scottish widows flexible option bond charges

cardeanlover

I suppose that I am a bit of an inexperienced investor & I would be grateful if someone could explain to me the charges associated with this bond. I appreciate that there are charges of 1.76% & as the fund grows (hopefully)so the charges will rise in proportion. However, I can't reconcile that the charges rise totally out of proportion to the fund value to the extent that in the final 5 years of the illustration given the fund rises in value £68000 & the charges rise by £54900 to amount to almost 40% of the fund value over the 20 year period. This is based on an initial investment of £151900 giving a medium return of 6%, resulting in charges of £136000 & a resulting fund of £350000. I would be grateful if anyone can shed light on this. Thank you

dunstonh

If this is a new investment you are proposing to make then don't. The other Scottish Widows Bond is a better option as its cheaper (recently under the Clerical Medical Brand). Like a number of the SW products, it is not available through LloydsTSB branches. You need an IFA. Many IFAs also get better terms on some SW products than buying from a bank. As well as you being able to work on fee basis which will be a lot cheaper than going on commission basis with the bank.

However, I can't reconcile that the charges rise totally out of proportion to the fund value to the extent that in the final 5 years of the illustration given the fund rises in value £68000 & the charges rise by £54900 to amount to almost 40% of the fund value over the 20 year period.

The annual management charge is expressed as a percentage of the value. So, the higher the value, the greater the charge. If you are looking at an illustration you should avoid the "effect of charges...." column as that is not the actual charges deducted. There is usually an actual charges column. You also need to remember that the charges over a 20 year period are in future money terms. Not todays money terms. If you bring 20 years worth back to think of them as if they were in todays money then they look far higher than they actually are.

jimjames

I assume these are all estimated figures from the terms you were given based on the length of the investment. One of the IFAs will be able to comment on whether they are good value or if this bond is as poor value as some others.

EDIT - he already has!

Loughton_Monkey

You should be able to see that this is a mathematical certainty. Take any investment, say, £10,000 and calculate its growth at 1.76% over 20 years and you get £4,175.62 growth. That's 41.76% of the initial figure.

Once you add additional growth, over and above 1.76%, you are going to get more back than £10K, but the charges will remain at a similar figure (around 40%) of the final value. This is why charging rates are so critical (all other things being equal).

But sadly, charges in this order are not uncommon.

It brings into focus, also, though, that if I choose a fund that grows 5% per annum (above the charges), while you choose one that performs just slightly better (say 5.5%) then you will be 10% better off than me after 20 years

Or, needless to say, if you fund grows at 5% plus 1.76% (i.e. 6.76% after charges), you will be better off by... er... 40%.

Mathematics is wonderful!

cardeanlover

Thank you for your prompt reply. I appreciate you taking the time & having the patience to answer my query. This was a new investment that I was pursuing with the "HBOS" private banking. It appealed to me because it allowed me to build a fund IHT free to help supplement the pension provision for my 2 children but still let me have a certain control over the initial sum. I have signed & I'm in the 30 day period of grace for cancellation. I would definitely feel a certain degree of bad form to pull out. However, it wasn't until now that I received details of the charges or the fact that over £10000 went immediately as commission to the bank. I thought the set up initial charge was the 1.25% unit allocation. Probably somewhat naive! You were right that the table does say "effect" of deductions to date, but I can't find anything that says actual deductions. I'll try & pursue this with SW. Very many thanks for your input. If you have any further thoughts I would be pleased to hear them. Thanks again

cardeanlover

Thank you so much for your prompt reply to my thread. I cannot agree with you - Mathematics is not wonderful! I have always struggled to see even what appears to be obvious. I had envisioned this bond running for longer than the 20 year period & from the table they sent me it looked as though that by year 23 or 24 then the charges would begin to exceed what was being added to the fund. Added to the initial set up of 1.25% of the unit allocation & a commission in XS of £10,000 + charges I began to feel that this would not build up a worthwhile fund. It was to be in trust & not liable for IHT & help supplement my childrens' pension. Thanks again for your input which is greatly appreciated

cardeanlover

Many thanks for your input

dunstonh

This was a new investment that I was pursuing with the "HBOS" private banking.

Expensive and limited. Notice how HBOS are recommending a Lloyds Banking group product rather than the best product and taking it on maximum commission basis.

It appealed to me because it allowed me to build a fund IHT free to help supplement the pension provision for my 2 children but still let me have a certain control over the initial sum.

That may explain the bond tax wrapper but you can get better options (mainly cheaper)

However, it wasn't until now that I received details of the charges or the fact that over £10000 went immediately as commission to the bank.

Go to a local IFA on fee basis and pay around £1000-£1500 as a fee and you save £8500 straight away. Plus, as mentioned there are other cheaper providers.

Added to the initial set up of 1.25% of the unit allocation & a commission in XS of £10,000 + charges I began to feel that this would not build up a worthwhile fund.

To put that in perspective, you could get 108% on fee basis or get lower annual charges instead.

feesarefare

dunstonh wrote: »

If this is a new investment you are proposing to make then don't.

I think you need to be careful - looks like your giving advice to me:(

feesarefare

cardeanlover wrote: »

I have signed & I'm in the 30 day period of grace for cancellation. I would definitely feel a certain degree of bad form to pull out. However, it wasn't until now that I received details of the charges or the fact that over £10000 went immediately as commission to the bank.

You should have been advised of the commission/charges before you signed/commited to anything. The way banks operate is disgraceful. Far from feeling bad from pulling out, it should give you alot of pleasure!( athough I sure the bank will have advised you that if you cancel in the cooling off period you may get back less than you invested?;))

dunstonh

I think you need to be careful - looks like your giving advice to me

I am. Its not regulatory advice though. Its common sense advice. He is paying over £10,000 in initial commission when fee basis could be around 1/10th of that. Rounding the figures, that's a saving of around £9000. Its pretty fair to say that its advisable to pay less rather than more when the difference is that great. Indeed, you yourself suggest that in your following post.