10 year savings plans: alternative to with-profits?

JohnFB

That's interesting I never knew there were Endowments and Low-Cost Endowments. You are usually correct on these things Dunstonh.
Mine is not guaranteed to pay off the mortgage and I am using overpayments to cater for this.
I think that if in 1988 if I'd been offered and explained about the two types I would have gone for the former.
Never mind only 6 years to go !

dunstonh

That's interesting I never knew there were Endowments and Low-Cost Endowments. You are usually correct on these things Dunstonh.

Over the years the "general" terminology changed and the low cost endomwents were just referred to as endowments and the endowments were referred to as full cost endowments.

I think that if in 1988 if I'd been offered and explained about the two types I would have gone for the former.

You wouldnt have done. You would have gone repayment. By the time LAPR tax relief was abolished on new plans and MIRAS after that, full cost endowments were too expensive compared to repayment mortgages. The low cost endowment took over.

Primrose

Why not pay a monthly amount into an equities ISA, using up your £7000 annual allowance? You can contribute to a different fund every year (or a selection of funds), especially if you invest via a broker like Hargreaves Lansdown. This will give you far more flexibility than any insurance company With Profits fund, which might at any time impose an MVR penalty if you need to withdraw any of your investment. You will still be investing over a fixed term (which can be flexible if it needs to be), the money when you withdraw it will be tax and capital gains free, and most equity ISAs can be subscribed to on a monthly basis. There are lots of regular savings account for cash deposits but over ten years you are likely to get a far better return for your investment with equities. Your savings are also more likely to keep ahead of inflation. Also, cash savings in an ISA are currently limited to £3,000 p.a. (although they will increase marginally next year) whereas Equity ISAs allow you to invest up to £7,000 p.a. so you have scope for increasing your savings every year if your salary increases and you can afford a larger monthly investment. Check out the Hargreaves Lansdown site for an idea of some of the equity options available (h-l.co.uk)

EdInvestor

There hasn't been a guaranteed endowment since life assurance tax relief was abolished in 1983 (IIRC).Note there is no tax relief on "life funds", that is endowments and investment bonds.If you want tax relief, go for ISAs or pensions.

The most devastating change that has affected WP funds is that the regulators finally decided after the demise of Equitable Life and the near -death experience at Standard Life in 2003 that they had really better make this irresponsible bunch of gamblers at the life companies actually obey the rules.

So the FSA forced the insurers to make good on what guarantees did exist in their WP endowments and pensions , by reserving an adequate amount of money to pay for them in safe investments like bonds and cash.

What happened?

Instantly the returns on more than half the WP funds in the land collapsed as the companies were forced out of the stockmarket and into low return assets.Hence we now have the aptly named "zombie funds."

But just think about what was happening before: these companies were promising you a guaranteed return which was not actually guaranteed at all. They were punting your money which you thought was safe, in the stockmarket - they were claiming to be able to provide you with a free lunch.

WP was in many cases tantamount to a fraud, providing stockmarket returns at building society safety levels.This is why so many people have won misselling cases bases on the failure to take into account their attitude to risk.

The downfall of the with profits buisness started with the building societies and their greed and is now left in such a poor state by liars jumping on the compensation wagon, encoraged to do so by the regulators.

Of course salesmen of all stripes didn't tell them that the money they were expecting to pay off their mortgage was being punted on the stockmarket,did they? And nor did the providetrs of the product make it easy to spot for the inexperienced.

Otherwise no-one would have taken out an endowment, would they?

dunstonh

Note there is no tax relief on "life funds", that is endowments and investment bonds.If you want tax relief, go for ISAs or pensions.

That is incorrect. Those that had a plan in force before the removal still got/get LAPR.

Otherwise no-one would have taken out an endowment, would they?

Why wouldnt they have taken out an endowment to cover their mortgage if they knew it was stockmarket based?

You tell everyone in the pensions section to do income drawdown and risk their retirement income on stockmarket returns. That is riskier than an endomwent policy for a mortgage.

Retired_I.F.A.

Get to your Doctors Ed I reckon he can at least refer you to a specialist to help with your compulsive lying syndrome.

EdInvestor

dunstonh wrote: »

Why wouldnt they have taken out an endowment to cover their mortgage if they knew it was stockmarket based?

Most people I've met who used endowments were told that there was no risk of the endowment not repaying the mortgage: the only risk related to the size of the additional lump sum. This of course was a lie. Had people known the stockmarket risk could produce a shortfall on the loan repayment itself , they would not have taken out the policy.Hence they were missold.

You tell everyone in the pensions section to do income drawdown and risk their retirement income on stockmarket returns. That is riskier than an endomwent policy for a mortgage.

An income drawdown can be safer than an annuity.It all depends on what you invest the money in.I would never suggest that anyone invested a drawdown fund in With profits.Nor would I ever suggest anyone took out a With profits annuity, an extremely dangerous product that should be banned IMHO.

dunstonh

Most people I've met who used endowments were told that there was no risk of the endowment not repaying the mortgage: the only risk related to the size of the additional lump sum. This of course was a lie. Had people known the stockmarket risk could produce a shortfall on the loan repayment itself , they would not have taken out the policy.Hence they were missold.

Many of these same people have gone on to have mortgaged buy to lets. Do they realise that they could lose their primary residence and bankrupt them if it goes wrong? No. Because whilst its making money, people ignore the risk or forget about it when there has been a sustained period of growth. Its only when things go wrong that people start to complain.

You are also incorrect to assume that people would not have done a stockmarket linked mortgage. Many still do and quite a few on here still do using modern products like ISAs.

An income drawdown can be safer than an annuity.It all depends on what you invest the money in.I would never suggest that anyone invested a drawdown fund in With profits.Nor would I ever suggest anyone took out a With profits annuity, an extremely dangerous product that should be banned IMHO.

So, you are saying that an income that is subject to investment returns is safer than a guaranteed income for life?

Whilst I am no fan of with profits annuities in general, I have to say that I did a couple of these for someone about 4 years ago and they have been spectacular in their returns and the level of income provided. The main reason was that they were set on a zero ABR which has seen them increase signicantly above the rate of inflation each year and it doesnt matter if the bonus ends up being zero. So, slating them like you have is totally wrong.

EdInvestor

dunstonh wrote: »

Many of these same people have gone on to have mortgaged buy to lets.

Source for this statement, please.

So, you are saying that an income that is subject to investment returns is safer than a guaranteed income for life?

A fund invested directly in gilts guaranteed by the Governmenr is certainly safer than an annuity from an an insurance company which could go broke.

I did a couple of these for someone about 4 years ago and they have been spectacular in their returns and the level of income provided.

I am surprised that you would promote a stockmarket based retirement income product on the basis of 4 years returns dating from the time of the stockmarket recovery/bull run.

What was the performance of the same product dating from 7 years ago may I ask?

And how many people are advised to take out these With profits annuities on the basis of ABRs of zero, which will provide a very poor initial income?Isn't it much more likely that clients are advised to take out higher ABRs, which carry the risk that the income will decline?

dunstonh

I am surprised that you would promote a stockmarket based retirement income product on the basis of 4 years returns dating from the time of the stockmarket recovery/bull run.

What was the performance of the same product dating from 7 years ago may I ask?

I am not promoting any product. Use of a product in the right scenario is not promoting it. It doesnt matter what returns have been or will be as the zero ABR removes the bulk of the risk.

£10,000 income taken out in 2000 would now be £15,848. That is an average increase of over 6.5% a year. Yet the income level in year one cost about the same as an RPI annuity. Only two years saw no increase but there was no drop in income in any year.

And how many people are advised to take out these With profits annuities on the basis of ABRs of zero, which will provide a very poor initial income?

What basis do you think it will provide a poor income? Performance figures prove otherwise

Isn't it much more likely that clients are advised to take out higher ABRs, which carry the risk that the income will decline?

There has been no evidence to suggest that is happening. Probably in part to sensible marketing from the major player in this field, Prudential.