In a note to investors, the firm says the 50 per cent of the fund that has been switched to its standard fund is available immediately due to large levels of liquidity built up.
Investors then have two choices with what to do with the other half. If they move it into AIG’s new protected recovery fund, the capital will be protected at current levels, plus any interest accrued up until December 14, if the investor is prepared to lock the money away until mid-2012.
If investors withdraw the second half of their fund on December 15, when it becomes available, AIG forecasts that they could see a loss of between 20 per cent and 50 per cent of that part of the fund.
Advisers and their clients will have to decide whether to take the losses and move the money or lock it in for the capital protection. The product was originally marketed as an alternative to building society accounts without any lock-ins.
Informed Choice joint managing director Martin Bamford says the risk of the protection option is two-fold as investors are risking seeing no growth on their investment at the end of the three-and-a-half-year term and are also risking a possible default on the guarantee.
“I think any investors in that fund are going to have their confidence so badly knocked that I cannot see many people taking up that protected recovery option,” says Bamford.
AIG Life parent company Alico, which is up for sale, currently has an A+ rating and there is no suggestion that it has any financial problems.
The note to investors reveals that the asset allocation of the enhanced fund includes 45.1 per cent in cash, 14.5 per cent in asset-backed securities and 13.2 per cent in term deposits.
The note says the fund has £210m of downgraded assets in Lehman Brothers and other financial firms hit by the cre-dit crisis and expects losses of 50 per cent on these assets.