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

jem16

dunstonh wrote: »

To be honest, I dont see the point of posting information when you get Ed ignoring it, twisting it or making it up.

Because if you didn't we'd all be led up the garden path by Ed :rolleyes:

Now just count to 10 and have a nice cup of tea (or whatever)

EdInvestor

These bonds seem to work on two basic levels:

a)A higher alloaction rate, accompanied by exit charges to claw it back if you leave in the first 5 years, effectively trapping you in the bond

b) A 2-5% initial charge but no exit penalty, thus depleting your capital before you even invest it.

Personally I prefer to invest with NO initial charges and NO penalty exit fees.

Looking at the charges with this investment package, there will often be an annual charge of 0.5% (at least) for the bond, on top of the annual management charge of (usually) 1-1.5% for the funds within it. Note there are hidden charges in funds (transaction charges, brokers fees, stamp duty) which typically add another 1%. It's thus not uncommon to be paying charges of 3% annually, and with many bonds 4% is the norm.

This means that if the investor wants to take an income of 5% from the capital, the investments within the bond must make a minimum of 8-9% each and every year in order for capital not to be depleted.

Given that for a cautious investor, much of the money should be invested in lower risk/lower return assets such as bonds, this is an almost impossible task unless quite high risks are taken with the equity part of the investment.How many people knew that supposedly low risk With-profits funds had 75-80% of their money in the stockmarket in the past?it was the only way they could deliver the returns, but were well above many investors' risk profiles - eg Whoosh's mum, who is now suffering the consequences with that MVA. .

If on the other hand, you can avoid wasting 3-4% of the investment income on paying the charges,the risk of depleting capital is much lower.

Then there's the additional problem of the tax, 20% on the gains within the bond, whether realised or not. :mad: . That's another drain on the returns, a further risk to the capital - and it's a tax that you won't have to pay at all if you invest your money properly outside the bond.

The more you look under the bonnet of investment bonds the more it becomes obvious that plenty of people are making money out of flogging these wrappers - your advisor, the insurance company, the fund managers, HMRC.

That's why they are all so resolute in opposing any criticism - something like 25bn quid's worth of IBs are sold every year, mostly to unsuspecting oldies who don't know what to do with lump sums landing on them when they retire.They really are a very nice little earner: but perhaps for others, rather than for you.

dunstonh

a)A higher alloaction rate, accompanied by exit charges to claw it back if you leave in the first 5 years, effectively trapping you in the bond

Its not trapping you. You are given money upfront so its only reasonable they have a penalty to claw that back if you dont stay 5 years. If the penalty concerns you then dont pick a provider with a tie in.

b) A 2-5% initial charge but no exit penalty, thus depleting your capital before you even invest it.

Which is identical to unit trusts, shares etc (whether held unwrapped, in bonds, pensions or ISAs). However, there are investment bonds with no initial charge so your figures are wrong.

Personally I prefer to invest with NO initial charges and NO penalty exit fees.

You dont though. You have suggested a number of times that you buy shares. These have dealers costs and a bid/offer spread.

Looking at the charges with this investment package, there will often be an annual charge of 0.5% (at least) for the bond, on top of the annual management charge of (usually) 1-1.5% for the funds within it. Note there are hidden charges in funds (transaction charges, brokers fees, stamp duty) which typically add another 1%. It's thus not uncommon to be paying charges of 3% annually, and with many bonds 4% is the norm.

Wrong. The annual management charge is the only charge. There are no hidden charges. Indeed, a number of bond providers have the TER as the same as the AMC.

This means that if the investor wants to take an income of 5% from the capital, the investments within the bond must make a minimum of 8-9% each and every year in order for capital not to be depleted.

And your evidence to support your made up figures?

Then there's the additional problem of the tax, 20% on the gains within the bond, whether realised or not. :mad: . That's another drain on the returns, a further risk to the capital - and it's a tax that you won't have to pay at all if you invest your money properly outside the bond.

Its not a problem. Its a feature of the taxation of this wrapper. The individual has no capital gains tax liability. For those that use their CGT allowance or those that do not want to fill in a tax return and face the hassle of having to sell and buy every year and incur more charges, then the bond offers a solution. For higher rate taxpayers, there is no further tax liability providing they hold onto the investment until they are a basic rate taxpayer or lower. There is also no impact on the over 65 age allowance and they are not included in any means test for local authority care or pension credit. They can also be utilised in trusts to help reduce IHT liability.

How many people knew that supposedly low risk With-profits funds had 75-80% of their money in the stockmarket in the past?it was the only way they could deliver the returns, but were well above many investors' risk profiles - eg Whoosh's mum, who is now suffering the consequences with that MVA. .

Why are you talking about a with profits bond when this thread is discussing unit linked bonds. If I was to say brooke bond and james bond would you mix those up as well?

That's why they are all so resolute in opposing any criticism

You mean, that is why you are critical. Because you dont understand how they work, how they are charged and how the tax works.

Coops10

dunstonh - you're wasting your breath. If I was you I'd focus on helping the people that require it the most and those that are grateful for your obvious knowledge, and leave Edinvestor to focus on writing her wholly inaccurate Daily Mail financial articles!

Wurz

It's been a few weeks, but having read various views I have asked my new and potential long-term IFA (thanks for leads from several of you!) to see if it is worth salvaging my current bond with Scottish Widows. The criteria is simple. I can get at least 5% or even 6% from a High Street vendor with no risk to capital. Yes, one can consider the devaluation of inflation, but if I took around £5k a year income from such a bond and re-invested half that in a high interest savings account then at the end of the two years (thats the average time scale on a High Street sale, some are just one year) I would have my original capital back, plus whatever the other amount grew to. Interestingly this would give more monthly income than I'm getting now, with no risk......Makes one wonder!

I have said if tweaking my current Bond (that is penalty free by Jan '09) cannot achieve that then what is the point of hanging on. Yes, I can get a 107% allocation on a NEW bond - which seems a good idea from Dunstonh and Coops, but my cautious nature seems to be telling me that another 5 year tie up at this stage may not be all that, after all, the 107% would be on the amount left after a £2k penalty on what is now a £94k investment from the original £100k so really it would only be a small gain with a new bond. I have offered to reduce the monthly income from the original £375 to £200 so again it is giving the current bond a fighting chance. If the current Bond is just a "wrapper" then whatever is in it can be changed, I presume. I then said that if the current bond recovered I would be more inclined to take a long-term view to investing, mindful of the fact that when I retire (in around 5 years) I will need monthly income without too much risk....

As always I look forward to the forums views!

EdInvestor

Hi Wurz

Your money is invested in fixed interest (corporate bond) funds i do believe, whereas the general view is that it should be invested in a mixture of shares, property and bonds.

As you may have noticed the stockmarket is going through a bit of turmoil at present, so now may be a good time to switch some of your money into shares, as the prices are down and you can buy in cheap. This would offer the opportunity of getting a good bounce back as prices go up again, recouping your earlier losses. Commercial property funds are cheap for new investors as well at the moment.

No guarantees of course, but not a bad time to switch IMHO.

What other funds are available? If it's not clear, ring up and ask.

munk

Wurz wrote: »

I have said if tweaking my current Bond (that is penalty free by Jan '09) cannot achieve that then what is the point of hanging on.

Hi wurtz,

My mother's in a very similar situation to you, she has held a Scottish Widows (SW) Flexible Options Bond (FOB) for just over a year now and in that time the investment has dwindled. Like you - I took it from a quick fly through of the posts above and seem to remember you saying you had your money in a single fund - my mum had her whole investment sum dumped into a single fund (SW Cautious Solution) within the FOB which has really underperformed in the time (the fund is mainly corporate bonds which haven't performed so well the last few years).

Again as with you, my mum has the 5 year exit penalties to contend with (4% exit charge I believe after 1 year), so moving the money out isn't really the best option. With this in mind I'm looking to reallocate the investment so it's spread across a larger number of funds within the FOB instead of just one single fund.

FYI the details of what funds you can choose from in an SW FOB are on this page:

Flexible Options Bonds - choosing your funds

and the specific list of funds is on this page:

Funds available for investment within Scottish Widows Flexible Options Bonds

If it helps you at all, I whittled down the list of funds (actually well over 100) to a shortlist of decently performing funds:

SW Artemis UK Growth Life
SW Fidelity European Life
SW Invesco Perpetual Corporate Bond Life
SW Invesco Perpetual High Income Life
SW Jupiter Income Life
SW Jupiter UK Growth Life
SW Jupiter Undervalued Assets Life
SW Merrill Lynch UK Dynamic Life
SW Merrill Lynch UK Smaller Companies Life
SW New Star Property Life
SW New Star UK Alpha Life
SW Newton International Bond Life
SW Schroder Managed Life
SW Schroder UK Alpha Plus Life
SW Schroder UK Mid 250 Life
SW Schroder UK Smaller Companies Life
SW Threadneedle Global Select Life

Maybe this will help if you're still thinking of changing your spread. I screened these by looking at the underlying external funds performance on the Bestinvest funds research pages and picking only the funds that had been managed well.

Right now I'm inclined to suggest the following spread for my mum who's a 'cautious' investor profile rating (though the below is probably more closer to a balanced investor profile or somewhere in between):

Scottish Widows Fund Name: Weighting (%)
SW Fidelity European Life 10
SW Invesco Perpetual Corporate Bond Life 20
SW Invesco Perpetual High Income Life 5
SW Jupiter Income Life 5
SW Jupiter UK Growth Life 5
SW Jupiter Undervalued Assets Life 10
SW New Star Property Life 10
SW Newton International Bond Life 20
SW Schroder Managed Life 10
SW Schroder UK Alpha Plus Life 5

If you're considering doing it yourself, you can just send SW a letter telling them you wish to reallocate your current holdings and provide them a list of all the funds with the respective weightings as above. There's also a form included in the welcome pack my Mum got for switching. You can switch up to 12 times per year without being charged - the above reallocation counts as a single switch.

Anyway, would be interested to know how you got on and what advice you eventually ended up taking if you did go for an IFA.

Dunstonh - you said above:

dunstonh wrote: »

Its not trapping you. You are given money upfront so its only reasonable they have a penalty to claw that back if you dont stay 5 years. If the penalty concerns you then dont pick a provider with a tie in.

Can you explain what you mean here? As far as I can tell from my mother's policy schedule her allocation percentage was only 99% - the extra 1% is then used to cover their charges in setting up the policy (according to the technical guide for the FOB) - how are we 'given money up front' here?

I was surprised to read above that some IBs have an allocation percentage of as much as 108% - how can this be profitable for the providers? Also would we need to go through a discount broker to get into the NU IBs without being hit by high charges? Mind you there are further complications since this FOB/IB is actually in trust for IHT reasons...

PS this FOB issue is different to a previous thread you kindly replied to regarding ISA/OEIC SW investments

Cheers.

dunstonh

Can you explain what you mean here? As far as I can tell from my mother's policy schedule her allocation percentage was only 99% - the extra 1% is then used to cover their charges in setting up the policy (according to the technical guide for the FOB) - how are we 'given money up front' here?

Scot Wid is not a very good example as it isnt a very good investment bond. Going back to the bond on this thread title, I did one just before the weekend with a 107% allocation. So, the tie in really relates to bonds with that sort of quality.

I was surprised to read above that some IBs have an allocation percentage of as much as 108%

partly answered above. On current research, NU are coming out 2nd for me. However, most of the top 10 have allocations between 106% and 108%.

how can this be profitable for the providers?

Investment bonds are typically held on for longer periods than unit trusts. So, that is factored in a bit. Plus, the period needed to break even is 5 years. Hence the 5 year tie in. If you go for one with no 5 year tie in you dont get an initial allocation increase.

edit. following added: I just checked the illustration on the one I did last week and the RIY due to charges was 0.3% p.a. over 5 years. So, you see they dont make much in that period. Over 10 years it was 0.8%. I have seen RIY in negative positions after 5 years in the past. Usually in a special offer period when the provider is buying market share (running at a loss to improve stats).

Also would we need to go through a discount broker to get into the NU IBs without being hit by high charges?

Discount brokers are IFAs offering a discount over standard terms. Any IFA therefore can offer a discount if they want. FSA average shows majority do. Some more than others though.

Mind you there are further complications since this FOB/IB is actually in trust for IHT reasons...

Is it in a trust that is provided by the insurer or is it in a standalone trust? The rules changed on a number of trusts not too long back and you may find that the trust in place cannot be replaced if you surrender and restart. However, if it is a standalone trust rather than insurance company trust then changing the bond may be possible.

munk

Is it in a trust that is provided by the insurer or is it in a standalone trust? The rules changed on a number of trusts not too long back and you may find that the trust in place cannot be replaced if you surrender and restart. However, if it is a standalone trust rather than insurance company trust then changing the bond may be possible.

This is the URL that details the trust:

Flexible Power of Appointment Trust

and this is a sample of the trust form that was completed.

It appears that it's a Scottish Widows trust, but as I (very superficially so far) understand it my mother (as settlor) and I (as sole trustee) could - acting in the best interests of myself and two other beneficiaries - reinvest the monies currently held in the FOB into an alternative investment. So after the initial 5 year establishment charge period - ie when there's no exit charge - it might be a better idea to move the investment to another more suitable/better structured bond. I just hope that we're not tied down to Scottish Widows by this trust.

This raises a point - the initial poor allocation percentage aside - are we still onto a loser with this bond in your opinion? Looking at the annual charges now they do seem somewhat on the high side - generally between 1.5-2.0% pa when SW's own AMCs are factored in (again this was something that struck me as going against what you said above, maybe again this is just down to it being a 'bad' example though).

For examples, these are the fund charges for the FOB funds

(lot more info here too generally on sw fob: FOB Literature Library for advisers on scot wid extranet)

So for example the SW Fidelity Euro fund costs are:

Fund name: SW's AMC + Other expenses = Total AMC (Net Total Fund Charge)
SW Fidelity European: 1.000%+1.253%=2.253% (1.906%)

which just going on my knowledge so far of UT/OEIC investment funds does seem to be quite extortionate! Grr.


Note - as a layperson having experienced poor service with Lloyds/SW - I can certainly see EdInvestor's points when they're aimed at providers like Scottish Widows (as you point out there are better IB providers). EdInvestor hit the nail on the head - at least for me - with this quote:

Given that for a cautious investor, much of the money should be invested in lower risk/lower return assets such as bonds, this is an almost impossible task unless quite high risks are taken with the equity part of the investment.

This is exactly what I thought when I found out my mother's money had been invested in a single SW 'cautious' fund which consist mainly of bond content. Any equity content seems to have been mismanaged - or at least generally the fund has well underperformed the 'cautious managed' benchmark. SW's in-house funds seem absolutely awful - perhaps that's why they've still not been given an official ABI categorization after 2-3yrs. My mum would have been a lot better off just dropping the cash into a savings a/c - even a lloyds saving a/c - and that's saying something!

The tied agents in my experience are giving the industry a bad reputation in the eyes of the public (well me anyway!), sheep dressed as wolves so to speak. When you're given advice by a financial institution like Lloyds bank, the average joe will take that as 'financial advice' and the person giving that advice as a 'financial adviser'. Additionally many - especially more vulnerable people like my mother - will take that 'advice' on trust and just presume that because they've banked with Lloyds bank for 20-30+yrs, they must be trustworthy - they don't imagine they'd get ripped off after having been loyal for so long.

When they eventually find out what's happened to their money, of course their faith in 'financial advisers' is damaged quite badly - this is why tbh personally I'm quite wary of getting an IFA in now.

If these salesforce people get more leeway with the FSA as I think you mentioned in another post, it'll be a huge blow to the public's confidence in IFAs in the long run IMO.

Anyway, enough, before it turns into a full on rant.

dunstonh

This raises a point - the initial poor allocation percentage aside - are we still onto a loser with this bond in your opinion? Looking at the annual charges now they do seem somewhat on the high side - generally between 1.5-2.0% pa when SW's own AMCs are factored in (again this was something that struck me as going against what you said above, maybe again this is just down to it being a 'bad' example though).

Easy way to compare that is to the current top bonds and you are looking at a RIY of 0.8% p.a. over 10 years. Compare that to your 1.5-2.0.

So for example the SW Fidelity Euro fund costs are:

Fund name: SW's AMC + Other expenses = Total AMC (Net Total Fund Charge)
SW Fidelity European: 1.000%+1.253%=2.253% (1.906%)

Compare to NU sustainable future european which is a good fund (outperforming Fid and charges less) and is 1.0% amc. Even if you went with Fid on NU it would be cheaper.

This is exactly what I thought when I found out my mother's money had been invested in a single SW 'cautious' fund which consist mainly of bond content. Any equity content seems to have been mismanaged - or at least generally the fund has well underperformed the 'cautious managed' benchmark. SW's in-house funds seem absolutely awful - perhaps that's why they've still not been given an official ABI categorization after 2-3yrs. My mum would have been a lot better off just dropping the cash into a savings a/c - even a lloyds saving a/c - and that's saying something!

If you were looking at cautious, my provider of choice would change to Clerical Medical. Rubbish at medium risk or higher but a great spread of funds for low risk. Their goals are for consistency rather than outperformance. So, you never over achieve with them but you dont get the bumpy ride either. So, unlike unit trusts, you can find the provider of choice can vary depending on where you want to invest and how (although that can happen to some degree with unit trusts and pensions as well as you can get discounts based on larger investments).

The tied agents in my experience are giving the industry a bad reputation in the eyes of the public (well me anyway!), sheep dressed as wolves so to speak. When you're given advice by a financial institution like Lloyds bank, the average joe will take that as 'financial advice' and the person giving that advice as a 'financial adviser'. Additionally many - especially more vulnerable people like my mother - will take that 'advice' on trust and just presume that because they've banked with Lloyds bank for 20-30+yrs, they must be trustworthy - they don't imagine they'd get ripped off after having been loyal for so long.

Tied agents account for more complaints by far. A lot of the time that it due to the fact they operate as a salesforce and you get pressure to sell. However, some of the reason is that they are not qualified to a high standard and not authorised to portfolio plan. This is why you see a lot of recommendations from banks that end up in a single fund. Its not the adviser's fault. Its what their remit is when giving advice.

If these salesforce people get more leeway with the FSA as I think you mentioned in another post, it'll be a huge blow to the public's confidence in IFAs in the long run IMO.

Yes, that is one bad side of the FSA proposals. Increasing the standards for IFAs is good (especially for those already there or on there way there). However, downgrading the consumer protection that the salesforce advisers will have is daft. They account for most complaints so how does the FSA address this? Remove the ability to complain to the FOS. Of course, that will lower the number of complaints and the FSA can say that their proposals were a success but its all smoke and mirrors and no benefit to consumer.

That said, it could benefit IFAs because you may finally see the difference in standards between a good IFA and a tied agent. IFAs will not only be whole of market but also qualified to a higher standard.

At present every adviser, whether general practitioner IFA, mortgage IFA, specialist IFA, whole of market adviser, multi-tied agent or tied agent are all in the same pot in the eyes of most people. That needs to be addressed so people know the skills of the person they are talking to.