Investing with insurance companies

fryery

Last year before de collapse of Northen Rock I was advised by the FA of HSBC to invest some of my hard earned money in distribution bonds....,this was done; shared in 4 companies; namely The Prudencial (MGD distribution 7 fund)...., Standard Life (distribution life fund)...,Legal & General (distrib.(a)....., and AXA (high yield distr)., As we all know the value of this funds plummeted, I decided to hold on beacuse of the exit penalties., however, I know hear rumors about insurance companies being the next in line to suffer., My question is what happens to this investments if one of this companies goes bust? does de FSCS covers any of the money invested?

dunstonh

As we all know the value of this funds plummeted

Those funds shouldnt have plummeted. Down yes, but not to the degree you suggest.

My question is what happens to this investments if one of this companies goes bust? does de FSCS covers any of the money invested?

You get insurance FSCS protection which is 100% of first £2000 and 90% of the rest with no upper limit. However, with unit linked funds, this isnt really an issue as the funds are ringfenced away from the insurance company assets.

There is no suggestion that any UK insurer is going to fail. Most have reported their capital position and can suffer further significant drops in the markets without the need to raise capital. The rumours have started though because some are choosing to increase their capital position and that has been taken by some to mean they have problems. Others would say its prudent to get the capital in early just in case rather than leave it too late.

Streetperson

A quick question if anyone can help. I have a L&G bond which suffered a Market Value Reduction of £2500 in 24 hours last week. Can anyone explain MVR to me and how they are calculated. On one day the bond was worth £13,750 on the next it was £11,250. I know the market dropped but that much?

dunstonh

I know the market dropped but that much?

Yes it did.

A rough guide is to consider a with profits fund like a balanced managed fund but they smooth the ups and downs out. They will absorb short term small losses offsetting short term small gains. However, large losses cannot be absorbed as easily so a market value reduction applies if you choose to cash in during the period there is an MVR. If you are not cashing in then you dont worry about it. MVRs are not normally charged on death, at defined guarantee points or maturity (not many have maturity dates nowadays).

Different companies take different approaches. NU have chosen to reduce terminal bonuses whilst Pru have chosen to keep the terminal bonuses but apply an MVR. If you cash in either of those then the effect is much the same (although if you die, the Pru is much better). L&G have chosen the MVR route.

Streetperson

Thanks dunstonh - is there anyway (other than waiting 25 minutes for L&G to answer the phone) of finding out what their MVR currently is. I also have a SLife Bond - do they also operate an MVR. At least you can get an automated valuation over the phone with them!!

dunstonh

is there anyway (other than waiting 25 minutes for L&G to answer the phone) of finding out what their MVR currently is.

No. If its on the unitised with profits fund then it will depend on your date of entry. Only the old conventional with profits plans have a one size fits all MVR. Unitised funds are much better on that front.

You could ask your IFA. We can get the information on plans within a minute or two as we can log into insurers or get the information fed directly into our own back office software.

paul5046

A nice lady in the Abbey told me today the guarantees againt losses are 50k in a bank for savings and 48k for losses with insurance companies regarding investments.

dunstonh

paul5046 wrote: »

A nice lady in the Abbey told me today the guarantees againt losses are 50k in a bank for savings and 48k for losses with insurance companies regarding investments.

She maybe nice but she is wrong.

The 48k limit applies to investment contracts which are not wrapped in a life or pensions wrapper. If they are wrapped in a life or pensions wrapper then the insurance FSCS protection applies.