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Mutuals - Am I missing something?

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  • planteria
    planteria Posts: 5,321 Forumite
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    i guess it's me that bowlhead refers to Cardinal-Red..

    i don't know much about Shepherds, and I am not a member, but if they are Tax Exempt schemes then they are limited to £25/m contributions. perhaps they are a combination of some kind, perhaps with £25/m going into a TESP (Tax Excempt Savings Plan) and £75/m going into an RSP (Regular Savings Plan)-can have slightly different names?

    just a thought, but we have a baby arriving in the next few days. He is set to have a TESP and a JISA set up for him. overlook the silliness and dishonesty that you can get on forums and consider products yourself. TESPs are able to provide the benefit of generating returns on funds not yet invested - in return for commitment, and they do provide some surety, as referred to above, which might sit nicely alongside investments that carry greater risk.

    good luck with whatever you decide.
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
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    Moo
    planteria wrote: »
    TESPs are able to provide the benefit of generating returns on funds not yet invested - in return for commitment, and they do provide some surety, as referred to above, which might sit nicely alongside investments that carry greater risk.
    Any perceived benefit of "generating returns on funds you haven't even invested yet" is something that doesn't stand up to the most rudimentary investigation or analysis; because as you say, it is only provisionally given to you based on the fact you have committed over the long term and promised not to stop early.

    Fan of these schemes: year 1, I put a few pounds in, "ooh, they've given me a bonus which is pretty high compared to what I actually put in so far during year one, as most of the money won't even be put in until the last 9 years of the plan."

    Sceptic: "ok then, try to take the money out of your plan and get your hands on that 'bonus' before you've actually invested enough money to justify it"

    Fan: "hmm, I just tried that and it turns out actually I can't get my hands on the deposits and the bonus unless I wait 10 years to avoid the crippling early redemption penalties that would wipe out any money that I allegedly 'earned' on money not yet invested"

    Sceptic: "yes, it is misleading marketing. These plans are only suitable in a limited set of circumstances and you can't get something for nothing".
  • planteria
    planteria Posts: 5,321 Forumite
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    a couple of quick things.. firstly i wasn't referring to you when i mentioned dishonesty, and secondly i hope you see that my response is a balanced one..

    it's not misleading, it just is what it is. i would say that C-Rs children (i think that's a correct assumption:o), along with planteria's children:D, could do well from a combination of TESPs and JISAs... with presumably far more invested in the latter. but yes, very clearly the basis of investing into a TESP would be to do so for the full term. and the £25/m limit, which is affordable for many, enables that commitment to be kept. whereas the JISA contributions can be varied, but all being well, far more than an average of £25/month over time. it also may be that the JISA would be dipped in to, perhaps at birthdays, whereas the TESP or other product designed to be held for a specific term, would be left alone.
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
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    edited 23 October 2016 at 12:49PM
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    planteria wrote: »
    it's not misleading, it just is what it is.
    but yes, very clearly the basis of investing into a TESP would be to do so for the full term.
    It is misleading to say that an advantage of the product is that it generates returns on funds you haven't invested yet. That sounds like, "ooh, free money, where do I sign!". But all it does is attempt to smooth the returns over time, holding back some of the profits in good years to instead allocate them to people in the bad years. The bonuses that you get on the statements are not actually yours to keep if you don't stay the full term, as they will impose a 'market value reduction' in such circumstances if the fund is not as valuable as implied by your statement.

    You can get back less than the bonus you were given ; in fact, you can get back less than you put in. The mechanism smooths the returns over time but does not create free money.

    So, as you say, the basis of investing should only be if it is something you want to do and stick with for the whole term, to avoid the penalties, which would claw back any performance you had been given but not really deserved. If you're going to invest for the full term, then you can't really say an advantage was that you earned returns on what you haven't invested, because you did invest for the full term.

    At the end of the day, these funds do not magic money out of nowhere. And the fees are high. The total amount of money made on the investment ventures, less the high fees, is available to be shared between investors. If you are saying that the smoothing produces an advantage because it allows investor A to receive investment profits that were really made by investor B in a different time period, then it is luck of the draw whether you are investor A or investor B, i.e. whether that process is to your advantage rather than being to your detriment.
    it also may be that the JISA would be dipped in to, perhaps at birthdays, whereas the TESP or other product designed to be held for a specific term, would be left alone.
    I agree that if people are saving for multiple goals they should consider multiple products.

    But as a warning to someone reading this who is now considering investing in a JISA for their child to 'dip into at birthdays' based on planteria's comments, you should be aware that neither you nor planteria will be able to dip into your child's respective JISA pots to buy birthday presents, treats, living expenses etc etc, unless the child has become terminally ill.

    JISAs are good long term investment options for children using the special tax advantages offered by HMRC to the child in exchange for a loss of access until the child is 18. If you want to access the assets earlier, you can put them in your own adult ISA and gift them to the child later whenever you like. Adult ISA allowance is increasing to £20k a year from April, which is almost £5k more than its current level so plenty of space to hoard assets for the child (unless you are concerned about having creditors chase you down in a bankruptcy or having the assets counted in a means-test for benefits).
  • dunstonh
    dunstonh Posts: 116,900 Forumite
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    I just read the Shepherds friendly KFD. It has a reduction in yield due to charges of 2.5% (when the growth is 5%). Remember that this is for a non-advised product. So, you cant blame advice for it being so high. This is a damned expensive product. However, there is a reason for that. It is for small premiums (so no large value cross subsidy) and it invests in a fund that is more expensive to maintain and comes with a higher liability to the provider. A type of fund that is generally regarded as obsolete nowadays (bar some existing old fashioned ones that may still be worth keeping).

    A regular contribution unit trust may well have been better value (cheaper and more flexible).
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • grey_gym_sock
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    it's pretty simple. costs matter. these "friendly society" plans are very very expensive. they have no real advantages which might make up for that. avoid.
  • planteria
    planteria Posts: 5,321 Forumite
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    bowlhead99 wrote: »
    It is misleading to say that an advantage of the product is that it generates returns on funds you haven't invested yet. That sounds like, "ooh, free money, where do I sign!". But all it does is attempt to smooth the returns over time, holding back some of the profits in good years to instead allocate them to people in the bad years.

    that's not right bowlhead. it is that the bonuses are paid on the Sum Assured, rather than on the funds so far invested. these 'headline rates' are low, but they can be calculated on relatively large sums. what i referred to is not just 'smoothing', which With Profits products tend to feature in general. you are right, no free money, but noone is suggesting that there is.
    bowlhead99 wrote: »
    The bonuses that you get on the statements are not actually yours to keep if you don't stay the full term,

    but if you do, they are. the way to use these products, as is clear, is to complete the term. the fact that investments can go down as well as up, and that if you sell an investment when it's value is lower than you paid, you lose money, is a given. these FS plans do provide some surety, as i mentioned above potentially working nicely alongside other investments.

    great points re. JISA terms. we may set up a new TESP for our baby with a term taking him into adulthood. whereas a JISA would allow him access at the stage of going to university, for example. both long term, one longer-term than the other.
  • redux
    redux Posts: 22,976 Forumite
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    A LV one has just matured for a relative.

    16 years at £15 a month - £2280 invested - £4800 received - very happy.

    Unless there were missing payments, that would be £2880 invested.

    Return about 5.9% a year.

    OK, but not spectacular.
  • atush
    atush Posts: 18,731 Forumite
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    If you only had £20 a month it might be the only game in town.

    Actually, invesco perpetual has investment trusts that you can invest in from 20 quid per month. Can be isa'd and jisa'd too i think? Or unwrapped.
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
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    edited 24 October 2016 at 2:43PM
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    planteria wrote: »
    that's not right bowlhead. it is that the bonuses are paid on the Sum Assured, rather than on the funds so far invested
    So in other words, say if I am on a £20pm plan and you are on a £10pm plan, I have twice as much Sum Assured as you. Over the course of the investment I am putting in (say) £4k and you are putting in £2k, and I will get twice the bonus as you, right? For two people starting with the same plan at the same time, the bonuses are just pro rata, whether you say it is on amount invested or sum assured. Between the two of us investors, there's no advantage to being paid returns based on the notional total to be invested or covered - compared to just paying out on actual total invested.

    Perhaps what you mean is if you look at two other people investing along side each other with same sum assured but one started earlier. The one that started later has the smaller amount invested at a point in time, but is getting the same bonuses because he has the same commitment. You are selling us this idea that it's somehow better for me as a late starter to be able to get a "full" bonus in early years when I haven't put much of my money into the plan yet. But that "advantage" would only be the case if:

    a)having that big bonus in year one based on a notional high "sum assured", boosted my account in a way that got me a bigger bonus in year two and three and four etc because of having a larger balance going into year two? But it doesn't give that benefit, because the bonus in year two and three and four is also based on sum assured (on the assumption that you complete the term) and not on balance. So no compounding occurs and getting the bonus early didn't give better overall value. So how about:

    b) if I got a high bonus early based on sum assured rather than on my paltry contributions, and then I was able to take that bonus away and spend it? That would be a nice effect. But you can't take the bonus and spend it; it only exists on paper, on a statement, and if you tried to access the funds before you had actually earned them you'd quite possibly get a crippling market value adjustment to thwart you, as well as losing the tax benefits you'd been looking forward to

    So, having a bonus notionally calculated on "relatively large sums" is not actually producing a tangibly improved return.
    you are right, no free money, but noone is suggesting that there is.
    I assumed you were suggesting there was, because you touted the ability to get paid a bonus based on money you hadn't invested, as a positive feature and an advantage of this type of investment plan.

    The money after fees is just being distributed internally among plan investors which may divert returns from one to another, but no obvious advantage, on average. As there is no "free money" that you can use in the early years to enhance your return in later years, and nor can you take out and spend it if you haven't earned it because you get the MV reduction.

    So, maybe let us know why being able to get a paper bonus before you have invested for long enough to be allowed to actually touch it or benefit from it, is an advantage? What am I missing?
    the way to use these products, as is clear, is to complete the term.
    So - as it is very inefficient not to complete the term once you've started, and therefore you'll complete the term... the method they use to allocate you bonuses that you aren't going to be able to practically access during the term, is not of too much interest and shouldn't be used as a major selling point, right?
    great points re. JISA terms. we may set up a new TESP for our baby with a term taking him into adulthood. whereas a JISA would allow him access at the stage of going to university, for example. both long term, one longer-term than the other.
    I agree that more than one product might be best if there are multiple objectives flying around. So you get the JISA, modern flexible product, to last until university at 18. But then you reckon you should also use the antiquated friendly-society-type plan with its high fees, for a term of even longer than those 18 years.

    Generally the investment market has got more transparent and easily accessible in the last few decades, exponentially so in the last few years. I generally think this push for fee and portfolio visibility and increased competition will continue a little while. So, I'd have thought these days people wouldn't want to saddle themselves with a long term inescapable commitment on an antiquated fee structure which will likely be even more expensive versus competition in five years, or a decade, let alone two decades - for a post-university-lump-sum plan.

    I appreciate you're not "most people" and the world would be boring if we all agreed on everything
    :)
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