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15 Oct 2019

Neil Woodford's flagship fund to close: what will happen to investors' cash?

Withdrawals from the Woodford Equity Income Fund have been frozen since June

Neil Woodford's flagship investment fund will be wound down from January 2020.

Woodford, a renowned fund manager, has also been removed as the investment manager of the LF Woodford Equity Income Fund with immediate effect and the fund will be renamed.

In a letter sent to investors, Link Fund Solutions Limited, which runs the fund on behalf of Woodford, claimed that it had planned to change the fund's investments with a view to making it profitable, but this had not been possible.

This is the latest twist in an ongoing saga, after the fund was frozen nearly five months ago, following a large number of withdrawals by worried investors. Those clients who were left have been unable to access their cash ever since.

Update:later on 15 October, Woodford announced he will close his two remaining funds - Income Focus and Woodford Patient Capital - and that his Woodford Investment Management business would also be closing down.

At its peak in October 2017, Income Focus was reportedly worth £747m - a total made up of £553m from its investors. It was most recently valued at just £253m, suggesting that savers will likely see heavy losses.

The LF Woodford Income Focus Fund was suspended on the morning of 16 October, as Woodford's departure from the company was likely to trigger a rush of withdrawals. Link has placed the fund under a rolling 28-day suspension, much like what happened to the LF Woodford Equity Income Fund in June.

Which? explains what Woodford investors can expect to happen next.

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Why was the Woodford fund suspended?

Neil Woodford had been one of the City's most successful fund managers. His funds earned billions of pounds and were hugely popular with investors. At its peak in May 2017, the LF Woodford Equity Income Fund held a record £10.7bn of investors' money.

However, its performance began to slip in recent years. As investors saw their returns diminish, many withdrew their money; by May 2019, withdrawals were averaging £9m a day. The fund had to sell most of its liquid holdings to meet these demands.

When Kent County Council requested to withdraw £250m from the fund's pension scheme at the beginning of June, the decision was taken to freeze the fund. The alternative would have been to sell the remaining shares at knockdown prices, disproportionately favouring those leaving the fund and short-changing long-term investors, the fund claimed.

Anyone who hadn't already taken out their money has been left in limbo ever since.

We recently took an in-depth look at the Woodford fund suspension on the Which? Money podcast, click below to listen.

Will investors get their money back?

Eventually, investors with money trapped in the fund will be paid, but it is currently unclear how much they'll get.

Link's letter says that some 'periodic charges' will continue to be taken from the fund before it is wound up. These will include payments to BlackRock and PJT Partners - the companies appointed to sell the fund's assets - along with the fund's depositary, administrator, custodian and auditor.

The periodic charges will stop from January, but Link says there are still likely to be other fees payable while the fund is wound up.

It is only once all fees and charges have been paid that investors will receive a share of the proceeds. Investors are likely to start receiving payments from the end of January, up until the fund's assets have all been sold.

Depending on how much the assets sell for, it's possible investors will receive less than they originally put in.

Will investors get compensated for any losses?

Unfortunately, no. The Financial Services Compensation Scheme (FSCS) does not cover investments that perform poorly.

Only those who lost money as a result of negligent advice or fraud, those whose investment company goes bust, or anyone who has received poor financial advice would be eligible for protection.

If any of these apply, you would be covered for the first £85,000.

Could investors also get stung with a tax bill?

Woodford investors will also have to consider the tax implications of having their shares sold off.

Any profits made from the sale of shares held within the investment fund will count as capital gains, which might be taxable and must be declared via self-assessment. You'll need to submit the paperwork even if you've made a loss.

You can earn up to £12,000 in capital gains before having to pay any tax in the 2019-20 tax year.

Realistically, after the losses the fund has incurred it's unlikely that anyone will have retained a profit. The good news is that losses can be carried forward and set against future capital gains tax profits.

Find out more:capital gains tax on shares