commission v fees

janemw · 22 October 2006 at 12:59PM

An elderly family member has a substatial amount to invest (over £500k), and we're looking for ways to minimise IHT. Long term care may be required at a later date. An IFA has recommended an investment with AXA IOM (Isle of Man), and I'm happy that they're a reputable company. However it's the fees v commission that I don't understand.

Investment will be boosted by 7%.
An establishment charge of 0.625% every quarter for 5 years.
An admin charge evry quarter of £17.
Average initial investment charges of 0.5% and ongoing 1% pa.
Initial commission to the IFA is £15,600, followed by 0.5% pa.

The effect of the deductions to date is illustrated at £25k for the first year, risng to a cumulative of £152k after 10 years.

Do these charges seem reasonable? I haven't clue really, altough I suppose % wise it works out to about 5%.

Help!

EdInvestor · 22 October 2006 at 1:10PM

The effect of the deductions to date is illustrated at £25k for the first year, risng to a cumulative of £152k after 10 years.

No, it is not reasonable to pay 30% of your initial investment in charges. [And that's only the charges they're required to reveal.]

I take it this is an "offshore bond"?

Is your relative a high or basic rate taxpayer and a homeowner ?

dunstonh · 22 October 2006 at 1:11PM

The charges are fractionally discounted from the standard. With £500k, you would expect to see more discounting than that. A New Model basis IFA would be cheaper but we only account for around 15% of all IFAs currently. So finding one may not be as easy although it should be easy to find another IFA who would give an increased discount. Indeed, you coudl go back to this IFA and tell them that you think the commission is too high and you are thinking of shopping around. I would aim for £5000 commission instead of that £15,600.

AXA is a company i dislike for onshore business but for offshore they are much better.

edit: Ignore Ed. She does not understand the effect of deductions column and reverts it back to 30% of the original investment. In reality you do not paying charges on the "effects of" column and you dont pay them in year one so have no relation to your original investment. The effects of column assumes that if the charges were invested at 7% a year, what would that have grown to.

So, to say that £152k is charges and accounts for 30% of your intial investment is totally inaccurate and misleading.

EdInvestor · 22 October 2006 at 1:17PM

DH

Do we take it you think it is reasonable for the OP's relly to pay 28% of the original investment, ie 141k in charges then?

dunstonh · 22 October 2006 at 1:31PM

Do we take it you think it is reasonable for the OP's relly to pay 28% of the original investment, ie 141k in charges then?

Nowhere in the OPs post is there any information that states that 28% of their money will be taken at the outset. I know that isnt what you mean but you arent commenting on the charges accurately as you keep relating them back to the original investment whilst the illustrations base them on achieving 7% p.a. growth.

I think a reduction in yield of around 1.5% over 10 years is reasonable with onshore business and if you can get 2% on offshore, then you are doing fine.

Offshore bonds are more expensive and that can often negate the tax saved if the wrong contract is chosen or it is set up with an expensive provider.

Ed, do you think it is reasonable for the OP to put £500k in a bank account at 4% gross (1.6% net if HRT) and appear to pay no charges and get back only £586,012 after 10 years whereas on a bond acheiving 6% after charges and tax would get back £895,423?

EdInvestor · 22 October 2006 at 6:07PM

I am not comparing this offshore bond with a bank account.

But before making an alternative suggestion on how this money might be invested at much lower charges, I think we need more information, in particular anwers to the queries I've already mentioned, plus does the investor have a spouse or partner? (This is particularly important in re IHT and care costs, as is the investor's approximate age.)

janemw · 22 October 2006 at 7:20PM

yes, it's an offshore bond, to be set up as an absolute trust with 5% pa withdrawals. the investor is 85, widowed and a basic rate taxpayer.
I understand there's compound interest used in the illustration, just the figures look scary.
what's the significance of offshore, and is it more expensive?

dunstonh · 22 October 2006 at 8:23PM

yes, it's an offshore bond, to be set up as an absolute trust with 5% pa withdrawals. the investor is 85, widowed and a basic rate taxpayer.

As its a trust, it requires an onshore or offshore bond. So, the product is right.

I understand there's compound interest used in the illustration, just the figures look scary.

Its £500k. The charges are going to look high. However, the potential returns are going to be even more. It isnt interest in there though. Its investment returns at 7% p.a. average.

what's the significance of offshore, and is it more expensive?

It is more expensive as offshore admin is greater and there isnt the competitive issues with onshore business pushing prices down. However, the gross roll up over time offsets the higher charges and more providing the product is arranged on a competive basis.

If IHT is coming into play with this investment, then the savings involved could be absolutely massive and the charges pale into insignificance. For example, If all the 500k was liable to inheritance tax, then Gordon Brown would get 40% of that. Meaning it would lose £200,000 and the beneficiaries only get £300,000.

I think you need to be directing these questions to your IFA as there appears to be nothing wrong with the recommendation on a product front. Just your lack of understanding of how the charges work.

Tiggs_2 · 22 October 2006 at 10:12PM

EdInvestor wrote:

No, it is not reasonable to pay 30% of your initial investment in charges.

complete lack of understanding of the figures.

however, when i do a decent size bond i make 100% sure the figures are explained to the client which means i end up getting my £15k commision becuase the client never wanders onto a site like this to be told nonsense like the above - so a better questions is this:

is it right to pay a single penny to an adviser that cant even explain the inital quote to all those concerned?

EdInvestor · 23 October 2006 at 6:42AM

These bonds are really designed for high rate taxpayers who might be lower rate in retirement.It can be worth it for them to pay these high charges to avoid higher rate tax.

But note that taxes are payable within both the on- and offshore versions of these insurance bonds which would not be paid by a basic rate taxpayer investing direct without using the bond.

Comparison of tax of on and offshore insurance bonds

An additional factor is that the 5% withdrawal is from the capital, not the income earned by the investments in the bond Do not imagine this is like putting the 500k in the bank and getting 5% in tax free interest. If the market performs poorly, with charges this high, capital can easily be depleted.

What can easily happen is that the capital disappears into the coffers of the insurance company via charges, in payment of the taxes in the bond, and is spent via the withdrawals. So yes you may avoid IHT, but because the estate has fallen below the 285k tax free threshhold, not because of any clever plan.:(

How much taxable pension income does the investor have? We need to consider the age allowance when considering how to invest this 500k, as although dividend income earned is effectively tax free for BRT's, it will, if large enough, affect the age allowance.However, if pension income is small, this may not matter and the annual capital gains tax allowance of almost 9k can also be used to provide tax free income.

What funds is the money going to be invested in?This should at least give us some idea of the investor's attitude to risk, assuming the IFA has done this part of the job properly.

We can also check if the funds chosen are any good.

PS Don't worry about the inevitable argument that will crop up with the advisors as above, they always defend investment bonds because they (and the industry) make so much money out of them.

dunstonh · 23 October 2006 at 9:21AM

These bonds are really designed for high rate taxpayers who might be lower rate in retirement.It can be worth it for them to pay these high charges to avoid higher rate tax.

That is one reason but it isnt the only one.

But note that taxes are payable within both the on- and offshore versions of these insurance bonds which would not be paid by a basic rate taxpayer investing direct without using the bond.

Wrong.

With 500k taken out of deposit and paid into a bond, this may well allow the age allowance to become available again saving more tax.

An additional factor is that the 5% withdrawal is from the capital, not the income earned by the investments in the bond Do not imagine this is like putting the 500k in the bank and getting 5% in tax free interest. If the market performs poorly, with charges this high, capital can easily be depleted.

Badly worded on purpose. If the investment fails to grow at 5% a year and you withdraw 5% then the value of the investment will drop as you are drawing more than it is making. If it grows at 10% a year, then it can easily cover the 5% and give a surplus.

What can easily happen is that the capital disappears into the coffers of the insurance company via charges, in payment of the taxes in the bond, and is spent via the withdrawals. So yes you may avoid IHT, but because the estate has fallen below the 285k tax free threshhold, not because of any clever plan.:(

Easily? Never seen it on any unit linked bond. Also IHT is 40%. So any drop, if it was to occur would need to be more than 40%.

PS Don't worry about the inevitable argument that will crop up with the advisors as above, they always defend investment bonds because they (and the industry) make so much money out of them.

Absolutely pathetic. None of the advisers here are earning a penny from the post you make on this forum. I find it highly insulting that Ed, who knows next to nothing about taxation on investments, criticises the advisers here when she has posted nothing but misinformation and anti-bond SPIN.

Everything that janemw has said so far indicates that an investment bond is the most suitable product.

commission v fees

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