Inurance Bond -- Good or Bad?????

EdInvestor

Beldray wrote:

I am about to draw a personal pension, the tax free element that is available is just over £80k, an IFA has advised that I should take the full amount and invest it in an insurance bond with Norwich Union or Prudential. Does this sound good advice and what are the pros and cons of this sort of investment?

Hello Beldray.

It would appear you are being sold the traditional 'annuity for the main fund plus investment bond for the tax-free cash' package, are you?

Or are you putting some or all of the main fund into immediate or phased income drawdown?

Did you want to take "income" from the investment bond and are you aware that the 5% "tax free" annual payout usually mentioned actually comes from your capital ( which is why it is tax free)?

How much of your income is in the higher rate band - and how old are you - does this planning take the age allowance into account?

What kind of annuity have you been recommended for the main fund?

dunstonh

If you read his next response Ed you will see that it was just a telephone enquiry at this stage. No recommendations would have been made.

whiteflag_3

dunstonh wrote:

If you read his next response Ed you will see that it was just a telephone enquiry at this stage. No recommendations would have been made.

But surely Dh, if it was just a telephone enquiry then i cant see how the IFA could be in position to discuss any products, let alone be able to talk about taking the maximum tax free cash from a tax free wrapper and depositing in a taxed (possibly) NU or Prudential investment bond .

BTW is 1% initial plus 0.5% trail cheaper than 5.5 % initial commission on say an investment bond over 10 years?

Perhaps we need another thread , but I think this NMA against old model adviser is far more complex than just lower initial commissions. I have heard of a number of NMAs that take 0.5% trail AND 0.5% "adviser" fees, but no one yet been able to tell me what the clients get from their new model adviser for the extra 0.5%. Now we all know the drastic effect an extra 0.5% can have on RIY let alone 1%

dunstonh

It wouldnt surprise me if there are different prices within the NMA model. I have heard some of some firms that target high net worth clients charging 1% p.a. (0.5% fund based with the other 0.5% fee based). I know a old model adviser that also charges fee retentions on a monthly basis and he has clients that pay it.

Different business models, different pricing, different service will exist in any profession. Personally, i think value for money is the most important thing. If an adviser 1 charges more than adviser 2 but does a better job, then it is better to pay more. If you can get the same quality for less, then that should be considered too.

I think the problem with NMA for some firms is that they cannot afford to move over to that method overnight. So, some will try and do a hybrid model. I didn't move to my current pricing overnight. It took 3 years to get to my pricing with a gradual decline on the commissions being taken over that period.

The salesforce model or employed IFA (or self employed attached to firm) model cannot realistically move to NMA basis within the 1% plus 0.5% fund based. Their costs and income requirements would not allow it. They are far more likley to remain on old model terms or try to mimick true NMA but charge more for it.

Chrismaths

Over 10 years, 1 initial + 0.5% annual is identical to 5.5% initial, in terms of RIY.
However, there are 3 main points attached to this:

1) Due to the wonderful idiocy and obfuscation of the insurance industry, the complexity of the charging structure leads to anomalies. It is possible that the 5.5% initial could be wrapped up in a higher ongoing management charge - that carries on into perpetuity, thus making the point moot.
2) Quite often, trail is paid anyway - certainly with a unit trust.
3) MOST IMPORTANT - the NMA has to keep you as a client to keep earning his 0.5% - that means he is motivated to keep you happy, by means of ongoing servicing - maintaining suitability for your circumstances etc etc.. The sales model has a motivation purely to sell you a product, an no reason to revisit it after the sale is made.

This also forgets how the marketplace changes - a bond written 10 years ago would almost certainly be more expensive than one written today, and indeed may no longer be suitable for you.

Also, if you want to cash in your bond after 3 years say, you will be around 3-3.5% worse off under the inital commission arrangement.

whiteflag_3

dunstonh wrote:

It wouldnt surprise me if there are different prices within the NMA model. I have heard some of some firms that target high net worth clients charging 1% p.a. (0.5% fund based with the other 0.5% fee based). I know a old model adviser that also charges fee retentions on a monthly basis and he has clients that pay it.

Different business models, different pricing, different service will exist in any profession. Personally, i think value for money is the most important thing. If an adviser 1 charges more than adviser 2 but does a better job, then it is better to pay more. If you can get the same quality for less, then that should be considered too.

I think the problem with NMA for some firms is that they cannot afford to move over to that method overnight. So, some will try and do a hybrid model. I didn't move to my current pricing overnight. It took 3 years to get to my pricing with a gradual decline on the commissions being taken over that period.

The salesforce model or employed IFA (or self employed attached to firm) model cannot realistically move to NMA basis within the 1% plus 0.5% fund based. Their costs and income requirements would not allow it. They are far more likley to remain on old model terms or try to mimick true NMA but charge more for it.

Yes I totally agree. However, as I said earleir, what I am not convinced about is what the NMA taking 1% pa is doing for the extra 0.5% ? Its all well and good punters reading some of the recent posts and thinking "i need a new model adviser" when in fact they could end up in the long run paying over the odds for mediocre service. Do you know or anyone else for that matter know what these 1% advisers are doing to justify the extra 0.5%?

I fear I may get the same response I get from broker consultants when I ask them how I justify recommending a PP with 1.5% amc when there is an identical product with a 1% amc (that obviously pays lower commission).

No one has been able to answer my question however the more expensive plans outsell the cheaper ones!

Chrismaths

Ah, fair enough. Depends on the level of service they provide I assume. 1% is a pretty standard annual charge for discretionary investment management services, but that's a different beast.

It's possible for an IFA to bundle all sorts of services up together - say an annual/more frequent meeting at your home, regular valuations, quarterly/half yearly reviews of your porfolio, reports, etc. etc.

But the point of the NMA is to remove commission bias - what you quoted with broker consultants is a clear example of commission bias.

whiteflag_3

Chrismaths wrote:

Ah, fair enough. Depends on the level of service they provide I assume. 1% is a pretty standard annual charge for discretionary investment management services, but that's a different beast.

It's possible for an IFA to bundle all sorts of services up together - say an annual/more frequent meeting at your home, regular valuations, quarterly/half yearly reviews of your porfolio, reports, etc. etc.

But the point of the NMA is to remove commission bias - what you quoted with broker consultants is a clear example of commission bias.

Yes but whats the difference between commission bias and taking an extra 0.5% per annum and doing nothing extra to justify it. Both are ripping off their client! What Im really saying is that while agree the NMA is the way forward investors should not be taken in by the first IFA they come across who says they are NMA. They should still ask what service they are going to get and decide whether it is value for money.

To illustrate I have just run a few bond quotes to illustrate the effect of the ongoing 0.5% and 1% trail.

Invest £80K over 10years 6% growth.

A Nil commission £136,000
B 5.5% intial only £129,000
C 1% + 0.5% £131,000
D 1% + 1% £125,000
E 7% + 0.5% £121,000 ( YES THIS COMMISSION IS AVAILABLE)


Both c & d could be new model advisers
E probably works for Positive Solutions:D

dunstonh

Good points WF.

Although it is important not to muddy the water with the 0.5% trail that is paid. For example, if you do an HL SIPP off your own back, then HL get paid 0.5% on the funds despite giving no advice. So, if you get a NMA on 1+0.5% basis, then the cost of advice is just 1%. If you get an NMA on 1+1%, then the cost of advice is 1% plus 0.5% p.a.

There really wouldnt be any confusion if the fees/commission discussion is done correctly at the start. i.e. this is what i charge. You can then compare and pick the adviser on clear and concise charges.

As long as the charges are fixed it makes it easy to compare. The variety of commission options makes it hard to compare. Especially as a small directly authorised firm may only get 4% on a bond but a network member gets 7% with absolutely no difference in charges to the client. If you look at commission only, you could eliminate the 7% commission adviser who may give 2% rebate but still gets 1% more than the other.

EdInvestor

whiteflag wrote:

Invest £80K over 10years 6% growth.

A Nil commission £136,000
B 5.5% intial only £129,000
C 1% + 0.5% £131,000
D 1% + 1% £125,000
E 7% + 0.5% £121,000 ( YES THIS COMMISSION IS AVAILABLE)

Moneysavers will no doubt be interested to note that if they invested 80k over 10 years @6% on a compound interest basis, ie dividends/ interest reinvested and no charges applied, they would receive 143,268 at the end.

The difference between this and the "no commission" figure quoted above is accounted for by the charges you pay with fund investments - primarily dealing charges for the buying and selling of shares in the fund, but also fees for what are called "soft commissions" - mainly relating to free research from broker to fund manager and such which are then charged to you. The regulator requires no disclosure of these hidden charges at present.As you can see, they bite off quite a substantial mouthful of your returns.

There are a lot of middlemen in the financial services industry, I'm afraid It's quite routine for them to pocket as much as half your profits in fees of one kind or another.