you won’t have to pay tax on the first £2,000 of your dividend income, no matter what non-dividend income you have. The allowance is available to anyone who has dividend income. You'll pay tax on any dividends you receive over the dividend allowance at the following rates:

• 7.5% on dividend income within the basic rate band
• 32.5% on dividend income within the higher rate band
• 38.1% on dividend income within the additional rate band

The Virgin Bond and Gilt Fund pays interest, not dividends, and is taxed differently.

Are interest distributions on my investment subject to tax?

Individuals have an annual Personal Savings Allowance. Basic rate taxpayers do not pay tax on the first £1,000 of interest earned on their savings. This falls to £500 for higher rate taxpayers and to £0 for additional rate taxpayers.

Although all interest paid on an ISA account is tax free, for savings held outside an ISA, interest will only be tax free up to the Personal Savings Allowance. If you receive more interest than the allowance, you will pay tax on the excess interest.