Norwich Union Portfolio Step-down: any good for income for a 63-yr-old?

dunstonh

Lloyds TSB in their Financial Review strongly urged that we took out the mini cash ISA's (something that we always do anyway), but did not refer to the mini stocks and shares ISA's.

Thats a mis-sale for £8000 of the investment straight away. Its automatic that you do stocks and shares ISA before anything else (doesnt matter if its MINI or MAXI as long as its one of them). Roughly, you would be losing around 1.2% a year on that £8000 because of the tax paid within the investment bond which would not be charged if it was in an ISA.

Does the documentation (suitability report) explain why the more tax efficient unit trusts were not recommended? There could be justification as I mentioned but age allowance doesnt apply. Higher rate tax doesnt either. Low cost could if it was on reduced commission but Lloyds dont do that. So, you are probably losing about 0.8% a year because they have recommended the wrong tax wrapper. (That 0.8% is taken from the FSA).

I put a complaint in to Norwich & Peterborough not too long back on the same basis and it got upheld. The investment was voided and money returned plus interest.

I would ask the adviser why they didnt use Mini stocks and shares ISAs and why they did they recommend an investment bond with a higher taxation liability than unit trusts.

For reference, the life fund you are in pays upto 20% tax on the capital gains within the fund (income generated in the fund is identical to unit trusts, its only the gains that differ). If you held the same funds or closest match in unit trusts then that tax would not be deducted. You would still be potentially liable but you have £9200 a year personal allowance each. It would mean your bond would have to grow by more than £18400 a year (every year) before you become potentially liable for capital gains tax. An unrealistic scenario in your case as you dont have the risk profile (and therefore higher potential gain funds) and you are withdrawing the capital each month.

if the bond is done on low cost terms you can get the charges down to upto half that of unit trusts and that can offset the tax difference. However, LloydsTSB dont sell it at a discount. If you look at your illustration they gave to you pre-sale (hope you still have it) take a look at the reduction in yield near the back. It will say something like "putting it another way, the charges will have the effect of reducing the returns from 6% to x%". What is the figure they have put in the x%? If its in the 5.4% range (as its 100% into an internal insurance company fund) then there could be justification. If its in the 4% range then its getting into unit trust is better territory.

Sorry about this getting a bit technical but it could be worth it from your point of view.

Wurz

Wow, you’re right, it does get technical. Which is where us “newbies” made/make our mistakes. My Wife, bless her, has banked with Lloyds for many years, and trusted them. Mistake 1. When we had a spare £100k left over after clearing the mortgage and felt like investing in order to get a monthly income she persuaded me to go with Lloyds for advice. Mistake 2. (You know how “Pub Landlord” Al Murray’s face goes when he mentions the French? Well mine goes that way when I mention Lloyds/ScottWids’) Anyway, the advisor visited, several times, and we said we had £100k from which we would like monthly income. We did mention that we could get any number of high street options (and I have banked with Bradford & Bingley since they brought out “bank accounts” in the early 80’s-can’t get those accounts now!) so what could he offer that was as low risk. Mistake 3. He persuaded us (my wife really) that if we invested with them not only could we get £375 a month (and we had not asked for any particular figure-just what was feasible) but that we would get an allocation giving us £104k ‘ish in the first year and with capital growth our investment would keep pace with inflation. Sounded good but should have listened to initial alarm bells when the paperwork had to be redone as, he explained, anything over £100k had to be checked by his line manager. Mistake 4. He had told us by the way that he had been with Lloyds for years, having worked up from the tills. He left Lloyds a few months later. You know the rest, first year paid £375 monthly and the capital stayed around the same. To me that’s 3.75%, a quarter % up on National Savings’ 3.5% at the time. The next year about the same. So, two years with almost zero growth in capital but at least 3.75% as monthly income. Now the past two years have plummeted even with an independent financial taking the reins in August/September last year. Makes you wonder what would have happened if I had stuck with the original fund, Fixed Interest, instead of spreading the risk as advised by the “independent” IFA from the IFA website (who recommended BatesAdvice,.Com.) Not sure I like the idea of “good years/bad years” which average out over say 5 years. If the investment cannot at least keep pace annually with bog-standard high street investments why take the risk? I suppose the moral of the story is to go to an independent advisor in the first place and avoid banks and institutions such as Scottish Widows (Agh, the face just went) who can adjust their figures at whim. (like the “revaluation” of their property fund) Didn’t mention that when we switched funds on August 22nd last year. When I noticed the plummet in that one my IFA reduced the 30% held in property to 10% on 20th December. Trouble is, all 5 funds dropped so really I was on a hiding to nothing. Mind you, there is always the thought that my independent IFA didn’t do a very good job when he recommended the funds that we were switched to, but that would be too much to bear. Someone has to know what they are talking about!

RammieD

Like you say it is now getting a little technical, but we are very appreciative of your continued interest.
On further investigation into the Lloyds TSB Financial Review, we have found something that may have misled you. We are really sorry if that is the case:

Quote:
'OEIC's & ISA's
The Flexible Options Bond is not as tax efficient as using your ISA allowances or possibly investing in Open Ended Investment Company (OEIC's), in relation to Income Tax and Capital Gains Tax (CGT). You have chosen the option of the flexible options bond over the option of the ISA in favour of a fixed regular income'.

They also confirm that:
'The Scottish Widows Flexible Options Bond includes the option to take up to 5% per annum as a withdrawal with no immediate liability to tax'.
This represents the £625 per month that we currently withdraw.

Answering your other question, the illustration states:
'Putting it another way, this would have the same effect as bringing the illustrated investment growth from 6.00% a year down to 4.60% a year over the first 10 years, again assuming you take withdrawals'.

They also state other figures in tabular form:
Year 3: 3.90%
Year 5: 4.50%
Year 10: 4.60%

In your experience and taking into account our obvious lack of knowledge in investments, do you consider it is necessary to have an IFA in our local area?

dunstonh

Mistake 3. He persuaded us (my wife really) that if we invested with them not only could we get £375 a month (and we had not asked for any particular figure-just what was feasible) but that we would get an allocation giving us £104k ‘ish in the first year and with capital growth our investment would keep pace with inflation. Sounded good but should have listened to initial alarm bells when the paperwork had to be redone as, he explained, anything over £100k had to be checked by his line manager.

Thats interesting. You aim to build a portfolio that has income and growth potential. You cannot guarantee anything but if built well it "should" achieve it over the long run but with no guarantees attached. Many IFAs dont get out of bed for investments of less than £100k. Thats perhaps a key difference. The bank staff arent able to handle large money.

Mistake 4. He had told us by the way that he had been with Lloyds for years, having worked up from the tills. He left Lloyds a few months later.

I'm guilty as charged with that for a while. I started at Lloyds and was with them over a decade. When I went into the advice side I thought everthing was great. Within a couple of years I found the limitations of the tie advice role to be a pain and working in a bank is a living hell. I am sure some of those I saw in the 6-12 months before I left were told the same.

To be fair, sometimes you cannot see the change coming. I still have some friends who work at Lloyds still (although most have left to become IFAs or got involved in other businesses) and they all say that the advice role at the bank has been downgraded and now its treated like any other job that someone may do for a while and turnover in that role is high. Thats disgraceful because although it may only take 3 months to get qualified, it can take years to actually understand the mechanisms behind it. Even now after 15 years of doing it I still learn new things. I'm sitting a higher qualification later in the year and I am dumbstruck at how much I am having to learn and how much I didnt know. So what hope do these new, inexperienced "part time" advisers have.

Not sure I like the idea of “good years/bad years” which average out over say 5 years. If the investment cannot at least keep pace annually with bog-standard high street investments why take the risk?

Cash will be around 3-5% p.a. long term. You would expect a cautious portfolio to be 5-10% average long term. Years in isolation will see one better than the other. With an income portfolio you aim for 5% income and 2.5% growth (subject to risk and actual needs may need 5%).

When I noticed the plummet in that one my IFA reduced the 30% held in property to 10% on 20th December. Trouble is, all 5 funds dropped so really I was on a hiding to nothing. Mind you, there is always the thought that my independent IFA didn’t do a very good job when he recommended the funds that we were switched to, but that would be too much to bear. Someone has to know what they are talking about!

The latter part of 2007 was a bad time. IFAs or anyone else cannot buck the trend. If the stockmarket goes down then stockmarket investments will go down. From about middle part of last year, property started dropping. The latter part of the year saw the stockmarket drop and fixed interest funds continued their doldrums. It was just one of those years you get every now and then.

Going foward, the anticipation is that property will be worth re-entering again during 2008. Possibly as little as a month or twos time as the unit prices now appear to be lower than the asset value. Inflows are coming back as well. Fixed interest funds now have some very attractive yields as high as 8.5% and unit prices are showing signs of improving (which is no suprise as fixed interest funds tend to do poorly when interest rates go up and better when they go down). Stockmarket is likely to remain volatile. That doesnt mean it will go down a lot more but more up then down frequently. Western economies likely to perform less well than Eastern/developing but they arent expected to be as much as last year.

All that said, there is no crytal ball and this is why you never look at investing in the short term. That average I was on about would have been 10-15% a year from 2002 to 2006. Even with 2007 they have still averaged double digits.

dunstonh

'OEIC's & ISA's
The Flexible Options Bond is not as tax efficient as using your ISA allowances or possibly investing in Open Ended Investment Company (OEIC's), in relation to Income Tax and Capital Gains Tax (CGT). You have chosen the option of the flexible options bond over the option of the ISA in favour of a fixed regular income'.

That really highlights a big difference between tied agent and IFA. They have put you in a worse product because you chose it.

I would still question it though because you went for advice and got sold a product that was not as good as the ISAs and Unit trusts. You didnt go to Lloyds to pay 7% commission to pick your own product.

Were you told the consequences of the inefficiency so you could make an informed choice? How can you be expected to make an informed choice if the first you learn about the differences is from what I have posted on this thread?

They also state other figures in tabular form:
Year 3: 3.90%
Year 5: 4.50%
Year 10: 4.60%

Thats expensive for internal funds on maximum commision. That would be the sort of figure you would expect for a mostly external fund spread. Internal means own brand funds. External would be other fund houses such as Invesco Perpetual, Fidelity, Gartmore etc. However, that does reflect the 7% commission that Lloyds took on it.

In your experience and taking into account our obvious lack of knowledge in investments, do you consider it is necessary to have an IFA in our local area?

I think it will do you good to have an IFA to help teach you as there is only so much you can learn from posts on a forum. Whether its local will depend on how you like contact. If you prefer face to face then local is the only way to go. If you dont mind phone/email/post then location doesnt matter.

jem16

Wurz wrote: »

Didn’t mention that when we switched funds on August 22nd last year. When I noticed the plummet in that one my IFA reduced the 30% held in property to 10% on 20th December. Trouble is, all 5 funds dropped so really I was on a hiding to nothing. Mind you, there is always the thought that my independent IFA didn’t do a very good job when he recommended the funds that we were switched to, but that would be too much to bear. Someone has to know what they are talking about! [/FONT]

It sounds like your IFA was keeping an eye on things when he reduced the property funds.

It's just been bad timimg and as Dunstonh says, there is very little the IFA could have done in such a short space of time. Most of the damage was already done in the preceding years.

Wurz

Looks like a few of us have been in the same "Flexible Options Bond" fiasco. I suppose what really rankles is that as "newbies" we trusted the trade names of Lloyds & Scottish Widows. In other words we entrusted them with our hard earned but failed to realise that once the product was sold to us we were on our own. As dunstonh, jem & others have said, you need to know what's inside the bond wrapper and how to juggle or switch funds. Now we know that it takes another outside advisor to do that as the original advisor cannot advise any more. Still takes charges, but hey. So, buy a SWid's product, pay all the management charges, pay a penalty if you want to salvage what's left, and use an outside agency to put right, or at least try to put right any shortfalls with the original product. You would have thought that if they are selling you a product with a five year penalty clause the least they could do is provide a service for 5 years. After all, they are taking management charges. For doing what exactly? When I first complained (In Jan last year) the replies kept coming for sufficient time for the bond to lose more money. At one stage I told them that the time taken between replies had cost me more than that years income! Did they care? Nope. They'd sold the product and washed their hands. After all, the bond hadn't lost money. They had the cheek to suggest that it was all my fault the bond had gone down as I was taking monthly income. Ah well, I'm sure I can survive the £9k loss more than poor SWid's. Oh, sorry, it's not a £9k loss, it's just that the bonds didn't perform so well. Full circle there, because the original supplier cannot recommend which funds to switch to. Funnily enough, when they wanted me to part with £100k there was absolutely no problem in paying me attention. Now, off to find my wife's premium bonds so that she can make up the deficit whilst I see what the IFA can come up with, and it seems from previous comments that Canada Life may not be the answer. I've got until the 29th Jan to decide. Trouble is, I could do another 5 year type of bond as I do not retire for another 4+ years, but once bitten and all that......

Wurz

Hi Jem, just as I posted my last I saw your reply. I must add that I called my IFA to let him know the fund had dropped £3.5k and he then recommended reducing the holding. The original deal with him back in August/September '07 was that if he could salvage anything with the SWids Flexible Options Bond then I would be inclined to place new business with him in the new year as I would only have one years penalty to pay. He said that any initial extras ie: 109% allocation would make up any penalty. Trouble is, the value of the old Fixed Interest was £97k as of 21/08/07 (having dropped from the year start of £99500, which was down from Jan '06 at £106k - hence my worries) and although the change brought a value of £99263 by 22/09/07 it was downhill after that. If we take the start base of £97300 in September to the current penalty free value of £93455 as of 18/1/08 that's a £4k drop. From the £99263 in September it's worse at a £6k drop in three months That's why I had a mild panic. Anything that can drop £6k in a short period of time is bad news. Problem is, how much will it drop from last Friday to close of business tomorrow, Monday. SWid's confirm they received my letter on Friday last, but won't honour that days' valuation. They could come up with any figure, I can't challenge. What I had said to my IFA, and to myself for that matter, I would speculate, hold on to, or whatever the IFA recommended, but once the value was perilously close to £90k I would pull the plug. No point throwing good money after bad. When the bond took another £1400 hit on the 16th January giving a cash-in value of £91k, that was it as far as I was concerned.

jem16

Wurz,

I sympathise with you as you thought, like a lot of people, that a bank was the best place to go for advice on financial matters. Unfortunately you have now discovered that it is a place to avoid for investment products as their products are usually limited and expensive. You also get no ongoing advice.

I nearly found myself in exactly the same position 3 years ago as my Widowed Parent's Allowance was coming to an end and I thought I needed to take an income from a lump sum that I had in a savings account. The Bank of Scotland financial adviser tried to get me to take some product that talked about a tax-free income - sounded great in theory. With hindsight it was probably the same type of investment you now have. However I kept putting him off, more by luck than judgement.

I then found this forum and began to pick up bits here and there. I decided to do something about that lump sum and knew that I had to avoid a bank and find an IFA. Fortunately I found a good one who has kept me fully informed as to what is going on, answered all my questions and allowed me to learn more about investing.

I still don't know enough to actually pick funds nor rebalance when necessary. However I don't need to as my adviser does all that as he actively manages the portfolio - his fees come from the annual management charges that you are paying anyway.

I don't know enough to give you an opinion as to what to do next. However I wish you well with whatever you do.

jamesd

Wurz, your expectations are unrealistic. The IFA seems to have done a decent initial job and selected funds with a fair long term prospect. In the US they are talking about having the worst start of a year since the 1930s.

Wurz wrote: »

Not sure I like the idea of “good years/bad years” which average out over say 5 years. If the investment cannot at least keep pace annually with bog-standard high street investments why take the risk?

You take the risk because the long term average for the UK FTSE1000 is around 10-11% a year after fees and fairly cautious mixes may deliver 7-9%.

You take the risk because you ultimately have no choice, because after inflation returns from bank savings accounts are no more than 1% or so and that's just not enough to live on. You need the higher average return from the investments to get a decent income and cover inflation.

What you should really have done is noted the terrible start to the year, said to yourself "that's a terrible start to the year" and carried on taking your income while waiting for the markets to improve.

Still, you've now sold the whole Scottish Widows bond product, right? So getting cash for that? The challenge now is what to do with it and an investment bond seems unlikely to be the right choice for most people now, because CGT rates are reducing. Don't ask the IFA for an investment bond. Ask the IFA for a suitable investment in a suitable tax wrapper, if any. And if a bond is suggested, ask the IFA to explain why using ISAs and bare unit trusts outside any tax wrapper isn't better.

You're after a lot of cautious investments so an investment bond could be right for you but it's not always so. It's a bit more likely to be suitable if you're a higher rate tax payer.

If you want a decent income after inflation with no more potential for drops some years than a high street savings account you're asking for the impossible, so don't expect anyone to come up with a recommendation that will achieve it. What you can get is significantly higher growth than the banks provided you're able to accept at least 10-15% drop in bad years - a drop of 10,000 to 15,000.

For the first six months of this year you might well be best advised not to use equity much and stick to corporate bonds and cash since there's every prospect in the UK of further equity market drops. After six months the picture might have changed enough to make some equities acceptable to you.