Please Help! with an Investment Bond

richp2k

Hello everyone, I really hope you can give me some advice!

I had £42,000 to invest, and was advised by an IFA to invest it in a Sterling Investment Bond for 10 years. I wanted to receive an income each quarter of approximately £525, but maintain the capital so it doesn't erode. I told my adviser this and that was what he recommended. He also chose 2 funds to invest in within the bond - Cazenove's Multi Manager Diversity fund and 7IM's Balanced Fund. I did some research into these and they seemed good performing trustworthy funds.

The paperwork has come through though and I'm not too happy with what I've seen. It says that after 10 years assuming my investments grow by 6%, I will get back £35,000. That's not what I wanted, being £7,000 less than what I invested. It says to get back my initial amount, it would have to grow by 8%. I understand 6% is the average, and in this current climate is 8% a realistic figure to expect my investment to grow? I'm concerned i've been miss-sold this Bond. If it grew at only 4% (a worst case scenario perhaps), then I'd only get back £27,000!

Apologies for the length of this message, I'm just wondering what other people think? Should I cancel it?

Many Thanks!


Richie

basil01_2

Hi Richie
Sounds like you'll be looking at is a standard FSA illustration, not actual performance of your bond. They always look at performance over 10 years and use set growth percentages.
If you're worried you should contact the IFA and ask for a explanation of the illustration.
You will have to remember that it's an investment and any results will be based on past performance alone.

dunstonh

Investment bonds on an illustration use 4, 6 & 8% before charges. It is usual with withdrawals to see the 4 & 6% ones show a figure that goes down.

in this current climate is 8% a realistic figure to expect my investment to grow?

Yes. Its certainly within the potential. Plus, 8% return is different to 8% on an illustration.

I'm concerned i've been miss-sold this Bond. If it grew at only 4% (a worst case scenario perhaps), then I'd only get back £27,000!

4% is not a worse case example. Minus 20% is probably a worse case example in a given 12 months.

I'm just wondering what other people think? Should I cancel it?

Sterling is not the cheapest option currently available (although the 7im funds are cheap within it so that may help it). The funds are a lazy choice. Neither of those make it a mis-sale although the recommendation is basic.

However, what could make it a mis-sale is the choice of tax wrapper. Have you used your £7200 ISA allowance this year? If not, then this is a mis-sale because the first £7200 should be placed in an ISA. After that you have the choice of unit trust or investment bond. With the higher equity content of those funds, the small amount of investment left (investment bonds dont really get best prices until 100k, although 50k isnt bad with some), it is quite probable that after the ISA, a unit trust should have been the better option.

Take a look at the suitability report and see what reasons it says for not doing an ISA or unit trusts.

EdInvestor

Also have a look at the Reduction in Yield figure in the small print, which tells you how much the projected growth will be reduced by the charges.

richp2k

Thanks for your responses everyone. I will have a good look at the paperwork tomorrow and give you an update. Just to note, I have already utilised my ISA allowance for this year.

Just one more quick thought. I'm going to check this out tomorrow, but I was also told about investing with the NS&I using their Income Bonds. Does anyone know how the tax works with these, and if they are any good? Tax is a huge grey area for me and I don't understand how it works - even when I try and and have it explained to me!

It seems if I invest £50,000 with them, I would get a monthly income of nearly £200, which they say is guaranteed and completely safe. Which I obviously like the sound of!

Thanks again folks. :beer:

dunstonh

Just to note, I have already utilised my ISA allowance for this year.

Is that the full £7200 allowance or just the £3600 cash allowance?

but I was also told about investing with the NS&I using their Income Bonds. Does anyone know how the tax works with these, and if they are any good?

They are not very good. Used to be many many years ago but not any more.

It seems if I invest £50,000 with them, I would get a monthly income of nearly £200, which they say is guaranteed and completely safe. Which I obviously like the sound of!

On the downside that £50k would be eroded by inflation and in 10 years time have the spending power of about £32k. 10 years after that about 21k. The income tey pay will go down in real terms as well.

When it comes to income, there is no risk free option. Just a combination of risks which you have to consider.

richp2k

Again, thank you all for your responses. Here is some more information, namely about the charges:

They say they will take 1% of the value of the funds each year. I understand this is the AMC, and that 1% is a standard amount. Also 0.5% of the Bond value each year during the FIRST 5 years. Is this common? The Cazenove Diversity fund also takes 1.27% per year, and the 7IM Balanced 1.1%. If I cash it in early within the FIRST 5 years, they will also reduce it by 9% in the first yr, 8% in the second, then reducing by 2% each year until the fifth year.

It also states that over 10 years the effect of deductions could amount to £12,300, put another way, it would bring down the investment growth from 6% a year, to 3.6% a year. What do you guys think of all this, bearing in mind what has already been discussed?

To be honest I feel in a real pickle at the moment. After hearing the news today about the world markets too, I'm not very confident in anything right now!

Thanks again for all your help! :beer:

dunstonh

They say they will take 1% of the value of the funds each year. I understand this is the AMC, and that 1% is a standard amount.

For internal funds, then 1% is the typical norm. You can get cheaper. Ironically, Halifax own Clerical Medical who retail through IFAs and CM funds are 0.85%. External funds will cost more and that will be closer to the unit trust norm of 1.5%.

Also 0.5% of the Bond value each year during the FIRST 5 years. Is this common?

Yes. Although it is an option with most providers. For example, going back to that CM version, they can pay 108% allocation and then take 0.5% back for 5 years. However, you can reduce the allocation to have a clean level charge from the start. Different providers will have different ways of doing it.

The Cazenove Diversity fund also takes 1.27% per year, and the 7IM Balanced 1.1%. If I cash it in early within the FIRST 5 years, they will also reduce it by 9% in the first yr, 8% in the second, then reducing by 2% each year until the fifth year.

I doubt a balanced managed fund would be tax efficient in an investment bond done on full commission terms (as Halifax will be doing it). Investment bonds are more efficient on higher yielding funds and fixed interest funds. They are not strong on equity funds due to them having to pay more tax than a unit trust on equities.

t would bring down the investment growth from 6% a year, to 3.6% a year. What do you guys think of all this, bearing in mind what has already been discussed?

That is disgraceful. That 3.6% figure needs to be 4.5% or higher. I havent seen one less than 5% for a long time.

After hearing the news today about the world markets too, I'm not very confident in anything right now!

The news about the world markets is actually positive. A major bad news event has occured but the markets have not fallen by anywhere near what was expected. Also, you must remember that when investing you shouldnt be 100% equity unless you are high risk. You may only be 20-50% equity. In which case on 20-50% would be affected.



edit: references to Halifax above are a typo. I am leaving them in to allow for thread consistency but replace Halifax with Sterling as the principle is the same.

EdInvestor

richp2k wrote: »

It also states that over 10 years the effect of deductions could amount to £12,300, put another way, it would bring down the investment growth from 6% a year, to 3.6% a year. :beer:

This is the reduction in yield (RIY) I mentioned.So, instead of getting a return of 6% on your investment ( the same as you can get at the moment on a bank account with no risk) you will get only 3.6% because 2.4% will be siphoned off in fees and charges.

AVOID.

richp2k

Again, thanks for your posts guys.

Unfortunately I'm unable to put certain quotes in like you do dunstonh (i'm not computer literate at all!!), but i noticed you mentioned the Halifax a few times. Are they related to Sterling at all? Not sure if they are, or if you have just put Halifax by mistake. Either way, your advice was good, so thanks for that. Thanks to EdInvestor as well. You've both attacked the 3.6% figure, as I felt you might. I was dubious before about the ability to maintain the capital, and that is going to make it even more difficult obviously. I think i'll get a letter off tomorrow to cancel it then. That seems to be the advice people are giving.

So I guess the final question is, 'what the hell should I do now'!! It looks like my IFA has sold me short, and i have no idea where to turn next. under the mattress maybe? once again i'm !!!!

dunstonh

i noticed you mentioned the Halifax a few times. Are they related to Sterling at all?

Oops. Thats me having Halifax in my head be mistake. Sterling are owned by Zurich. However, the same principle applies. The reduction in yield due to charges is too high to make the recommendation seem appropriate.

You've both attacked the 3.6% figure, as I felt you might.

That is really poor. It basically means an equivalent charge of 2.4%p.a. and that is crazy. The best investment bonds come in at around the 5.00% mark.

So I guess the final question is, 'what the hell should I do now'!! It looks like my IFA has sold me short, and i have no idea where to turn next. under the mattress maybe? once again i'm

The advice isnt necessarily bad. Its just greedy and unfortunately we do have a significant minority of advisers out there who appear to be greedy.

That said, a sale of an investment bond for a £42k investment wouldn't feel right as almost certainly unit trusts would be better (you could bed and ISA each April £7200 of the unit trust over the next 6 years utilising the CGT allowance and ending up with the lot tax free in an ISA. That wont be possible with the bond due to charges).

Don't let that put you off as the concept of investing is still fine. You can get some very good yields at the moment and maybe with a bit of phasing (not investing all at once but over a period) it could end up being a very good time to do it.