Standard Life Bonds - Advive Please!

rawdon51

Hi. My father has just retired at 65 with around £80k savings and pension just about enough to live off. He has been advised by his friendly HSBC advisor to invest £70k in a Standard Life capital investment bond with 75% in a "distribution" fund and 25% in a "property" fund. Overall although I can see it is a relatively low risk strategy, I'm concerned on a couple of fronts:

- The commission for the advisor is listed at around £5k, which seems quite a lot, but I'm no expert
- Management fees are 1.5% p.a.
- Exit penalties in the first 5 years are high - 10% in year 1 to 2% in year 5
- The blurb talks about income provision, but I can't see a way of extracting an income without invoking the large exit penalties, but maybe I'm missing something

Has anyone got any views as to whether this might be a wise/appropriate investment?....

Many Thanks,

Jon

dunstonh

Its a mis-sale waiting to happen.

- The commission for the advisor is listed at around £5k, which seems quite a lot, but I'm no expert

Its the maximum for that product. However, that is to be expected when you go to a bank. They always take maximum.

- Management fees are 1.5% p.a.

The IFA version has most of the funds at 1.0%. Bank versions tend to be more expensive. Ironically, it is possible to get 7.25% commission on the IFA product and 1.0% Annual charges.

- Exit penalties in the first 5 years are high - 10% in year 1 to 2% in year 5

They are about the norm. no issues there.

- The blurb talks about income provision, but I can't see a way of extracting an income without invoking the large exit penalties, but maybe I'm missing something

They have an annual penalty free allowance. Typically bonds allow between 5% and 10% to be withdrawn each year with no penalty. Some bonds allow natural income to be withdrawn as well but the Standard Life product isnt that advanced.

Has anyone got any views as to whether this might be a wise/appropriate investment?....

Its probably a mis-sale. For a basic rate taxpayer, the pecking order is ISA, Unit Trust then investment bond.

Investment bonds are good for estate planning, higher rate taxpayers and basic rate taxpayers over age 65 who are close to earning £20,100 a year. (a few other exceptions do exist but they are the main ones).

ISAs and unit trusts invested in identical funds will perform up to 1.2% a year better than the life assurance funds that this bond uses. So, why hasnt the adviser recommended those? Possibly as the commission is not 7.1% but 3% on ISAs, UTs etc

Ignoring the suitability for the moment, Norwich Union, Clerical Medical and Scottish Equitable all have better priced versions than Standard Life and thats against the cheaper IFA version, let alone the bank's version. Plus, as an NMA IFA, the standard life bond only has a limited number of switches which makes rebalancing a no-no. Their product is in need of a revamp as there are much better versions available. You can even get investment bonds now that invest in unit trust funds directly (not insurance company versions) at the same charge as unit trusts with no charge on the wrapper. Therefore the only difference is the tax.

So, in summary, its almost certainly a mis-sale, the fund choice for 70k is disgraceful (but what you expect from a bank salesman), the charges are high, the commission is greedy and you can get better elsewhere.

rawdon51

Thanks for the info dunstonh...I'll suggest he looks elsewhere

jamesd

Where are the savings now? In cash ISA or stocks and shares ISA?

If they are in ISAs now that solves much of the problem: the stocks and shares types can be retained and possibly switched to lower risk income-producing investments. The cash ISA can be retained for a year on speculation that the planned move to allow cash ISA money to be switched to stocks and shares ISA happens, or could be retained as-is in the highest rate cash ISA available (around 6% at present), though that would see gradual reduction of income due to inflation.

EdInvestor

He shouldn't be using an investment bond at all. He will be paying extra tax and much higher charges and the "income" will actually be withdrawn from his capital which is risky if markets fall ( like now).

He should invest in a mix of unit trusts via a discount broker such as https://www.h-l.co.uk whose website has some good pointers about what sort of income funds may be available ( some equities, some bonds, some property looks like the best bet).

He can take the actual income from the investments ( eg dividends ) with no tax to pay. For investments (eg bond funds) where income is taxed he should use his maxi ISA ( 7k a year, he can get 14k invested over the next couple of months.) He can expect around 3-4% income overall.

For extra money he can cash in up to almost 9k a year tax free using his capital gains allowance.

rawdon51

Stangely, the funds are currently in premium bonds mainly!....Returns were OK in the first year but seem to have dropped off, and now he's more intersted in getting a decent "guaranteed" income rather than speculating on winning the "big one" or anything like that.

I see that most people seem to be advising the ISA route. Doesn't the fact that he's not got any of it in an ISA currently & the maximum investment p.a. rules mean it would take him a number of years to move the capital into ISA's in the first place?

EdInvestor

When you say he wants a guaranteed income, do you mean he wants to take no risk?

If so the investment bond is even more of a misselling nasty than first thought.

dunstonh

A guaranteed income doesnt mean guarantee of capital. A fixed regular withdrawal could be all that is required.

EdInvestor

If he wants a guaranteed income with no risk then the correct product is gilts.

jamesd

A major question is how guaranteed he wants the income to be and for how long.

Lowest possible income is from premium bonds, cash under the bed and normal bank accounts. All guaranteed in some way, all poorly performing options.

If he wants an absolute guarantee that it will never change then the correct choice is annuity purchase. This is also the choice that will give him the next lowest possible income. Since the optimal time to buy an annuity is around age 75 (that maximises the benefits of the risk sharing side) it's not really a great choice today.

A combination of stocks and shares ISA and unit trusts/OEICs held inside and outside an ISA can do considerably better, producing an income of 6% of the fund value plus growing with inflation so he doesn't get poorer over time. The income from this would need to be adjusted once a year to reflect the current fund value but fixing at 4800 a year and not changing it often looks reasonable. I've assumed a fairly conservative growth rate. Also note that this fully preserves and probably grows the capital a bit, while the annuity consumes it all immediately. That difference may be very significant if ongoing care is needed later in life.

He can only move 7000 a year into the ISA and it may take 15-20 years to get it all in there after growth but since the income from money in an ISA isn't taxed, it'll gradually make more and more of his income tax free.

Here are two examples from fairly low risk sectors, though the Baillie Gifford fund is at the high end of risk in its sector. They aren't personal recommendations, just examples. Use the h-l links to see how little they moved when the market dropped last year:

• New Star Property (h-l) from Property all regions BI - real property uk, small REIT component
• Baillie Gifford High Yield Bond (h-l) from fixed interest - UK junk bonds

A large part of the money would be placed in relatively low volatility investments like these two, so it will see relatively small swings in value and income.

It's worth using the email link in the profile of dunstonh to ask for the risk tolerance questionnaire.

EdInvestor

He can only move 7000 a year into the ISA and it may take 15-20 years to get it all in there after growth but since the income from money in an ISA isn't taxed, it'll gradually make more and more of his income tax free.

Of course if he wishes to put some of his money in equities, the dividend income will be effectively tax free from the start, without needing to use the ISA, and is quite stable, more so than cash.

If he has ever had any demutualisation windfall shares, he will already know this.