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Back to the future for L&G with-profits bond

Legal & General – Capital Control Bond

Type: With-profits bond

Aim: Growth or income by investing in UK equities, international equities, fixed-interest securities and commercial property through the Legal & General with-profits fund

Minimum investment: Lump sum £5,000

Bonus rates: Capital Control Growth Bond  – 3% Interim Bonus plus 1.75% Final Bonus, Capital Control Income Bond  – 4.25% Interim Bonus

Investment split: Capital control growth bond – 39% fixed-interest securities, 30% UK equities, 14% overseas equities, 17% commercial property, capital control income bond – 49% fixed-interest securities, 25% UK equities, 9% overseas equities, 17% commercial property

Options: Single or multiple lives, automatic 10-year capital guarantee or choice of guarantee option one -10 year guaranteed return, option two – combination of five and 10-year capital guarantees, option three – combination of 10-year guaranteed return and five-year capital guarantee

Allocation rates: 97.5-101.25% depending on age of investor and amount invested

Charges: Implicit in bonus rates for investors up to age 74, initial charge 1.25% to 2.5% for investors age 75 and over depending on amount invested, guarantee charge annual 0.2% for five years for guarantee option one, annual 0.8% for guarantee option two, annual 1% for five years for guarantee option three

Commission: Subject to negotiation

Tel: 0845 273 0008

The capital control bond, Legal & General’s new with-profits bond, is available as a growth or income bond.

Discussing the product features, IPFM director Luke Gibbon says: “The capital control growth and income bonds are with-profits bonds with an automatic guarantee that at the end of 10 years, the policyholder will receive the initial investment back less any withdrawals, including any surrender penalties or market value reduction applied.”

Gibbon points out that this provides guaranteed increase of 10 per cent of the investment after 10 years, but at an additional annual cost of 0.2 per cent for the first five years.  He adds that other guarantees are available at an additional cost.

“For investors under 75 there is no initial charge and an additional allocation for investments of £25,000 or more.  For investors over 75 there is a reduced allocation.  However, there are surrender penalties on encashment, except in the event of death during the first five years.  These penalties start at 8.5 per cent in the first year, dropping to 3 per cent in the fourth year,” says Gibbon.

Discussing the charges in more detail, Gibbon says that in relation to annual charges, the key features simply states that deductions are taken into account when setting the bonus rates.  “These costs include the expenses of setting up and managing with profits bonds, the cost of guarantees, options and other expenses such as the value of the bond on death, the cost of life cover and payments made to shareholders. “ He complains that the key features document does not mention specific amounts, or an indication of what the effect of these costs is likely to be. “I doubt this will be allowed under the proposed RDR regulations,” he says.

If an investor takes a regular income, as long as it is up to 7.5 per cent a year of the original investment no surrender penalty will be applied.  “However, a market value reduction could be applied if the withdrawal exceeds the greater of the current value or the initial investment, less an allowance for any previous partial encashments, multiplied by the interim bonus.  It appears this calculation could be applied at any time and therefore a client could start a regular withdrawal and subsequently discover they are being penalised,” says Gibbon.

Gibbon says this bond could be put to a client as an investment giving a capital guarantee 10 years, or after five years at an additional cost, or with guaranteed growth of 0.96 per cent a year after 10 years at an extra cost, with unspecified charges and returns being determined by the insurance company, which may not reflect the growth of the underlying fund. “If the client was also aware that it is unlikely the regulators would allow such a product in a couple of years, do you think they would want to invest in it?  I know my answer,” he says.

Summing up Gibbon says: “In the past, with-profit funds have at times produced attractive returns for investors but, in my view, this product exemplifies why such products have had their day.”

BROKER RATINGS

Suitability to market: Poor

Commission: Average

Flexibility: Poor

Charges: Poor

Overall 2/10

Recommended

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