Abbey National With Profits Bond

suzy_hobday

My mum desperately needs some advice. She lives on her own in a co ownership flat for which she pays a monthly rental (she owns half of the property for which she has no mortgage). She is 56 years old, divorced from my dad and works as a checkout operator in a supermarket.

On 20/04/01 she invested £10,000 in an Abbey National With Profits Bond for a term of approx five years. At the time she was told it might lose money in the first year but after that it would gain interest. However, upon receiving her latest statement she discovered that for the second year running no profits have been paid. When she talked to Abbey National about this they said it would be best to come out of this bond as they could not say when or if any profits would be paid. She is very upset to learn that for cashing in this bond early she would only receive £8950.99. She is gutted to learn that she will lose this amount of money which is not a lot to some but it is to her, and is angry at being poorly advised when she took out the bond.

Abbey National now suggest a Lockaway Savings Account where there is no risk....is this the best thing for her to do? She does not want to touch the money as it was left to her by her dad, but would like to make the most of it for her future with no risk.

Please can anyone help? Thank you!

Loaded_Bachelor

Two answers:

Answer 1) If I owned the bond I would let it run to its natural 5 year end because there is a reasonable time left for stock markets to recover and I would think that part of the loss figure she has been quoted would be down to her having to suffer an early exit penalty if she cashes it in now.

Answer 2) It sounds as if the worry of the situation for your Mum is just as painful, if not more painful, than the monetary loss itself. Therefore, it might be best for her to just take the loss and re-invest in no risk interest bearing accounts such as a cash ISA and a 1 year fixed rate bond. If she takes this course of action then I feel she should not reinvest in any Abbey products as this could send the signal that she is happy with Abbey's service/advice. Having re-invested elsewhere she could then try and seek compensation on the grounds that she was mis sold the product. I am not sure of the procedure for applying for compensation but others on here will be able to advise how. If someone doesn't explain on this thread then maybe start up another thread to ask the compensation question.

Incidentally, I do think that most of these "with profits" bonds are a joke because many of them can be additionally devalued by the fund operators; this is on top of the fund itself going down naturally if stock markets are falling. So in effect they can double punish the investor if stock markets fall sharply. The excuse they give is that they are doing the additional devaluation to protect investors in 10 or 20 years time from the fund going under all together (I think this is a dubious concept). The ad hoc devaluation feature is always somewhere in very small print but rarely emphasized or even mentioned at all by the sales person.

I could be jumping the gun here a bit because perhaps your Mum's fund wasn't one that has been additionally devalued but in any case from what you have described it seems like the real risks were perhaps not properly explained to her.

dunstonh

A tied representative is not allowed to recommend cancellation of an existing product in favour of a new one. (they are when its the same company but they have to fully outline all the advantages and disadvantages of surrendering it and what you will lose by not leaving it where it is). Only someone regulated under the FSA can give that information. A cashier cannot for example.

Normally when working out if its a good idea to come out of a with profits bond, you would look at the surrender charges, request a projection and look at the underlying fund investments and decide if there is a likelihood of bonuses returning in the future. You then compare the charges and potential against what is currently available.

I assume it was a scottish mutual bond. I dont know if the tied advisors version is the same as the IFA version but if it is, then you should consider that there are other funds available with the product which may be more suitable. Indeed some of the funds are highly regarded and low risk.

You need to find out what the surrender penalty is and if there is a market value reduction being applied. If there is, how much is it. If there isnt a market value reduction (MVR) being applied, then your mum should consider switching into alternative funds. This wouldnt invoke any surrender penalty and an MVR couldnt be applied in the future as these only apply to with profits.

Incidentally, I do think that most of these "with profits" bonds are a joke because many of them can be additionally devalued by the fund operators; this is on top of the fund itself going down naturally if stock markets are falling. So in effect they can double punish the investor if stock markets fall sharply. The excuse they give is that they are doing the additional devaluation to protect investors in 10 or 20 years time from the fund going under all together (I think this is a dubious concept). The ad hoc devaluation feature is always somewhere in very small print but rarely emphasized or even mentioned at all by the sales person.

I disagree with your view. I can see where you are coming from but I feel the problem isn't with the product but with the provider. I still have no problem recommending with profits funds for investments. However, i do limit my recommendations to either Prudential or Norwich Union. Both of these have MVR free allowances and do not have the financial constraints that other smaller insurance companies have had. Many with profits providers have had to lower their equity content due to financial problems and the need to meet their solvency requirements and future guarantees. Those in this situation are unlikely to see much of a return, if any, in the future. However, Pru and NU, for example continue to pay bonuses, as do some others.

Had you invested an a with profits bond 10 years ago and an equity investment (say balanced managed or cautious managed), the with profits bond would have the higher valuation. Even where there is an MVR applicable.

So, really its not the product but the provider that you have to be wary of.

Loaded_Bachelor

Okay, I'll correct what I said and say that any fund where you entrust your funds to someone and that person can ad hoc apply an MVR is a joke fund.

These funds aren't free from capital gains tax so what is the point in investing in what are essentially equity funds with a built in extra potential downside when you can lose even more than the real devaluation of the equities themselves? There are masses of unit trusts and OEIC's you can invest in or indeed you can build your own equity portfolio so why let any of these muppets who can apply an MVR at will have any of your money?

I accept that where an MVR possibility doesn't appear in the small print that it is a less risky investment.

However, I would never touch any investments that are run by companies who's core business is insurance as in my view these companies would be far more exposed than say a dediacted fund managing company if markets dive due to terrorism or naturally occuring disasters. They would obviously take a huge caning on insurance claims, their own share price would crumble, the shares which they own on an ongoing basis purchased with customers insurance premiums would crumble and THEY HAVE YOUR MONEY.

One might argue that their client investment businesses and insurance businesses are kept as seperate financial entities but who really knows if this is the case. I would rather not take a chance on this.

Another point about with profits bonds is that in my opinion the administration charges/management fees are far less transparent and harder to work out than those of an OEIC. They are also often promoted by being offered as a half with profits bond, half cash bond by certain building societies, the cash bond paying maybe 1% higher interest than the best cash savings accounts available at the time.

This kind of promotion makes me sceptical anyway, it strongly smells of put 50% of your money into something better than average and the other 50% will go into a garbage product that lines the fund managers' pockets and pays a nice commission to the smarmy sales person in the building society branch.

Not for me thanks.

dunstonh

These funds aren't free from capital gains tax so what is the point in investing in what are essentially equity funds with a built in extra potential downside when you can lose even more than the real devaluation of the equities themselves?  There are masses of unit trusts and OEIC's you can invest in or indeed you can build your own equity portfolio so why let any of these muppets who can apply an MVR at will have any of your money?

There is no CGT to pay on life funds as the taxation is handled within the fund. They can also offer tax advantages for higher rate taxpayers now but who wont be in the future. They can be used to avoid IHT by being able to be placed in trust. There is usually a no initial charge option unlike a UT or OEIC. Thats a quick generic list of some of the gains on life funds. A with profits fund is just another life fund with some downside protection. Some with profits funds have explicit charges, others do not. Some have MVR free periods, others do not. In dealing with IHT mitigation, with profits funds have been great as there is rarely an MVR applied in the event of death. In cases like that, you are looking at an investment that can only go one way and thats up.

A with profits bond with an MVR free period or allowance can be a very good product still for someone who wants to have the potential of equity growth on par with a cautious managed/balanced managed fund without the risk of capital loss. If the markets go down (as they have done), then you can get your money out on the MVR free period and have no capital loss.

The problem, as you have made clear, is that the product was sold by insurers with weak financial strength (ie Pearl, Royal Sun Alliance, NPI, Alba) and the bonus rates were set by the marketing men and not the accountants. They couldnt afford for things to go wrong but they still sold the product. So, when it did go wrong, they closed for new business and killed the bonuses.

Additionally, with profits was oversold. It was the default fund for many providers and as tied advisors are not allowed to recommend an investment fund, its often where the money ended up. For many, they would have been just as happy in unit linked funds appropriate for their risk attitude.

It is just like any other product and fund. Its suitable for some but not everyone and the quality of the product depends on the provider and what they offer. Some will be good, some will be bad.

As i said, I still use with profits on occassion but I will only use Pru or NU. Although with the launch of the new Pru product and the NU 5 year MVR free period looking like it may not be continued beyond December (for new business), I may change that approach.

Milarky

DD,

Just out of curiosity when were MVR/MVAs first applied, and by which companies? I first remember coming across them at Equitable Life when they hit trouble and closed for new business at the end of 2000... I assumed that this 'canny' insurer virtually invented MVAs and that the rest of [rag tag] life company sector quickly 'rediscovered' these overlooked clauses and began to invoke them?

At Standard Life, for instance, there was no MVR in place until July 2002. When asked 'under what clause' they were allowed to do this, I was directed [by the company's own solicitor] to the 'Regulations' of the company which state [in effect] ''the Board can make any decision it wants". If effect, SL invoked force majure, rather than relying on an express clause in anyone's policy. I know that MVRs were written into some polcies latterly, but I just wonder whether anyone really knew about them before they were seized upon by with profits companies?

Loaded_Bachelor

I bow to your greater knowledge on these products DD. I have got a little bit right about them and a lot wrong and put my hands up to that and apologise.

(That's what the forum is for, someone like me can talk a fair amount of rubbish and get wisely corrected on it; a good learning tool)

Given your explanation of the ins and outs of these products it does appear that very specialist and good advice is needed for anyone to invest in one with real confidence. The shiny suited salesman I spoke to had very little knowledge compared to you on the subject and basically just wanted me to sign on the dotted line.

Although I've rightly branded myself a bit of a dummy, I can still sleep comfortably tonight knowing that my general instinct to duck these kind of investments when offered them twice (by Chelsea Building Society and by Abbey National) was correct. Both of the policies I was shown were operated by insurance companies, Norwich Union and Legal & General from memory and they both had MVR clauses in them.

Incidentally, when I was looking for a provider for an equity ISA back in April I noticed that there are a multitude of insurance companies operating ISA funds both selling them direct and through large concerns such as Barclays Bank, Lloyds TSB and Abbey. I ducked all of these for the reasons already stated.

dunstonh

Just out of curiosity when were MVR/MVAs first applied, and by which companies? I first remember coming across them at Equitable Life when they hit trouble and closed for new business at the end of 2000... I assumed that this 'canny' insurer virtually invented MVAs and that the rest of [rag tag] life company sector quickly 'rediscovered' these overlooked clauses and began to invoke them?

Thats a good one.  I cannot recall them being invoked in the same way before this stint.    I wasnt trading in 1987 so dont know if they applied them then.  However, since then, the market has been mainly one way until the recent drop.  

I think the Eq Life issues scared a number of providers into writing an MVR into their contracts.    

I know that Pearl dont have any MVRs and i am ripping millions out of them at present (on my third million this year so far - not my own money  ::) ).  I know that other IFAs are hitting them too big time.  Had they an MVR, i doubt they would be losing so much.  So you can see the logical reason behind an MVR.  

That is probably another reason insurers are more willing to levy an MVR than perhaps before.  I noticed that Standard Life and Pru show their online valuations with an MVR shown.  Both are showing it with a real time value.  Its like smoothing has gone real time behind the scenes and shows in the MVR.

I bow to your greater knowledge on these products DD.  I have got a little bit right about them and a lot wrong and put my hands up to that and apologise.

its just experience thats all.  No need to apologise.  As you say, its a discussion board.  

Given your explanation of the ins and outs of these products it does appear that very specialist and good advice is needed for anyone to invest in one with real confidence

I would say that about many products.  However....

The shiny suited salesman I spoke to had very little knowledge compared to you on the subject and basically just wanted me to sign on the dotted line.

...doesnt do any favours to the financial services sector and puts people off from getting advice.