With Profit Bonds

needmoney

As a financially ignorant housewife in Sept 2002 I put quite a substantial amount into a with profits bond with SL on the advice of an IFA.

Because of all the confusion with SL regarding demutalisation I really am at a loss to know how I stand i.e should I stay or should I go. I feel there must be a better deal for my money but am at a loss to work it all out and am loathe to go to another advisor as I've been told that bonds are the lowest of the low and he gave me that advice so once bitten twice shy.


Does anyone have any advice for me I would appreciate it very much. I'm told there's no such thing as a stupid question here and forgive if this question has been asked but I did a search and nothing came up, thanks in advance for any replies.

dunstonh

Assuming you mean Standard Life and not Scottish Life....

You have been misinformed.  Bonds are not lowest of the low.  Indeed over a 10 year period the charges on a bond can often be quite a bit lower than an ISA or Unit trust/oeic.

The taxation of a bond is different to an ISA or Unit Trust/OEIC so it can be beneficial to some and less beneficial to others on that front.  As a housewife it is likely the taxation on the bond is not as good for you as a unit trust.  Although you may have CGT or IHT issues which the bond is used to help reduce.

The With Profits fund you are invested in is not available in a Unit Trust or ISA so it could only be taken out in a bond.

Back in 2002, Standard life charges would show that the bond had a reduction in yield of about 0.3%.  (This means that the charges reduce the return by 0.3% per year).   An ISA or unit trust/OEIC would typically show around 1.5%.  

Also, as Standard Life are going to demutualise in 2006 (i dont know what confusion you refer to), as a with profits holder you would be entitled to a payout of some sort.  The method of this payout has yet to be decided.  

If the company is worth 3bn-4bn, the average payout would be around £1000.  If it is worth 4bn-5bn, it would be around £1500-£2000.  It could be that Standard Life decide to retain a fair chunk of capital after demutualisation and the average payout could fall to £500.    We will know closer the time.

There is a good chance that the IFA put you with Standard Life because they had the lowest charge bond (product) and the expectation of demutualisation leading for you to get a payout.  

Although i wouldnt place any business in Standard Lifes with profits fund currently.  I certainly wouldnt be removing any.   The underlying assets of the with profits fund are heavily weighted to fixed interest but they have 35% in equities currently which is higher than those with really poor with profits funds but not as high as the best with profits fund.     You are not likely to see the best with profits return from Standard Life but you are not likely to see the worst.  

needmoney

DD thanks very much for reply and yes I meant Standard Life.
After I posted I rung them to find out the value of my bond, although the staff member was not the most pleasant or forthcoming person I did get some information and was not overly displeased.
She told me that if I took it all out TODAY it would be x amount and if my calcualtions are correct it has  earned 14.87% of my starting amount, that is since Sept 2002. Perhaps when you've got time you could tell me what  you think of that? I also asked if I took it all out was there a penalty and she said No.

dunstonh

Standard Life provide a very good service to IFAs. Probably one of the best out of the providers I use. Its possible that as their distribution is to IFAs, that we get the best of the deal

The Standard Life bond also had an inital 5% charge although its probable that a couple of percent was rebated into the plan. So assume the charge was 3%, add on the 14.87%, you have real growth of 17.87%.

You are two years into the plan and the growth to you has averaged 7.4% per annum with no further tax liability. That matches what I have seen on the SL bonds I deal with.

By investing in Sept 2002, you missed much of the stockmarket decline so you stand to benefit more than those that were in there 12-24 months earlier.

I think you should be happy with it. Hopefully, you have a better opinion of the original advisor too. Perhaps you should ask the person that told you the bond was the lowest of the low how much they have made in the last two years and see if they have beaten you.

needmoney

Since you have been kind enough to reply again perhaps you could help me understand a little bit more. When I rang I asked for the value of my Bond now and she gave me the initial amount plus 2.9% but when I asked if I took it all out today she gave me the 14.87% figure I just don't understand it all.
The IFA who originally advised me is a family friend and I didn't think he would give me bad advice, we had taken into account my retirement status and the fact that I wanted no risk so I am not really blaming him it's just that remark by someone else. Is it also likely to go down again if the market gets worse?
Thanks for your interest and Oops I didn't realise you were an IFA, didn't mean to offend your pofession.

These are some of the commentes.
Well, if I was an IFA dependent on commission, I might have given you one too .

The resident IFA has said that he has never recommended any of his clients to take out a Standard Life WP Bond.
All of us with with-profits bonds should be wearing dunces hats

And where did the company get the money from to pay your IFA's commission?

I reckoned that it was only a matter of time before StdLife converted to a plc, but I didn't foresee the current situation.

I used a discount broker who refunded most of the outrageous commission that StdLife paid from MY funds.

Since I started these bonds:

- any potential DM windfall has fallen substantially,

- if I decide to sell my bonds, the company will charge an exit penalty - indeed, I now realise that bonds are the lowest of the low. I cannot EVER get my funds out without penalty unless stock markets recover substantially. Endowment policyholders can look forward to a penalty-free exit on maturity, but the only way I can get a penalty-free exit from my bonds is to die!

- bonds bear all of the costs of extra benefits of other policies, but none of the benefits. So your bond has to pay for GARs (Guaranteed Annuity Rate pension plans), GIRs (pension plans with a guaranteed growth rate), mortgage promise for nearly half of endowment policies, mis-selling compensation for those fortunate enough to be able to claim ignorance - and my view is that that is probably your best bet, but I'll have to pay for it!

dunstonh

When I rang I asked for the value of my Bond now and she gave me the initial amount plus 2.9% but when I asked if I took it all out today she gave me the 14.87% figure I just don't understand it all.

Are you sure its not the other way round? I would ask the IFA to get a valuation for you. Should take him 5 minutes to get into their extranet and print out a valuation that shows current and surrender values.

The surrender value is nearly always the lower value. I checked on one of mine that was done a similar time to yours and that was averaging 6.8%

Is it also likely to go down again if the market gets worse?

No. However, the bonus rate would drop and potentially increased surrender penalties would be applied (known as a market value reduction). These are more prone in the first 5 years and only usually applied if the stockmarket is down from the point you went in at.

Well, if I was an IFA dependent on commission, I might have given you one too .

Standard life are amongst the lowest commission payers on bonds. The earnings would have been the same on ISAs and UT/OEICs as their bond.

The resident IFA has said that he has never recommended any of his clients to take out a Standard Life WP Bond.
All of us with with-profits bonds should be wearing dunces hats

With profits funds are a good product for the right person and a bad product for the wrong person. There has been a lot of selling of bad with profits products, usually be tied agents of weak insurance companies that dont have the strength to see out bad times. 10 year past performance on a with profits bond is higher than 10 years PEP/ISA/Unit Trust/OEIC in a cautious managed or balanced managed fund.

And where did the company get the money from to pay your IFA's commission?

It pays from the charges. The IFA would have got projections from a number of companies and Standard Life (at that time) would have been top of the list with lower charges.

I used a discount broker who refunded most of the outrageous commission that StdLife paid from MY funds.

If you want to come up with the product and fund yourself, most IFAs will offer better terms. By offering better terms, they become "discount brokers"

- any potential DM windfall has fallen substantially,

Correct. The value of standard life has fallen as has most companies since the stockmarket dropped big time. The windfall will be based on the value of the company.

- if I decide to sell my bonds, the company will charge an exit penalty - indeed, I now realise that bonds are the lowest of the low. I cannot EVER get my funds out without penalty unless stock markets recover substantially. Endowment policyholders can look forward to a penalty-free exit on maturity, but the only way I can get a penalty-free exit from my bonds is to die!

The charge is dependant on when you went in. If you invested when the FTSE was up at 6700 then you would expect it to take longer to exit without a surrender penalty of some sort.

The bond is not risk free. It is a medium risk product (on a scale of 1 to 10, 1 lowest, 10 highest, this would be rated 6 out of ten for risk). It is in line with cautious managed funds and some balanced managed funds. Only difference is that it has some degree of smoothing. It doesnt mean its capital safe though.

- bonds bear all of the costs of extra benefits of other policies, but none of the benefits. So your bond has to pay for GARs (Guaranteed Annuity Rate pension plans), GIRs (pension plans with a guaranteed growth rate), mortgage promise for nearly half of endowment policies, mis-selling compensation for those fortunate enough to be able to claim ignorance - and my view is that that is probably your best bet, but I'll have to pay for it!

Again, not quite true. Pensions, endowments, bonds etc have access to with profits funds but the bonus rates for each product area are different depending on the guarantees available. Bonds do not have GARS and there is no miss selling compensation on mass happening with them. This is why bond rates are usually higher than the other two. Only if the company itself was really suffering with financial strength and meeting regulatory requirements on assets and liabilities would they then reduce other areas.

No offence to the person that is making these comments but it sounds like someone who has read a little somewhere and jumped to many conclusions which have some degree of truth but only in certain circumstances and with certain products or companies.

3 years ago one of my regular clients was saying he could do better himself. I had his risk as low medium but he had been reading the papers and felt that what i offered him hadnt performed. He then spent close to 80,000 investing himself. Three years on, his investments are little over 40,000 whilst all the ones i did for him have increased. He invested above his risk rating by picking funds and shares he had learnt about by reading the Daily Mail. He couldnt afford to lose the money but he thought he could save a few pounds and do it himself after reading a little. This has happened an awful lot.

So, if you dont want advice and want to pick out your own funds and product, you can still use an IFA who will offer discount terms. If you want advice then you can choose to pay a fee for the advice or you can allow commission. You may find the IFA offers a rebate of commission to the plan anyway.

needmoney

Are you sure its not the other way round? I would ask the IFA to get a valuation for you. Should take him 5 minutes to get into their extranet and print out a valuation that shows current and surrender values.

The surrender value is nearly always the lower value. I checked on one of mine that was done a similar time to yours and that was averaging 6.8%

Now I'm even more confused, I am sure that's the way she told me I think I will probably give him a ring, thanks again.

missile

If you want a clearer picture, rather than percentages look at real money. How much did you invest, what is current value and what is the surrender value?

How does this compare with any other investments you may have? If this is your ONLY investment, IMHO your family friend ought to have advised you better. :mad:

dunstonh

Unlikely to get a response.... Last post was September 2004

missile

:wall: OOps, I am a bit new to this. Thx for pointing that out dunstonh

ReportInvestor

dunstonh wrote:

Back in 2002, Standard life charges would show that the bond had a reduction in yield of about 0.3%. !(This means that the charges reduce the return by 0.3% per year). ! An ISA or unit trust/OEIC would typically show around 1.5%.

Well that helps explain why the management has not been too keen to publish profit figures for the company to date.

Bad news for windfalls (but not for Iain Lumsden's bonus that year which was based on sales, not profitable sales).

But what happened to the RIY when Standard upped the up front commission available to advisers to 7% in 2003?

Alan Steel [in 2006] says commission / charges on bonds could be unclear

"Alan Steel, at independent advisers Alan Steel Asset Management, said his firm had always capped any commission payment at 3% to avoid bias, particularly where bonds were paying up to 8%. He said the Financial Services Authority had allowed insurers to hide the commission paid on bonds by not requiring it to be spelled out in the letter of recommendation to the client, as was the case with Unit Trusts, OEICs and ISAs. “I believe it should be a level playing field.” Steel said the commission payment on bonds only had to appear in the “key features” document, but it was “always on the back page, and pages are never numbered and often the back page is missing.” ….