Type: Unit-linked investment plan
Aim: Guaranteed income of 5 or 4.5 per cent by investing in equities and bonds through choice of four funds
Minimum investment: Lump sum £15,000
Minimum-maximum ages: 18-80
Investment choice: Prospect fund, vantage fund, vista fund, horizon fund
Allocation rate: 100%
Income facility: Monthly, quarterly, half yearly and yearly
Charges: Establishment charge Option A none, option B 1.5% a year for five years, option C 1% a year for eight years, option D 0.9% a year for five years, option E 0.6% a year for eight years, fund charges annual 1.55-2.25% depending on fund
Special offer: 101% allocation rate for investments above £50,000
Offer period: Until further notice
Commission: Option A none, options B and C initial 6.75%, options D and E initial 3%, renewal available
Tel: 0845 6000 173
This product guarantees an income of 5 per cent for life from the age of 60 onwards. Part of the income is deemed to be a return of capital and is tax-free.
Independent Personal Financial Management director Luke Gibbon does not know of another product that will guarantee a set level of income, have the potential for that income to rise, on death leave the residual fund, if any, to beneficiaries and allow full or partial encashments during the term as this does.
“The capital is invested in one of three funds, each of which is split between a UK index tracker fund and a corporate bond fund. The difference between the three funds is the percentage split. The income will be reviewed every three years and increased if the underlying funds have increased value,” says Gibbon.
On death, the residual funds will be available for their beneficiaries subject to tax. Also the policy can be cashed in at any time. There may be a tax charge and possibly a penalty when doing this.
“In addition, the adviser remuneration consists of initial plus I believe fund based renewal and the initial can be foregone to reduce the establishment charges. I think the charges are slightly on the high side, but taking account of the flexibility and guarantees are not too bad,” says Gibbon.
While Gibbon thinks the details sound great, he has some reservations when looking at them in more detail. “If the funds did not grow- or fall- the income is guaranteed effectively for 20 years. Over this period it is extremely unlikely that UK equity markets will not rise and of course the corporate bond markets will be providing an income,” he says.
Gibbon pulls out some statistics from the literature. A person aged 60 has a 50 per cent chance they will live to age 88 if male and 91 if female. The literature also states that if a male aged 60 invests in a typical 50/50 equity/fixed interest fund and draws an income of 5 per cent a year, there is a 33 per cent chance the fund will run out before he dies. This risk increases to 40 per cent for a woman.
“While I accept that there is a potential for the funds to be totally depleted, I feel this type of marketing is scare mongering,” says Gibbon.
He calculates that if a person age 60 draws an income of 5 per cent from their fund they need a net return of about 2.7 per cent a year for the fund to last until age 88, 3.3 per cent a year for it to last until 91 and 4.3 per cent to last until 100 – none of which should be a particularly onerous target.
“If markets over a long period of time were that poor, the income from this product could be severely eroded by the effects of inflation and the investor would arguably still be in financial difficulties,” says Gibbon.
In terms of potential competition, Gibbon says there is nothing that can be directly compared due to the guarantees, but he would consider UK-registered investment funds and possibly onshore bonds as an alternative.
“Overall, while the plan offers guarantees, their value is arguably limited and the overriding factor will be the fund performance. The corporate bond fund has only been running less than a year and is difficult to judge. The UK tracker fund performance provided shows average returns over one, three, and five years but the statistics provided are based on the Scottish Equitable Pension Fund with a 1 per cent charge. The conclusion therefore is that it would have underperformed with a higher charge.
Suitability to market: Average
Investment strategy: Average
Advisor remuneration: Good