Legal & General has cut back the extra allocation offer on its portfolio bond after some advisers abused the deal to make easy cash.
From January 2006, L&G offered clients 3 per cent enhanced allocation on assets transferred into its portfolio bond through Cofunds.
But as the bond only had a cancellation charge of 7 per cent, some advisers realised that they could make an easy 2 per cent by investing in the bond and then immediately vesting it.
For example, if a client invested £100,000, enhanced allocation meant that £103,000 was invested.
Six per cent initial commission of £6,180 was paid dir-ectly to the IFA, which could be rebated to the client. If the bond was then sold, the client incurred a 7 per cent exit fee, receiving £95,790 back.
But as there is no tax on the bond due to the loss, the client got a total of £101,970, £95,790 plus £6,180.
L&G recognised that some advisers were abusing this and has now reduced the extra allocation to a maximum of 1.5 per cent and increased the cancellation fee to 10 per cent through Cofunds and 9 per cent elsewhere.
Spokesman Mike Connolly says: “We have shut the door. We are disappointed because it means the market is being forced to raise cancellation fees to protect against unscrupulous IFAs, who are not acting in customers’ interests.”