Life Assurance or Savings?

Rocketrod_2

Well here goes, my first post on this forum so please be gentle.
My 70 year old father passed away recently leaving my 65 year old disabled Mother with their £160,000 home and approx £160,000 in the bank. My Mother is currently in receipt of state pension and disability benefits, which are sufficient for her to both live on and have a few luxuries. These payments are awarded for life so her immediate needs are catered for which leaves her long term needs and possible future care to plan for. After researching the best AER’s for various savings accounts we had a meeting with a High Street provider who suggested that maybe a managed fund would be the way to go. The benefits of the fund were that it has achieved a better rate of return than a savings account, my Mother could take monthly interest payments if required as an income and the fund would pay out 101% of the value should my Mother pass away. This last point, I’m told, means that it is termed a “Life Assurance Policy” which, again I’m told, says that should my Mother need to go into a nursing home or need nursing care, the value of the policy is not ‘means’ tested by Social Services and her savings will not be taken to be used for her care.
I’m familiar with debt related problem solving for which this site has been excellent and I have become quite savvy when it comes to borrowing money but as yet my investment knowledge is limited and any help or guidance is much appreciated.

Rocketrod

dunstonh

we had a meeting with a High Street provider who suggested that maybe a managed fund would be the way to go.

Never ever get advice from a bank tied salesperson. Tied agents are not allowed to portfolio plan and you end up with sub-standard products which are usually more expensive, poorly invested and not maintained after the sale by the adviser. Even if they bank has a known insurance company link, you arent getting the full retail version of the product but often a cut down version at a higher cost.

The fact you mention "fund" and not "funds" suggests straight away that this is a bad move.

This last point, I’m told, means that it is termed a “Life Assurance Policy” which, again I’m told, says that should my Mother need to go into a nursing home or need nursing care, the value of the policy is not ‘means’ tested by Social Services and her savings will not be taken to be used for her care.

That is correct. However, the adviser is not allowed to recommend it for that purpose and nowhere must it be seen that the reason for doing it was that. Otherwise it will be included.

This means the adviser would have to have other reasons for justifying it over the better ISA and unit trust options which have lower tax. A bank adviser being more expensive wouldnt be able to rely on lower costs either. Any IFA or complaints handler could get that classed as a mis-sale easily.

any help or guidance is much appreciated.

There are three main types of advisers in the UK. tied, multi-tied (a panel of providers) and independent (whole of market). You have seen the tied type who can only sell products from one provider. Tied agents also have restrictions on the type of advice they give. Typically they cannot advise on investment portfolios. They ascertain the risk profile of the individual and give the individual the choice of which funds to invest in from their risk profile. If they only have one fund in each risk profile, then they put you automatically in that fund. All the eggs in one basket.

The UK has mutliple tax wrappers (too many to be honest). You can invest in the same investment funds in many of the wrappers (pension, ISA, unit trust, onshore investment bond, offshore investment bond etc). The only difference would be how they are treated for tax and the charges. The bond, or to give it the correct generic name of single premium, non qualifying, whole of life assurance, has no personal liability to income tax if you are basic rate or lower. There is also no personal liability to capital gains tax. You arent getting away with it though because its paid within the investment. A non taxpayer and/or someone that doesnt utilise their CGT allowances would pay less tax with unit trusts. Especially if low risk funds are used as you can still claim tax back on those. A basic rate taxpayer would pay a little less tax as well. Only higher rate taxpayers benefit from investment bonds (ignoring trusts which is another area where bonds could be better).

As for charges, bonds can be cheaper under the right circumstances or be exactly the same or more expensive. A good priced investment bond would have a reduction in yield of less than 1.5% over 10 years. If you were given an illustration, near the rear you will see the effects of charges section which will say something like "Putting it another way, this would have the same effect as bringing the investment growth down from 6% to 4.8% a year." So, in that case, the reduction in yield due to charges is 6-4.8= 1.2%. Look at the illustration you have been given to see what reduction they quoted.

Then you have the key reason for doing this. It is an investment. Everything else is secondary. So, what portfolio spread has been recommended? What is the investment strategy? High yield funds? Cautious sector allocation? etc. Were you told, was it even discussed? As it was a tied agent, bet it was a 100% into a distribution fund or the cautious managed fund. That is old fashioned, low skilled investing which will result in lower returns over the long run.

I suggest you get a proper investment IFA to look at it if you are unable to do it yourself. Do not use the tied agent. Investing is a good idea but it needs to be done correctly.

Rocketrod_2

Wow-thanks for that comprehensive reply.

You were spot on with:-

As it was a tied agent, bet it was a 100% into a distribution fund or the cautious managed fund

. No illustration was given as really my Mother was totally lost once the word 'fund' was mentioned but what I thought to be overly optimistic figures of 8-10% were mentioned.
I have to admit we did go in with a very cautious approach as really the idea is to get some income but above all to protect the capital from both loss and Government bank raiding. With regard to the sums to be invested I don't intend to put it all in one fund but rather divide it between 3 or 4 different places but again these are just ideas.
It sounds like this an area for an IFA rather than a DIY job so I will talk to a chap I know locally who has quoted me previousy on Buy to let mortgages and is whole of market.
Thanks again for your reply and I welcome any further input from you and other forum users

Rocketrod

dunstonh

but what I thought to be overly optimistic figures of 8-10% were mentioned.

Depends.

Anything less than 10% a year I see as failure. Typically 15% a year average is closer to the market on medium risk, even if you managed to invest at the highest point before the crash. A really cautious portfolio would hover around the 8-10% mark but the level of risk with a cautious managed or distribution fund is higher than that and a proper spread of investments to that same risk level would offer greater potential. Note the word potential. No-one knows the future. Experienced investors and advisers will expect a long term average but know there will be individual years where you get more and where you get less. There are no guarantees.

I have to admit we did go in with a very cautious approach as really the idea is to get some income but above all to protect the capital from both loss and Government bank raiding.

If you want a guarantee you will pay for it. Typically in higher charges or lower returns (and sometimes both). However, there are certain event gurantees with some providers that may satisfy your requirements. Quite a few providers will give a capital guarantee in the event of death. For an elderly individual, that may be they wish. The investment can do its ups and downs in the interim providing that on death it at least at minimum pays out what was paid in. There are also a few that will protect gains each year to a certain level as well. These types of guarantees dont cost usually or have a very very small cost.

It sounds like this an area for an IFA rather than a DIY job so I will talk to a chap I know locally who has quoted me previousy on Buy to let mortgages and is whole of market.

Remember that the term IFA covers a wide range of skills. An IFA that spends 90% of their time on mortgages, for example, is probably not the best choice to discuss larger investments with. They may be great with mortgages but do they spend enough time on investments to know what is best there? Make sure the individual is an investment specialist.

Investment specialists will have a strategy and be able to explain how and where it will be invested quite easily. It wont just be a single managed fund. It will be a spread. Anyone advising a single fund for that sort of amount is not an investment specialist.

The bond may not be the wrong option as long as you get a low cost version with a decent fund range. Look for the illustration when you get it and make sure it is no more than 1.5% in reduction. The lower costs can make up for the higher tax paid within. If you pay higher charges and higher tax, when a unit trust would have given you the exact same funds, then its a waste of money.