Scottish Friendly "My Prosperity" ISA

reliquit

5 years ago my wife and I were in a dark place financially speaking. We were deeply in debt, struggling to pay even the most basic of bills. Living on her state pension paid weekly - we were in the position of having to choose between "heating or eating" on more than one occasion.In May 2015 I took out a Scottish Friendly My Prosperity ISA into which I paid £10 per month. I did no research at the time, and I simply chose this because I saw an advert for it and being able to save even so modest an amount was a much-needed boost to my self-esteem.

Fast forward to today and our lives are very different. We have survived an IVA, retrenched our lifestyle, and while we are not rich by any yardstick we are comfortable with the way things are. We can pay all our bills, and even manage to go out to lunch at least once a week, and have started to wonder whether this is a good way for us to save. Should we close the SF ISA (currently worth £730 less penalties) and invest elsewhere, should we let it continue adding small payments (currently at £15 per month) until maturity in 2025, or increase payments to the maximum I can afford?

bowlhead99

I wouldn't suggest increasing contributions to the My Prosperity product as it is not really a great product. The attraction is that it has a low monthly minimum. Other more mainstream products that you could invest in elsewhere have more competitive charges and no exit valuation adjustments/ penalties. 

So, invest elsewhere (the maximum you can afford), which just leaves the choice whether to continue with the product at a token tenner a month, or give up on the product. If you are continuing with it, you can only invest in one S&S ISA per tax year so it would restrict your options, but your wife could use her own £20k-per-year ISA subscription allowance  - presuming you're not likely to be wanting to invest over that amount of new money every year between you anyway.

Personally I would not use the product - consolidate all your investing into one new investment platform for £whatever a month you can afford. But in my case I'm investing a lot more per month so having a tenner a month go to SF with a balance of under a thousand in it is just a distraction and I would give up on it and move it to keep things simple. It would not be the end of the world if you kept it (likely no worse than a bank account over the next 5 years) but it's unlikely to be the best option for someone who can afford a more meaningful amount.

masonic

How much will you pay in penalties if you close the product now?

reliquit

I have trawled through their website but can't find any clear information about surrender penalties. I'm sure I could contact them and get a figure if it was absolutely necessary, but after reading @bowlhead99's concise post above I think I'll just let it run for the remaining 4.5 years - as said we have my wife's allowance should we need to use it.

Thanks for the advice.

bowlhead99

There isn't a fixed penalty.

By default, the money will be invested in the  Unitised With-Profits fund. In that type of fund, the returns are smoothed because regardless of the exact underlying performance of the assets in which it invests, the fund will tick up quite smoothly in value from time to time as fixed bonuses are added to it. However, if you want to leave before the ten years are up, they can apply a 'market value adjustment' -a penalty to reduce the headline unit value to whatever the underlying assets are really worth, which may be less than the £730 figure. So if markets are doing terribly compared to the average of the values when you were paying in your tenners, you may get less than the £730, and it could be less than the £6xx you actually paid in over the five or so years since you started.

If you wait until the 10-year maturity (or subsequent five year anniversaries of that date) then you can exit without the same level of potential penalty because there will be a guaranteed amount.

Overall it's an expensive product with costs likely to be in the range of about 1.5-1.6% a year, for an investment mix that's a little over 50% equities and commercial property and the rest corporate and government bonds and cash. At other mainstream S&S ISA providers / fund supermarkets you could find mixed asset investment funds with annual net costs a whole percentage point lower than that (e.g. ongoing charges of 0.5-0.6% or sometimes less, including both fund fee and investment platform /ISA manager fee).

Still, if you are only investing a tenner a month into it and have less than a thousand pounds invested in total, the annual fee is not going to be a huge amount of actual pounds whether it is 0.5% or 1.5%. So even though the product costs three times as much as rivals - and may not have particularly good gross returns even before those high fees - people use these products because a tenner a month is an easy commitment to make (better than just blowing the tenner a month on beer and pizza), while more mainstream investment ISA providers used by people who aren't on the breadline might have a minimum of £25, 50 or £100pm.

masonic

reliquit said:

I have trawled through their website but can't find any clear information about surrender penalties. I'm sure I could contact them and get a figure if it was absolutely necessary, but after reading @bowlhead99's concise post above I think I'll just let it run for the remaining 4.5 years - as said we have my wife's allowance should we need to use it.

Unless you definitely want to keep it even if there is no penalty or MVR to reduce the £730 valuation, then it would be worth testing the assumption that you will get back less than that. You've stated this is not something you'd invest in today, which is the usual criteria for axing an investment. I agree it might be better to hold on if there is a material penalty to withdrawing early.