New to investments

KiKi
KiKi Posts: 5,377
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edited 10 November 2010 at 2:33PM in Savings & investments
Hello everyone

I'm usually offering advice on other areas of the board, but now need some advice for a friend of mine! She has inherited around £100K, and wants to put it away.

She plans to put the majority of that £100K in high interest savings accounts, split between accounts for security.

However, she has seen an IFA about investing some of it, perhaps up to £50K, certainly no more. Her one criteria is that she must get the capital back, so investment must be cautious and the capital guaranteed.

He recommended three products:
1 - Prufund Protected Cautious Fund (10 year investment, but can be accessed after 5)
2 - RBS Autopilot International (5 year investment)
3 - L&G Autopilot Plan 5 (5.5 year investment)

With the last two, although the capital is protected, it's not guaranteed if the bank were to become insolvent. Therefore she has pretty much decided against them.

However, if she invested £50K with the Prufund product, the effect of the total deductions could amount to nearly £13K. The £50K would be guaranteed to be returned after five years, probably less if she accessed it earlier. She has no plans to touch it for at least five years.

Although I can understand the literature, I have no experience of investments. And, of course, you don't know what you don't know!

Can anyone make any comment on the Prufund product (or the other two)? Or make any suggestions for other guaranteed cautious plans which do not take such a large proportion in fees? That may be unrealistic, but with no experience I'm not sure what to expect.

Thank you if anyone has any comments, particularly on the Pru product. :)

Cheers :)
KiKi
' <-- See that? It's called an apostrophe. It does not mean "hey, look out, here comes an S".
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Comments

  • dunstonh
    dunstonh Posts: 116,040
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    She is pretty much restricting herself to a very small handful of products, of which the pru protect is one of.

    Whilst she seems very focused on investment risk and provider risk and taking an abnormally over cautious stance, she is leaving herself open to inflation risk and shortfall risk. What is the money going to be for? how long? what is her tax position?
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Reaper
    Reaper Posts: 7,277
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    She has tied the IFA's hands by insisting the capital is not at risk. Investments always involve risk. These ones that say they don't do so by putting the bulk of the money in interest earning things (eg gilts) and only actually investing a small part of it. That way the interest covers any possible losses. So that Pru one for example only actually invests 30% of the money in shares. That and the charges pretty much guarantee a poor return even if the markets do well.

    If you want my opinion she should choose a smaller amount to invest that she is actually willing to take a risk on and remove the insistance of getting her money back.
  • KiKi
    KiKi Posts: 5,377
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    dunstonh wrote: »
    She is pretty much restricting herself to a very small handful of products, of which the pru protect is one of.

    Whilst she seems very focused on investment risk and provider risk and taking an abnormally over cautious stance, she is leaving herself open to inflation risk and shortfall risk. What is the money going to be for? how long? what is her tax position?

    Yes, she's definitely restricting herself. It's to put away for whenever she might need it in the future (she's 51), and so she doesn't have it sitting in her bank account earning 0.01% which it is currently!

    Her only objective is to protect it and earn interest on it. She has no interest whatsoever in making lots of money or risking it. If saving is the better option, she'll go with that; investing is just something she's looking at.

    She can put it away for at least 5 years, probably 10 - although I advised her that I wouldn't lock it away for that in case she needs the money to live on. Plus, of course, the economy and savings and investment products will change in that time.

    She has just finished working, and is taking a year out (she has money to live on already). She has a home, no mortgage, few bills. She would pay 20% tax on any interest this year (ISAs excepting) and, depending on her income next year, possibly no income other than interest on savings.

    She has tied the IFA's hands by insisting the capital is not at risk. Investments always involve risk. These ones that say they don't do so by putting the bulk of the money in interest earning things (eg gilts) and only actually investing a small part of it. That way the interest covers any possible losses. So that Pru one for example only actually invests 30% of the money in shares. That and the charges pretty much guarantee a poor return even if the markets do well.

    If you want my opinion she should choose a smaller amount to invest that she is actually willing to take a risk on and remove the insistance of getting her money back.

    Thank you. Yes, she has tied the IFA's hands, but that's her stance. She's not adamant about investing at all - she's just exploring her options for the best return without risking her cash. It looks like saving may be better for her. She hasn't even really saved in the past, and she finds admin and paperwork very burdensome, so just getting her head around these things is a minefield for her. Thankfully she was strong minded enough not to commit to anything that was suggested, and has taken it away to review.

    I calculated that if the Pru product returned 5% a year, because of the fees she would still be better off putting the money in a savings account at 3-4% a year!

    I might talk to her about saving it for now, and looking at an S&S ISA next year. Break her in very gently!


    Thanks both for the advice and opinions, I appreciate your time. :)
    KiKi
    ' <-- See that? It's called an apostrophe. It does not mean "hey, look out, here comes an S".
  • KiKi
    KiKi Posts: 5,377
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    edited 10 November 2010 at 5:11PM
    Edited due to spamming post being removed. :)
    ' <-- See that? It's called an apostrophe. It does not mean "hey, look out, here comes an S".
  • Ifts
    Ifts Posts: 1,950
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    KiKi wrote: »
    No, I don't think I will.

    Post reported.

    Please just press the Spam button. Try not to quote these parasites, because when their posts eventually get removed by admin the link to the spamming site is still shown in your post. ;)
    Never let the perfume of the premium overpower the odour of the risk
  • KiKi
    KiKi Posts: 5,377
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    Ifts wrote: »
    Please just press the Spam button. Try not to quote these parasites, because when their posts eventually get removed by admin the link to the spamming site is still shown in your post. ;)

    I did hit 'spam' - that's what I meant by reporting. :) Will unquote.
    ' <-- See that? It's called an apostrophe. It does not mean "hey, look out, here comes an S".
  • jimjames
    jimjames Posts: 17,532
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    edited 10 November 2010 at 7:46PM
    She needs to consider what is the bigger risk. Inflation at 4.6% and cash savings rates at 3% or the potential of growth via investments. She also needs to bear in mind that during the first 5 years the chance is fairly high that she could be able to get a higher amount of money back if she needed the money and had invested in shares than if she had invested in the protected bond as the bond does not guarantee return of capital in the first 5 years.

    Even over the last 10 years which have been the worst for UK shares for some time, had you invested at the peak in 2000 you would still have made money over this time span - admittedly not much different to a building society account. I think it puts in context what a capital guarantee might mean when shares held over this period have endured the dot com bubble and the worst recession/banking crisis since 1930s yet still have returned the original capital. (Obviously all based on UK market averages not individual shares)

    Personally I just wouldn't see the point in a £50k low risk investment that took £13k in fees when the return from a bank is so close to it with flexiblity to get your money whenever you want.
    Remember the saying: if it looks too good to be true it almost certainly is.
  • KiKi
    KiKi Posts: 5,377
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    jimjames wrote: »
    She needs to consider what is the bigger risk. Inflation at 4.6% and cash savings rates at 3% or the potential of growth via investments. She also needs to bear in mind that during the first 5 years the chance is fairly high that she could be able to get a higher amount of money back if she needed the money and had invested in shares than if she had invested in the protected bond as the bond does not guarantee return of capital in the first 5 years.

    Even over the last 10 years which have been the worst for UK shares for some time, had you invested at the peak in 2000 you would still have made money over this time span - admittedly not much different to a building society account. I think it puts in context what a capital guarantee might mean when shares held over this period have endured the dot com bubble and the worst recession/banking crisis since 1930s yet still have returned the original capital. (Obviously all based on UK market averages not individual shares)

    Personally I just wouldn't see the point in a £50k low risk investment that took £13k in fees when the return from a bank is so close to it with flexiblity to get your money whenever you want.

    Thank you for your advice and opinions, I appreciate your time. It seems that she'll either have to take some risk, or just put it in a good savings account.

    Thanks again. :)
    KiKi
    ' <-- See that? It's called an apostrophe. It does not mean "hey, look out, here comes an S".
  • KiKi wrote: »
    Yes, she has tied the IFA's hands

    If she went to a fee based adviser then that wouldnt be a problem as they wouldnt be forced to sell a product to get paid. They would just give the most suitable advice!
  • asc99c
    asc99c Posts: 134 Forumite
    Capital guaranteed investments are quite a bit more common I think - Barclays has a couple of options and also many other high street banks. But I would say no-risk investments are a bit of an oxymoron. Other than the banks supplying them, not many people are too positive about these structured products. If you want no risk, savings accounts are very definitely the way forwards.

    I realise my attitude toward risk is only my own, but I do wonder why, if someone has £50k in savings, do they feel an additional £50k needs to be in a no-risk account. Personally, I've got two full cash ISAs, and at that point started to wonder why I really needed any more cash savings than that. 100% of my additional spare money now goes into investments.
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