Flexible Option Bond?

JohnieBoy

How good is the advice I am getting from an IFA? I have recently inherited £40,000 from my parents. I want to keep about £10,000 on easy access, and have taken IFA advice to put £7,000 in a unit trust based ISA. He wants me to invest the remaining £23,000 in a Scottish Widows Flexible Option Bond, which has received many negative comments on this site. Would it be better to pay off some of my mortgage and put any resultant monthly savings into a 2008/9 ISA?
Relevant background: I am 5 years away from retiring on a half final salary index linked pension. A have recently crept into the higher tax bracket. I have no real savings, apart from this £40,000 currently in the Building Society.

dunstonh

have taken IFA advice to put £7,000 in a unit trust based ISA.

Thats good. ISAs always come first unless its trust work (or dont qualify for ISA).

He wants me to invest the remaining £23,000 in a Scottish Widows Flexible Option Bond, which has received many negative comments on this site.

The negativity is not the product as such. Its when its been recommended and the distribution method used, which is typically the LloydsTSB insurance rep and not an IFA.

However, in your case you say its an IFA so that makes a change. Unfortunatly, I am going to be critical of the advice. You have £7k available now and £7200 available next week. So, of that £30,000 you can put £14,200 into an ISA. The remaining amount should go into unit trust. There is absolutely no justification I can think of that says the bond should be used for such a small amount.

Would it be better to pay off some of my mortgage

Sometimes, sometimes not. It depends on your mortgage rate, risk profile and tax position along with your future requirements.

The 2xISA is common sense but you need to pull your finger out because the cut off for this tax year is Saturday at 11:30pm for most ISA providers available to IFAs.

I would question why the bond is being recommended as the tax wrapper is not going ot be suitable for you as you will pay more tax within it than a unit trust. The recommendation you have suggests a low skilled adviser and possibly one that is using commission bias.

And all of that is without knowing what investment spread has been recommended!

munk

JohnieBoy wrote: »

How good is the advice I am getting from an IFA? I have recently inherited £40,000 from my parents. I want to keep about £10,000 on easy access, and have taken IFA advice to put £7,000 in a unit trust based ISA. He wants me to invest the remaining £23,000 in a Scottish Widows Flexible Option Bond, which has received many negative comments on this site. Would it be better to pay off some of my mortgage and put any resultant monthly savings into a 2008/9 ISA?
Relevant background: I am 5 years away from retiring on a half final salary index linked pension. A have recently crept into the higher tax bracket. I have no real savings, apart from this £40,000 currently in the Building Society.

When you say 'IFA' do you mean a Lloyds TSB sales adviser (typical symptoms being if you get a call from them or a word from a branch staff member suggesting you might like to talk to an adviser about making your money 'work better for you' - usually after you introduce a larger amount of money into your lloyds account than usual)?

If this is the case I would definitely not take them up on the 'advice' - Lloyds bank are great at handling day-to-day banking - and up to a point reasonably good value - but for financial investment products quite frankly they stink!

The amount of money you'll pay in charges to them really isn't good value at all - for example out of personal experience my mother's investments with Scottish Widows cost her £3500 in charges compared to just £70 by going 'DIY' and investing the money via Hargreaves Lansdown - a discount broker. On top of that the investments with HL were a lot better in terms of both performance and support (Scottish Widows are not the best at making information readily available, at least not to the same degree as somewhere like HL).

If it really was an IFA who suggested the FOB I would question their motives, are they making a killing on commission? I understand there are the odd time when Scottish Widows are ok (pensions maybe?) but for something like an investment bond they're not the best by a long shot - only what I've picked up from reading on this forum and admittedly I'm biased after having unfortunately experienced their poor products.

Further since the changes to CGT recently, investment bonds have become less attractive in most instances. There are some instances you might want an investment bond - high income tax payer (maybe this was why it was recommended for you?) and inheritance tax planning are two that come to mind, means tested care home planning is another, something about over 60s with high income is another perhaps(?), not wanting to deal with tax returns regularly yet another (again ??) - for basic rate tax payers afaik investment bonds come down the pecking order now after ISAs and funds/shares/etc investing - you get better economic value from using those first over an IB.

End of day if you really want an investment bond and understand why it's better for you personally to use an IB over unit trusts/OEICSs, have a shop around for a better bond - I understand Norwich Union do a decent offering?

Otherwise if you can afford to tie the money up for 5yrs+ (presumably this is the case since the FOB has an establishment period of 5yrs usually), perhaps invest it in a portfolio of 'outside ISA' funds and over time transfer them over into an ISA wrapper when each new tax year comes around?

Also worth searching this forum for 'flexible option bond' or 'scottish widows' to get comment on their offerings - invariably the comments are bad but then again this is a forum dedicated to people who've had problems with investments so ... :rolleyes:

dunstonh

When you say 'IFA' do you mean a Lloyds TSB sales adviser

I wondered that too. I just cant see an IFA being able to justify it and it would be an easy complaint to be upheld. Tied agents can get away with more due to clever wording like "you chose" which they are allowed to use but IFAs are not meant to.

End of day if you really want an investment bond and understand why it's better for you personally to use an IB over unit trusts/OEICSs, have a shop around for a better bond - I understand Norwich Union do a decent offering?

NU's bond is cheaper and has a good fund range but for the size of the investment a bond is not the option.

Obviously we dont know the full facts but one thing we can tell that the investment size is better with unit trusts. Even if higher rate taxpayer.

chesky369

What are the details of the ISA he has advised on. I suppose you can juggle things around later on but it would be interesting to know what he is suggesting.

JohnieBoy

Twice before I have tried unsuccessfully to post a reply (without saving the text first), so hopefully this is third time lucky.

Thanks all for your advice
The 2*ISA option plus some unit trusts was what I expected, so the FOB was a surprise to me – and why I started this thread. It does seem to be tax free (as long as I don’t cash it until I have retired), but it is difficult for me to assess the likely growth. I had to choose an IFA quickly to get an 07/08 ISA, and I chose a local man with 30+ years experience. We discussed fees quite openly, and I agreed to the commission basis (though I see that SW stress their good commission on their advisor extranet). I have accepted his advice on the equity ISA (Skandia with currently 25% in each Invesco Perp. Pacific, Artemis UK growth, AXA Fram. UK Select Opps., Fidelity managed Internat.). His recommended £23k FOB is currently all in one “mixed” fund. He suggests doing an 08/09 ISA by regular payments from income. I have to take advice, I do not have the experience to choose specific funds – but I am still concerned. I am not sure his advice is similar to the financial press (I have since seen that two of the Skandia funds have performances ranked by FT as low). Maybe I should not follow the pack, but then I should not do something stupid!

My main concern is still to get most of the £40k out of high street, high tax accounts. I had wondered about 2*ISA + NS&I index linked certificates (until Wednesday’s rate drop). I am increasingly thinking of using the £23k to pay off my outstanding £23.5k mortgage (Halifax, standard variable rate), keeping paying the endowment (until 2011), and putting most of the remains of the £40k into an 08/09 ISA (Barclays tax haven, 6.5%).

dunstonh

It does seem to be tax free (as long as I don’t cash it until I have retired

No its not. It pays tax within the funds at a higher rate than unit trusts.

though I see that SW stress their good commission on their advisor extranet).

Dont read anything in to that. SW pay typical rates. You can get more from other providers.

His recommended £23k FOB is currently all in one “mixed” fund.

Mixed fund = jack of all trades funds. Regulars will know what i man by that. Its nothing special and trys to be a bit of everything.

am not sure his advice is similar to the financial press (I have since seen that two of the Skandia funds have performances ranked by FT as low).

You are not in any skandia funds according to your list so why are you looking at the Skandia funds?

munk

I would just urge you to please search this forum for 'flexible option bond' or 'scottish widows'.

Sometimes it's hard to search this forum for advice on a topic because the topic is an abstract concept - but in this case your search topic is ideal for finding information about scottish widows flexible options bonds. You'll get a fairly small result of posts that detail good reasons why not to invest in SW - I reiterated (again) above a few of the issues with SW FOB, but you'll find much more detailed info by searching.

dunstonh wrote:

You are not in any skandia funds according to your list so why are you looking at the Skandia funds?

Perhaps he means he has a number of funds held via the Skandia platform?

JohnieBoy

Thanks again dunstonh and monk

I did view the SW FOB feedback, which is why I needed to discuss it with somone. Many forum comments related to purchases some years ago, and maybe the price is better now (the IFA did say the time is right now - don't delay).

I was not too impressed with the FOB return he showed me for some of his other (unnamed) clients - seemed much the same as available from standard savings accounts - but he stressed the investor returns were not subject to CGT (not sure if there were any provisos?) or income tax (for basic tax-payers). Yes, corp.tax will have been paid - is that not the case for standard unit trusts managed by corporations? I never really got from him what was special about the bond, and I don't understand how it might differ from an investment trust. I need to read something on the differences between these various 'vehicles' and their tax and share ownership implications - any recommendations? Whatever the vehicle, if the capital grows, isn't it eligible for CGT?

And yes (on his advice) I purchased those unit trusts within a Skandia platform/ISA - my cheque was made out to Skandia.

Any further comments on paying off my mortgage rather than investing anyway? I did like having some money I could get at if needed rather than having to approach the moneylenders. But the relative interest rate projections, especially if I have to pay 40% tax on savings income, seem a clincher to me.

So it looks like I am going to decline the IFA advice.

JohnieBoy

Thanks again dunstonh and monk

I did view the SW FOB feedback, which is why I needed to discuss it with somone. Many forum comments related to purchases some years ago, and maybe the price is better now (the IFA did say the time is right now - don't delay).

I was not too impressed with the FOB return he showed me for some of his other (unnamed) clients - seemed much the same as available from standard savings accounts - but he stressed the investor returns were not subject to CGT (not sure if there were any provisos?) or income tax (for basic tax-payers). Yes, corp.tax will have been paid - is that not the case for standard unit trusts managed by corporations? I never really got from him what was special about the bond, and I don't understand how it might differ from an investment trust. I need to read something on the differences between these various 'vehicles' and their tax and share ownership implications - any recommendations? Whatever the vehicle, if the capital grows, isn't it eligible for CGT?

And yes (on his advice) I purchased those unit trusts within a Skandia platform/ISA - my cheque was made out to Skandia.

Any further comments on paying off my mortgage rather than investing anyway? I did like having some money I could get at if needed rather than having to approach the moneylenders. But the relative interest rate projections, especially if I have to pay 40% tax on savings income, seem a clincher to me.

So it looks like I am going to decline the IFA advice.

munk

The government has a site dedicated to explaining financial investment terms:

http://www.moneymadeclear.fsa.gov.uk/

You should be able to find out info on investment bonds, unit trusts/oeics and investment trusts there.

Just to (hopefully!) try and clear up a little confusion on the terms you've mentioned above:

• Unit trusts or OEICs (open ended investment companies) are generally known as 'investment funds' (mutual funds in US terminology).
  
  It sounds like this is what you're invested in via Skandia. (Skandia are the broker who execute the transactions to buy/sell/switch funds - your financial adviser will probably have chosen to use Skandia because they offer him favorable commission).
  
  
• A Stocks & Shares ISA is a 'wrapper' that you 'fill up' with investments (usually with funds but can be other investments like direct shares in companies or investment trusts).
  
  The point of an ISA is to allow the investments inside the wrapper to grow free of tax - the government's incentive to people to invest in the stockmarket.
  
  
• An investment bond is a life assurance 'wrapper' that you 'fill up' with investments (usually a selection of 'life funds'). It's vaguely similar to an ISA in as much as it just 'contains' your investments all 'wrapped up' in one convenient wrapper.
  
  Investment bonds serve a different financial aim than ISAs though - the primary purpose (although is often (ab)used for other purposes such as mitigating inheritance tax liability) is to provide life insurance for the policy holder (other lives can be insured as well I think?) - if the holder dies then the investment bond policy pays out the sum insured. If the holder doesn't die, they can cash it in (usually after the establishment charging period which is typically 5 years(?)), banking any profit that's been made on the funds inside the wrapper.
  
  
• An investment trust is yet another type of investment(!) - similar to a fund but can use leverage/borrowing (funds can't do this) so generally more risky than plain vanilla funds. Their value is also calculated differently since they're traded on the stock exchange.

These explanations may be woefully inadequate, you can literally write tomes on each of them(!) but hopefully it's a start. Here's a decent explanation of the different 'layers' of investment:

http://www.moneymadeclear.fsa.gov.uk/products/investments/types_of_investments.html

That guide isn't too bad actually, it looks at investing as having different 'layers' and explains each layer as it goes.


Re what to do about your investment - perhaps it would be an idea to get a second and even third opinion on what you should do with your money? Have a ring around a few different IFAs (whatever you do don't go to a bank for financial advice!!!) and get advice from them just to see how they compare - not just in terms of how much they cost but how well you get on with them and how each of their advice differs.

The best place to start looking is:

http://unbiased.co.uk/

or have a look on that FSA site (didn't rate their IFA finder tool there though).