Investing c£92k for income, for 60+year-old widow & misselling complaint (w/prof bond

whoosh

Hi

This is my first post - I'd be very interested to hear any advice the MSE community can offer! I'm trying to help my mother sort out her savings.

There's a lot here, but any thoughts on bits of it would be helpful.

She's in her early 60s. She has approx £100,000 invested in a Scottish Mutual with-profits bond (from 2000) that's been earning diddly-squat for ages now. The money was from the sale of my late father's business. She wanted to use it for income alone. She can manage on about £450/month (no debts, mortgage etc).

The money was originally invested in a building society account before her IFA persuaded her to go with the bond in 2000. Given the lack of income from bonuses for some time now, she's managed on the monthly repayment of a family debt for the past year or so, but this will be paid off in a few months. The bond's 10-year anniversary is several years away. So she now accepts that she'll have to encash and suffer the Market Value Adjustment (about £8k at the moment I think) to start getting income again. She should have about £92k to invest.

She's had initial meetings with various local IFAs but remains none the wiser. She's a complete financial novice. The IFAs have generally recommended spreading investments across different funds, some of which like Canada Life apparently offer an allocation rate high enough to offset some of the MVA. One suggested offshore investment bonds.

Her main concern is understandably to avoid losing money again as a result of bad advice. She wants to preserve as much of the capital as she can to provide an inheritance when she dies, and wants simply to gain income in the meantime. She's already got a smaller amount saved in an ISA for emergency use. She should not need immediate access to the £92k.

I'd really appreciate any thoughts. We're keen to get a decent IFA who won't just sign her up to a plan, take the charges and forget about actually managing her investment. I'm also keen to get 2nd, 3rd opinions/suggestions on how she should invest c£100k for income. She's quite risk-averse, hence the original building-society account, and following the failure of the with-profits bond, she doesn't want to end up in a similar position.

I'd be interested to know what people think appropriate charges would be for this sort of advice with the sum of money involved.

I guess there are a few questions, e.g. what financial options come to mind for her purpose and the amount of investment, what we should expect of an IFA etc.

As a secondary question, I'm nearly finished with the complaint to the Ombudsman, on her behalf, against the IFA who advised her to sink the bulk of her investments into a with-profits bond, even though she originally stated she would never want to spend her capital. Her is a fairly common position from what I can see - the possibility of an MVA was mentioned in the literature (but the implications were not explained), the IFA up-sold the benefits, she signed (on his advice) the risk scale as Balanced (4/5), even though she hadn't a clue what that implied. Any advice from those in the know (or who have made similar complaints) would be very useful before I send mine off.

Anyway, that's a lot of questions, but any thoughts or shared experiences on some bits of my post would be gratefully received.

Hope the New Year is going well so far for all MSEs!

Thanks.

dunstonh

Dump the adviser trying to sell you Canada Life. Good commission payer for up front commission. Typically sold by one hit wonders. (i.e. sell the case and move on to the next person). It has a high allocation rate but sucks up a ton of charges in the following years. Yes it may cover the Scot Mut MVR but its usually better to take a hit and go for something with lower charges ongoing. Its best to cost the options over a 10 year period (sometimes 20) to see which is giving you the real value. i.e. get 10% up front but 2.5% in charges per annum is, in simple terms, the same as getting nothing up front and 1.5% a year in charges.
If any of the advisers has failed to recommend ISA for the first £4k (if shes used her cash ISA this year) or 7k (if she hasnt) then dump them.

Her main concern is understandably to avoid losing money again as a result of bad advice. She wants to preserve as much of the capital as she can to provide an inheritance when she dies, and wants simply to gain income in the meantime. She's already got a smaller amount saved in an ISA for emergency use. She should not need immediate access to the £92k.

If she sticks it in a deposit/savings account, it gets eaten up with tax and inflation and if shes drawing from it to provide an income, it will go down quite quickly in real terms. £100k will have the spending power of around £70k in 10 years and then £49,000 in 20 years. It would be the equivalent of a stockmarket crash in real terms once every 5-7 years without even being on the stockmarket.

It is logical to have some investment risk here but its finding a balance between what is acceptable risk for her and what is going to meet her goals.

There are a number of products covering the ISA, unit trust and investment bond range which do offer capital security on death. If this is a concern of hers then she could still invest in a sensible way taking a little more risk than she would normally like but be safe in the knowledge that if and when she passes away, if the value has fallen back, then at least her original investment would be payable. You have to offset this though against cost. Where you ask for guarantees like that, you pay for them in increased charges.

In reality, there are many different ways of doing this and we dont know enough and we wont know enough to give you any absolute answers on the forum as to what she should do.

Taxation, charges, investment requirements will all impact on what is best and different IFAs get products on different terms so what is best for charges for one IFA wont necessarily be best with another.

We're keen to get a decent IFA who won't just sign her up to a plan, take the charges and forget about actually managing her investment.

You are looking for a "new model adviser" or an investment manager. The term IFA can cover a range of advisers and skills. An IFA that spends 90% of their time on mortgages isnt going to be that skilled on investments. An adviser taking full upfront commision isnt going to be interested in servicing or ongoing advice. NMA advisers are not that common though and probably only account for around 10-20% of all IFAs.

You can help reduce the odds by not seeing advisers who are employed by firms or attached to salesforces (national or regional). Their business model usually forces the IFA to take full up front commission as the employer gets the bulk of it. There is the risk of adviser turnover being higher as well. You need to be looking at the smaller local firms and ideally get in to see the owner/partner/director as they are the ones that are going to be there for the long term. My experience with other firms is that the owner/partner/directors have far higher knowledge and are generally better skilled than the employees or attached advisers.

I'm also keen to get 2nd, 3rd opinions/suggestions on how she should invest c£100k for income. She's quite risk-averse, hence the original building-society account, and following the failure of the with-profits bond, she doesn't want to end up in a similar position.

Every regular in this forum is now bracing themselves for the usual repeats

EdInvestor

In the first place, it would appear that she has not withdrawn any of the money from the bond yet, is that correct? Usually you can withdraw 5% annually from your capital,tax and MVA free, and this annual allowance accumulates.

If so she should be able to withdraw 7 X 5k (ie 5%) =35,000 pounds from the bond right now paying no penalty.Call up SM and ask if she can withdraw the accumulated money and if so,take it out.

That 35k can perhaps be put into high interest accounts/Bsocs immediately as it would appear that she would want a largish chunk of cash to be part of the new reinvested portfolio .

Don't do anything else with the bond yet ( except find out how much is left after the 35k capital withdrawal.

Next question: what other income does she have from pensions and such? Considerable savings can be made by choosing the right type of investment from the tax point of view for older people.

And the last one for now:How do you judge her attitude to risk? Is she prepared to take any at all? Is so, low only or low - medium?

What percentage of the 100k could be put in investments with some risk? 50%? 25%? less,more?These questions lead to what they call 'asset allocation', which is a fairly simple way of managing risk.

Regarding the complaint,try searching for WP bond complaints on the FOS site to read the explanation of what they see as misselling and what not.

https://www.financial-ombudsman.org.uk

the possibility of an MVA was mentioned in the literature (but the implications were not explained)

This is a good ground for complaint.The risk should have been spelt out by the advisor.

She originally stated she would never want to spend her capital.

This is also a good indication the sale was unsuitable: the so called "income" from an investment bond is actually a withdrawal of capital.She should have been told this.

An investment bond/WP bond still remains a completely unsuitable product for Mum on that ground alone, so you'll know she's being missold (again) if any advisor tries to sell her a new one..

she signed (on his advice) the risk scale as Balanced (4/5), even though she hadn't a clue what that implied.

Did she have any earlier history of risk based investments, or was all her money kept in cash? I doubt you'll need to say anything about this,as the other two issues should be enough (IMHO), but it's always useful to know.

I hope MSE poster Defender of the Weak will be along to comment on the complaint, he's the expert in this area.

whoosh

Just a quick note dunstonh & edinvestor: thanks very much for your thoughtful replies. Some food for thought there. I'll read around what you've both said and post my thoughts soon. And I'd be pleased to hear from Defender of the Weak! Speak soon...

defender_of_the_weak

Whoosh

I wil leave all comment regarding future courses of action to those on here who are currently practicing as they know which products are now available Looking purely at the original advice and bearing in mind how little backgound we know it does seem that this was perhaps not the way to go. Given the sum of money the IFA could easily have built a decent spread of investments using deposits, gilts, possibly Nat savings and maybe a small amount of equity based investment to balance against inflation. All financial advice is subjective and if you had 43 advisers you would probably get 43 different suggestions not least for the reasons dunston has quoted above.

I assume you have already complained to the IFA and been rejected hence the FOS comment. Just to make things clear I run what is primarily an endowment claims company but deal with all types of financial mis-selling, if you would like to pm me an email address I would be happy to read through and supply any pointers to your fos submission

whoosh

Hi,

Following the earlier points on my thread, I thought I'd cast the net for a bit of advice again...

My mother (age 63) has a Scottish Mutual w/profits bond of about £108k, and needs income from it since her other income from hobbies barely covers the bills.

Ideally she needs £400-500 per month, in an overall low-risk portfolio. She'd like to avoid spending the capital so it will form an inheritance for her children.

She will have to swallow the MVA in order to get an income again and will end up with just under £100k.

Can you finance whizzs offer your thoughts on the responses from various IFAs she has seen who were broadly briefed as above. I had some really useful comments earlier in the thread, so I'm posting more detail in the hope of more detailed advice. This is one area in life where I don't feel comfortable offering advice to her myself.

Suggestions received thus far from preliminary IFA meetings:

IFA 1
1) AXA bond with initial allocation of 105.25% (some commission foregone), invested in diff funds to match risk profile
2) Offshore investment bond - said to provide higher return over long-term all things equal. What's the score with this? No other IFA mentioned this option. She seemed to be mentioning AXA again.She said the gross roll-up should offset the higher charges of offshore bonds. She also commented that offshores are better vehicles for trust planning, but didn't explain to my mother what this meant for her.

IFA 2
1) Go for highest allocation rate on the market - bearing in mind mum's concern over ther MVA, Canada Life. (One MSE in this thread slated the charges on Canada Life)
2) Split capital between diff providers and fund types. Suggested guaranteed funfds with Norwich Union/Fr Prov, and suggested that the higher allocation of Canada Life could be mixed with diversification of the portfolio - thereby not reducing the MVR as much as option 1) but giving a spread of investment types.
3) Put half investment in Canada Life for a high allocation and pick 2 other funds (eg guaranteed funds) - more offsetting of MVR but retaining some diversification
4) Do nothing or see if Scottish Mutual will permit moving monies to another fund

IFA 3

1) Invest in several areas, e.g.
i) some cash on deposit for short-term requirements, poss switch this into cash ISA
ii) Fixed-interest bonds, eg 3-5yrs with Nat Savings, banks or b/societies
iii) Life assurance bonds, esp. distribution funds and maybe investment trusts
2) Also suggested some stock market investment for long-term growth, eg life assurance bond funds and perhaps unit trusts in addition to above
3) Pointed out that leaving capital intact for children should be considered ideal scenario and priority should be saving for comfortable retirement.

IFA 4
Scottish Life Safe Combination Bond. (Not sure if he recommended any others)

Finally - can anybody recommend an excellent IFA in the Fylde Coast area (Blackpool, St Annes etc)?

Thanks all!

dunstonh

Obviously we dont have the full information but comments as follows:

IFA 1
1) AXA bond is quite good value when large range of external funds is used. Its not quite as cheap as Clerical Medical currently but they just started a special offer last week the IFA may not be aware of it.
2) AXA offshore bond is good but I dont think the extra charges in the bond would make up for any potential tax benefit from gross roll up with her tax position.

IFA2

1) allocation rate is a plus point but higher charges annually would soon eat into that.
2) splitting between providers for the wrapper is pretty pointless given the amount.
3) the option to see if Scot Mut will permit moving to other funds is a good call but I fear it wont be any different to surrendering as far as the MVR is concerned.

IFA3

Seems more of a general view with nothing specific.

IFA4

No experience of that product unless he is referring to the Royal London/Scot Life Riley plan.

Put my views down as IFA5. Note that these are without knowing full details.
1 - ISA. ISA always comes top. (hold some back for next tax year too)
2 - Unit Trust/OEICs. I dont think there is enough information on this thread to 100% rule out investment bonds but I also dont think there is anything to recommend them either. In which case unit trusts should be used before bonds. A wide spread of funds should be used to average out to risk profile. A capital guarantee on death could be added if she is more concerned about what happens to money on her death.
3 - ensure sufficient liquid reserve available in bank/building society.

I think the problem with the bonds is that they have good allocation rates which go some way to offset the MVR but the annual costs would not make it worthwhile. If you hold back £14k for ISA allowances (this and next tax year) then it doesnt leave enough for the investment bond to benefit from the better allocation rates and although they would be cheaper in the short term, they wouldnt be in the long term.

EdInvestor

It's just as one suspected.All of the IFAs instantly try to flog investment bonds - a repeat of what she has already been missold

IFA 3 is the only one who comes anywhere near a reasonable approach - at least he presents alternatives to the bonds, and this is the way to go.

To boil down IFA 3's alternaives this is what you could do for a low-medium risk portfolio which is realonably easy to understand and manage.

Target income: 5,400 pa (450 net per month)Perhaps you could clarify if the required income is pre or post tax, I have assumed net.


1) 40% in cash, using high interest accounts, National savings index linked, and BS high rate savings bonds

Income @4.5% 1,800 pa

2) 40% in equity income unit trusts via https://www.h-l.co.uk (a discount broker which will rebate charges).No tax to pay on income or capital gains from these as within allowances or tax already paid.

Income @ 3% 1,200
Realised capital gain:1,500 ( represents modest growth of 3.75% on the 40k capital invested)

3)20% in a mix of property investment trusts ( using this year and next year's ISA allowances of total 14k to protect the income.) The rest to go in the following year's ISA.

Income @ 4.5% 900 p.a

Total income: 1,800 + 1,200 + 900 = 3,900
Realised capital gain: 1,500

Total 5,400

Note that one would expect better capital gains pa on even an average equity income fund than she would need to cash in and the best ones routinely do enorously better.

Performance of UK equity income funds over past 5 years

Plus there should be lower but steady capital gains on the property element.Thus her fund should grow over time to provide an income to match inflation.

This arrangement is easy to DIY via Hargreaves Lansdown, I assume she can manage the cash herself.