Savings & Investments Part 5: Unit trusts and OEICs

Unit Trusts and Open-Ended Investment Companies (OEICs) are another way to provide a tax efficient income.

Your money is put into a fund and pooled along with money from other investors. This pooled fund is then invested across many different investments by a fund manager.

What’s the difference between a unit trust and an OEIC?

Fundamentally, they offer the same benefits but, for the more technically minded among you, there are a few key differences between Unit Trusts and OEICs:

      • Pricing. Unit Trusts generally have two prices: a bid price at which you sell and an offer price at which you buy. OEICs have one price, the single price at which you buy and sell.  To make money in a unit trust the bid price must rise above the offer price before you sell the units.
      • Flexibility. OEICs can offer different types of share or sub fund to suit different types of investor.  This means private investors can participate in the same funds as major institutions and pension funds.
      • Management.  Both Unit Trusts and OEICs are overseen by an independent body. For Unit Trusts this is called the Trustee and for OEICs it is the Depositary.

What does investing in a unit trust or OEIC involve?

Unit Trusts and OEICs are best viewed as long-term investments (five years or more), but you can use these products to withdraw an income each year.

Taxation of unit trusts and OEICs 

If your fund is invested in shares then any dividend income that is paid to you (or accumulated within the fund if it is reinvested) usually carries a 10% tax credit. If you are a basic rate or non taxpayer, there is no further income tax liability.

You also have an annual capital gains allowance of £10,600 (2012/13).  This makes it possible to withdraw up to this amount each year without paying tax.  In this way, unit trusts can be used to provide a tax efficient income in retirement.

If you qualify for the increased age allowance you should be aware that dividend or income payments from Unit Trusts and OEICs will be taken into account in calculating whether the income limit is exceeded. Click here for more information.