Q. I have had two investment Individual Savings Accounts (ISAs) for many years. When I was looking at the most recent statements, I noticed that one has “units” and the other has “shares”. What is the difference?
A. This is a straightforward question, and the short answer could be that there may be very little practical difference. The longer answer is that the difference is in the legal structure of the underlying investment. The “ISA” can be thought of as a tax “wrapper”, which can be placed around a number of different investments. Most investments in ISAs use some form of collective investment, where many investors’ money is pooled together to spread costs, enabling a much wider range of company shares to be purchased. These collective investments have different legal structures, which is where the difference arises. The plan you have with “units” is likely to be a unit trust. This is a structure where the manager issues and redeems units to satisfy demand, and the unit value is directly related to the value of the underlying pool of investments. The plan with shares has an underlying investment structured as a company. This could mean it is directly invested into company shares (for example BP, Vodafone, etc), but is more likely to be a type of collective investment which is itself structured as a company, either an Investment Trust or an “Open Ended Investment Company” (OEIC). Investment Trusts are closed- ended funds. This means that there are a fixed number of shares in issue and prospective investors must find an existing holder who is looking to sell and agree a price, as with any publicly listed company. The OEIC operates in the same way as a unit trust, issuing and redeeming shares to satisfy demand. An Investment Trust is quoted on the London Stock Exchange, so its price moves throughout the day and is driven by changes in investor demand. It could trade at a discount (below) or premium (above) the value per share of the underlying assets, according to the rules of supply and demand. Although the price will be closely related to the value of the underlying assets, it will not necessarily identical, unlike unit trusts and OEICs, where the units /shares are valued and traded at net asset value (NAV) set once a day. A chartered financial planner will be able to tell you whether you have investment trust or OEIC shares, and, possibly more importantly, whether they remain appropriate to your objectives and risk profile.
Q. I qualify for my State Pension next month, and have heard it is possible to increase this by making additional NI Contributions. Is this worth doing?
A. It is now possible for those reaching State Pension Age before the introduction of the new Single Tier State Pension in April 2016, to make Class 3A voluntary contributions to purchase up to £25 per week of extra pension. The costs are based on average life expectancy, and appear to compare favourably with annuity rates offered by insurance companies. Like all state pensions, it will be paid gross but taxable, and will therefore affect the amount of tax due from any private pensions. The facility is open up to 5th April 2017, and further details, including an indication of the cost, which depends on age, are available on the government website at www.gov.uk/statepensiontopup . There are a few things to think about. If you do not have entitlement to a full basic pension, you may be better paying either Class 2 or Class 3 voluntary contributions either instead or as well as the new ones. Compare the costs of both. Also, for a married couple, consider whose name the pension is bought in. Does either of you have any unused personal tax allowance which could mean the extra pension is effectively free from tax?
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
