With unit-linked investment plans, your money is pooled with money from other investors and used to buy units in an investment fund.
The number of units you get depends on how much you invest and the price of the units at the time you buy. You can invest either a lump sum or make regular savings depending on the fund.
Professional investment managers look after the fund and decide how to invest it. They can invest in a mix of assets such as:
•cash or high-interest deposits
•bonds issued by governments and companies, which pay a fixed rate of interest for a set time
•equities, or shares, in Irish and international companies quoted on stock markets
•property, including commercial properties such as offices and shops which produce an income from lease or rent.
You can choose from a range of different funds to suit your attitude to risk. These include low-risk deposit-type funds, medium-risk funds and higher-risk funds that are almost completely invested in the stock market.
The safer the fund, the lower the potential return, while riskier funds offer the prospect of higher profits but involve more risk to your capital. Almost all unit-linked plans involve capital risk, but some plans offer a money-back promise on a particular date, for example, the sixth anniversary. Such plans usually have lower potential for growth than other unit-linked plans.
Unit-linked funds are open-ended, which means you can withdraw part or all of your investment at any time. However, you should be prepared to hold your investment for at least five years as most of these plans may have a very low or even negative return in the early years. Also, if you need to withdraw in the first few years you may have to pay an early encashment fee..
You have to pay several charges on unit linked and with profit funds.
You could consider investing in a special type of unit-linked fund, known as a ‘with-profit’ or ‘smoothed fund’, to reduce risk.
If your fund performs well in a particular year, the fund manager may hold back some of the growth to prevent a fall in value in later years when the fund may not do so well. This ‘smoothing’ evens out investment gains and losses, so that there is no dramatic rise or fall in the value of your investment fund in any particular year.
You can only benefit from this fund smoothing if you are prepared to leave your money in the fund and withdraw it only on specified withdrawal dates, such as the 10th anniversary. These are the only dates when your original capital is protected.
If you withdraw outside these dates, a penalty known as a market value reduction (MVR) may be applied, which would reduce your investment by a certain percentage.
An MVR is used to protect all investors in a fund and usually applies if you withdraw your money when investment markets are down in value or when there are a large number of withdrawals.
You have to pay several charges and taxes on unit linked and with profit funds.
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