Tax Exempt Savings Plans [TESPs]

jimjames

planteria wrote: »

i hadn't seen the thread updating. and yes, i see what you're doing:T

i don't think you can do better in cash, jimjames, as even if the rate is lower than, say 4% from Club Lloyds, if it is paid based upon the amount you would invest over the 10 years, then the return is higher.

What matters is the return after 10 years. Using hypothetical sums assured, whatever they are, is irrelevant if the overall amount paid back is tiny.

Why would you bother taking something like that out when even cash savings account does better without any lock in? The only people I can see who would invest in such a plan are those that don't have the knowledge to do any better which I find a very sad situation.

masonic

planteria, as you keep ignoring the question, I can only conclude that the information you have offered to provide would be nothing more than the information I can get directly from the Friendly Society.

I think planteria stated in an earlier post that he is not here to provide the information himself and that any information requested would have to come directly from the Friendly Society. Of course, this involves the collection of people's personal details, which is against forum rules (and nobody should be sharing personal details here for their own safety). That's probably why the conversation stops here at the point people actually request some information from planteria.

The best way to avoid breaking forum rules in this case is by contacting the Friendly Societies directly yourself in the unlikely event you are interested in any of their products.

bowlhead99

Effectively these are a very niche investment product. As mentioned, there are not many groups of investors who would benefit from one of these compared to other competing products.

You put your money into a blind pool of capital; it grows, somehow, based on the performance of investments you can't see or properly monitor, less some high operating expenses. They add arbitrary bonuses as you go along leaving space for a bigger bonus later. It does not really matter what they give you as you go along and the fact you can't monitor how it's really doing is also perhaps not a concern, as you are not going to buy or sell the investment at some mid point anyway, as penalty-free exit is highly restricted and premiums can't be changed once you started the plan.

It only really matters what you get at the end, which can't be known up front. You just get a projection of what you would get if they made a particular underlying level of return. What you don't know is what level of return would correspond to what economic / investment market conditions, because historic performance is hard to find. You can just say that if markets are good the returns from the product per pound invested will be necessarily lower than in other investments due to the much higher level of fees. The only way you 'win' is if the whole market tanks and you get back your guaranteed minimum, which of course can be less than what you paid in and even less than that in real terms by the time you get it, but might still be better than a 'proper' investment, perhaps.

Probably the only group who finds them useful is the group who wants something different to cash, i.e. vaguely investment-related, but can only commit to the very low individual monthly contributions that are available - as little as £5 a month with Kingston Unity for example. That's about a pound a week. With the premiums fixed at the outset, it will be significantly less than a 2015 pound per week in real terms when you are paying in during years 10+.

The reason they can offer this low level of contributions (the absolute maximum level of contribution for a TESP being at or below the absolute bare minimum level of contributions for 'conventional' funds-based investment) is because of the huge fee rates. Or put another way, the fees are very high as a percentage of what you invest, because there is some bare minimum cost per person of administering and running a 'guaranteed' with-profits fund and the amounts of money being invested are small.

Even if you are putting in £300 a year you are investing collectively with people putting in £60 a year ; by year 15, if you choose to stay that long, the people putting in £60 are really putting in less than £40 a year. Running their account is not going to be cheap and there is no incentive to keep costs down when the majority (generalising) of investors using this asset class are not sophisticated, do not know what level of return to reasonably expect, and do not have the opportunity to easily get out once they have got in.

I think planteria is the only one on these forums who is a big advocate of Friendly Society plans. Perhaps he was once involved in selling them or perhaps he had some good returns in the early days when other more mainstream investments were not as accessible as they are today (or he only had relatively small amounts available, or he simply didn't know what other returns were out there). And this positive experience has coloured his judgement in their favour so he still uses them. He is in a small minority on here though, for the reasons you've outlined.

Planteria does not owe us an explanation or a counterpoint to each of your points, as it's a free country for people to talk about what they want (aside from things such as advising on the suitability of regulated investments) and for others to shout them down if they feel their premise is flawed. In the absence of a true debate - you are not going to change the mind of someone who is set in their ways and is happy with their plan, but likewise they are not going to be able to say your points are inherently wrong either if they are factual - I would think there is plenty of info on this thread for people to make up their own mind whether these plans are for them.

Archi_Bald

bowlhead99 wrote: »

I think planteria is the only one on these forums who is a big advocate of Friendly Society plans. Perhaps he was once involved in selling them

There is a good chance he is still getting paid by the likes of Kingston Unity, Sheffield Mutual and Healthy Investment for introducing new customers. This would be, at least for me, the logical explanation for why he seems to be the only forumite who keeps recommending the TESPs of those companies, and why he keeps bumping up the thread regularly.

http://www.kingstonunity.co.uk/documents/200/member-get-member-reward/

http://www.sheffieldmutual.com/intermediaries

http://www.healthyinvestment.co.uk/introducers/commission.php

planteria

sorry not been contributing... lots going on and i tend to start with Credit Cards and work down.

some good posts. and bowlhead is right re. not owing anyone an explanation. also, there are certain questions which i can't really answer.

but yes, the information is available to anyone who is interested, prior to investing in any products from Friendly Societies. it is all about what appeals to the individual. and everyone should ensure they have all of the information they need to make informed decisions.

illustrations are just that...and i wouldn't expect Friendly Societies to be anything other than conservative.

i referred to the bonus i've received above, but i can't really say any more, and i did explain that the calculation of that bonus is based upon my commitment to invest for a considerable period of time.

i like the idea of some 'solid' investment in with profit funds alongside other investments, as i've said previously. and there are certainly other contributors here who choose to invest in TESPs and other products from Friendly Societies. not everyone is prepared to go toe-to-toe though;)

masonic

planteria wrote: »

but yes, the information is available to anyone who is interested, prior to investing in any products from Friendly Societies. it is all about what appeals to the individual. and everyone should ensure they have all of the information they need to make informed decisions.

Well there is some information, such as asset allocations that isn't provided by the Friendly Societies in advance, but having asked about this a few times, I'll take the hint that such information is amongst the things you aren't willing to discuss.

illustrations are just that...and i wouldn't expect Friendly Societies to be anything other than conservative.

i referred to the bonus i've received above, but i can't really say any more, and i did explain that the calculation of that bonus is based upon my commitment to invest for a considerable period of time.

The bonus you stated is not at odds with any of the information since provided, as has been explained to some extent. For the sake of further clarity, I've done a quick Excel simulation based on the data provided by Kingston Unity. Incidentally, the growth rates used in their illustrations are regulatory figures stipulated by the PRA/FCA and are based on long term historical returns taking into account the assets making up the funds.



Perhaps this takes a little explanation - essentially the figures to watch are the balance at the end of the year (New balance) and the AER (on contributions) figure. So, in the early years, the TESP has very impressive bonus rates in terms of the money so far invested (because they are based on the sum assured, which is the total to be paid in over the policy, less initial charges of 8.7% on average).

However, looking at the first two years, the AER is much higher than the last two years, even though in monetary terms, the bonuses are identical. Quoting the earlier bonuses in the absence of the context of later bonuses is therefore quite misleading. I've allowed for a bear market (and lower bonuses) around the middle of the policy and so that the total money paid out at the end of the policy is consistent with the illustration provided by Kingston Unity.

My figures are of course made up, but done so in such a way to be consistent with all of the information available to me regarding how this product might actually work in practice. Clearly, YMMV and anyone taking out such a policy could get a higher, or lower, return than the one stated. All that is guaranteed is the return of premiums less some fees.

In contrast, we have the scenario where the same money is paid instead into a Santander 123 account. I have made the assumption that there is no net monthly account fee (i.e. cashback on DDs cover these) and that the tax free savings allowance comes into force in 2016 (so 3% gross interest is paid out). In this case a return that is higher than the average case for the TESP is guaranteed (risk free), so one would have to rely on one's luck to beat that in a TESP. On a risk adjusted basis (risk being only the sum assured is returned from the TESP), the Santander account would be the best bet, despite the 60% return paid in year 1 of the TESP policy.

i like the idea of some 'solid' investment in with profit funds alongside other investments, as i've said previously. and there are certainly other contributors here who choose to invest in TESPs and other products from Friendly Societies. not everyone is prepared to go toe-to-toe though;)

With-profits could certainly have a place in people's investment strategies. As has been highlighted, with these policies it isn't possible to predict or control the underlying investments, but one can control the costs. So there have already been a few equivalent low cost options mentioned, such as the Sheffield Mutual S&S ISA charging 1.5%, or the Prudential products charging 1.35%. So it makes no sense to go with a product charging 2.5% or more.

If you have enough to save/invest in order to meet the minimum requirements of the above non-TESP products, then it is a no-brainer. As bowlhead points out, the only people who might have a case for using them are those that "can only commit to the very low individual monthly contributions that are available - as little as £5 a month with Kingston Unity for example". However, those people would invariably be better off instead saving their small amounts in cash as an emergency fund.

planteria

good post masonic. good work. a few quick responses..

masonic wrote: »

..some information, such as asset allocations that isn't provided by the Friendly Societies in advance

certainly has been when i have taken out a TESP, but i may well have asked for more information than others.

masonic wrote: »

Quoting the earlier bonuses in the absence of the context of later bonuses is therefore quite misleading.

i'll take that, as per above.

masonic wrote: »

I've allowed for a bear market (and lower bonuses) around the middle of the policy..

i would hope that, with the diverse portfolio, and with profits 'smoothing' that bonus rates won't drop as far as 1% on any of my investments:think:

YMMV?

masonic wrote: »

All that is guaranteed is the return of premiums less some fees.

No. In the example i have here there is a guaranteed positive return. the Sum Assured was always higher than the premiums to be paid over the term of the plan. and once the bonuses are added (which are after fees have been deducted) they are guaranteed too.

i save using Cash Regular Savers too. 6% from HSBC, 4% from Lloyds and 4% from Skipton Building Society at the moment. just bagging an opening incentive with M&S Bank so may look to add their 6% Regular Saver too. i'm happy to have those alongside TESPs and other investments:)

masonic

planteria wrote: »

i would hope that, with the diverse portfolio, and with profits 'smoothing' that bonus rates won't drop as far as 1% on any of my investments:think:

The trouble at the moment is that a market crash would tend to make everything fall. Bonus levels will tend to be decided based on preserving some sort of return for unlucky investors who are in their early years. What I modelled was a conservative approach to bring down bonus levels relatively quickly in order that there would be something in the pot for some years to come, and then a relatively quick return to better bonus levels. In other words, a short sharp shock and then back to normal (which in the context of a 10 year plan would be the best approach IMHO). Of course, alternatively rates could be reduced more slowly and held at lower levels for longer after the recovery. The net result would be the same, but less fair on those starting their plans close to the crash who would essentially subsidise the sustained bonuses of those towards the end of theirs.

YMMV?

Your mileage may vary.

No. In the example i have here there is a guaranteed positive return. the Sum Assured was always higher than the premiums to be paid over the term of the plan. and once the bonuses are added (which are after fees have been deducted) they are guaranteed too.

I was using the information from the TESP currently available from Kingston Unity. I'm happy to take into consideration the details of any other TESPs you know about and think are superior to that one, but I can't do that if you refuse to name those TESPs or provide details of them.

I'm left having to assume that the positive guaranteed return is just a different structuring of the same underlying product and this additional protection against the worst case scenario is accompanied by lower returns paid for those in the best case scenario and essentially the same result for everyone else.

i save using Cash Regular Savers too. 6% from HSBC, 4% from Lloyds and 4% from Skipton Building Society at the moment. just bagging an opening incentive with M&S Bank so may look to add their 6% Regular Saver too. i'm happy to have those alongside TESPs and other investments:)

The point is that as soon as you put a TESP wrapper around these products, it costs you an extra £150-£200 in fees. Since you can get the same products in a S&S ISA or unwrapped and save a substantial sum on those fees, it makes no sense to pay the extra money.

colsten

Tax Exempt Savings Plans - 40% of the first years premiums
http://www.healthyinvestment.co.uk/introducers/commission.php

40% of £25 x 12 is £120.

planteria, why would I want to pay £120 of my money to an introducer (e.g. yourself) on top of the charges I pay to the provider of the investment? What do I get for my £120?

masonic

colsten wrote: »

Tax Exempt Savings Plans - 40% of the first years premiums
http://www.healthyinvestment.co.uk/i...commission.php

40% of £25 x 12 is £120.

Yes, this is a very real concern. All it does is tempt unscrupulous individuals to promote these products for personal gain. Remarkably, for this product it actually appears to cost the customer more in fees when they take out a policy via an introducer than if they went direct.

This simply isn't allowed to happen in better regulated areas of the market. The (then) FSA clearly shared these concerns when it banned such kickbacks to investment platforms and IFAs. The nature of the problem within the Friendly Societies is arguably much worse and in desperate need a clampdown by the PRA.

It just goes to show how poor some of these products really are that there are Friendly Societies willing to pay such a high price to anyone who is able to successfully coerce someone into taking one out.