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Scottish Widows gets flexible with-profits

Type: With-profits bond

Aim: Income or growth

Minimum investment: Lump sum £5,000

Bonus rates: With-profits growth 4%, with-profits income 4.75%

Allocations rates: 98.25-103.25% depends on age and premium level

Charges: Initial 0.5%, annual with-profits growth 0.85%, with-profits income 1%

Commission: Subject to negotiation

Tel: 0845 8432111


Flexibility 6.3

Bonus rate 2.0

Company&#39s reputation 6.7

Past performance 3.0

Charges 5.7

Commission 3.0

Product literature 3.0


Ian Bird, account executive, Adams Tingle, Alan Lakey, partner, Highclere Financial Services, Peter Pickup, principal Peter Pickup IFA

Scottish Widows&#39 flexible options bond is a with-profits bond that invests in the funds from 12 external fund managers and 17 Scottish widows funds, including two new with-profits funds. One is designed for income and the other designed for growth.

The panel kick off with how the bond fits into the market. Bird says: &#34Very well indeed. The growth fund is nothing new in terms of asset mix compared to other with-profits funds. The income fund is unique in the market place for a with-profits fund.&#34 Pickup thinks it fits in as part of an overall investment portfolio as the low to medium risk element, particularly suitable if looking for income. However Lakey says: &#34It is trumpeted in some quarters as a new transparent with-profits device, but it proves to be a tired wolf in sheep&#39s clothing.&#34

Commenting on the types of clients for whom this bond is suitable, Lakey is negative. He says: I am not sure I can think of anybody I dislike enough to offer one to.&#34 Pickup says: &#34Low to medium risk investors who prefer steady growth without too much risk. Retired elderly clients who want very small risks may also be very suitable.&#34 Bird says: &#34Advocates of with-profits funds. However, a new fund will not have the historical potential financial strength of an established with-profits fund. Generally, I think it is suitable for those seeking income. For instance, in retirement.&#34

Looking at the marketing opportunities the bond will provide, Pickup thinks it is a good alternative to direct stockmarket investments and it is very suitable now in view of recent stockmarket problems. However, Bird says: &#34Generally very few, but it is a new option for those seeking income.&#34 Lakey agrees and adds: &#34Although it may prove useful in helping to sell other more worthwhile products.&#34

The panel then assess the main useful features and strong points of the bond. Bird says: &#34The simplified charges and the good assets of the underlying fund.&#34 Lakey thinks the Scottish Widows name counts for something and Pickup says: &#34The low charges, the 5 per cent withdrawals with tax deferred for higher rate tax payers and the good household name.&#34
Commenting on the bonus rates for the bond, Lakey and Bird say they were not given in the literature provided. Pickup says: &#34Very average in comparison.&#34

Turning to the bond&#39s drawbacks, Bird says: &#34The high charges for external managers. Why does Scottish Widows still charge 1 per cent annual management charge if they are not managing any money?&#34 Pickup mentions the charges are not listed specifically in the key features document. Lakey also lists the indecipherable literature, confusing terminology and Scottish Widows&#39 lacklustre investment performance.

Considering the flexibility of the bond, Bird says: &#34Fine, given the long-term nature of the product.&#34 Pickup and Lakey disagree. Pickup says: &#34Good but not unique.&#34 Lakey says: &#34There is nothing new here. Free switching is only to be expected.&#34

Next, the panel comment on Scottish Widows&#39 reputation. Pickup and Bird think it is good. Bird says: &#34Generally it is good, but it lost something when it was bought by Lloyds TSB.&#34 Lakey says: It was once extremely high, but sadly a malaise has overtaken the Company since the Lloyds TSB invasion. It is no longer highly respected, it is merely another company.&#34
The panel put Scottish Widows&#39 past performance record under the spotlight next. Bird says: &#34The traditional with-profits performance is very good, but most of the unit-linked funds were very poor up to three or four years ago. It has recognised this and now makes extensive use of links to other investment managers.&#34 Lakey says: &#34The unit-linked funds have been below average over recent years. With-profits returns are a shadow of their past glories.&#34 Pickup thinks it is average.

Commenting on which products they see providing the main competition, Lakey says: &#34Clerical Medical, Standard Life, Skandia Life and Merchant Investors.&#34 Bird suggests Scottish Equitable&#39s performance bond, Prudential&#39s with-profits bond and Legal & General&#39s with-profits bond. Pickup says: &#34With-profits bonds and investment bonds, particularly from Legal & General, Liverpool Victoria, Norwich Union and Standard Life.&#34
Analysing whether the charges are fair and reasonable, the panel have mixed opinions. Lakey says: &#34No. Although the external fund links are well and good, the doubling up of charges means that many options now approach the same dizzy heights as GAN Life&#39s charges.&#34 Bird thinks the initial charge is reasonable but thinks the annual management charge for external funds is not. Pickup says: &#34I cannot tell from the key features exactly what the charges are.&#34

The panel think the commission is fair and reasonable although there was not much detail given in the literature.

As far as the literature is concerned, the panel have mixed views. Bird says: &#34It looks good and is well written, but I am not so keen on large chunks of text – a necessary evil though.&#34 Pickup says: &#34It is adequate but I could not find a record of past performance.&#34 Lakey says: &#34It is not suitable for a client, even I barely comprehended it. Awash with jargon and buzz words, it can only confuse and frighten the investor. Think again!&#34

To sum up, Bird says: &#34In general a good, competitive product, but I have concerns about the high charges for external funds and the financial strength. That is, the ability to smooth returns in a new with-profits fund.&#34 Pickup says: &#34The BestInvest independent guide to with-profits bonds states it is below average in all areas.&#34


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