Money news, advice and predictions for savers and spenders.
By Jeremy Gates
An army of small investors will soon be looking for a new home to store their billions of pounds of savings, as they grab the chance to withdraw money from poorly-performing With Profits bonds without paying a penalty.
Tens of billions are locked in With Profits bonds, which are supposedly super safe, because they are invested in shares, bonds, fixed interest investments, property and pensions funds. Risk-averse savers piled £10-£15 billion a year into the bonds a decade ago, when the bursting of the tech 'bubble' sent shares crashing.
By promising 'smoothed' returns - profits retained from good years to fatten bonuses in the bad - the bonds looked a better bet than cash in the building society.
However, the policies - managed by providers like Standard Life, Prudential and Aviva - went into the same pot as endowment policies, which originally promised to pay off the mortgage for homeowners after 20 or 25 years, and to give them a lump sum to enjoy afterwards.
As endowments mature, many homeowners are getting smaller sums than the outstanding mortgage.
As for With Profits bonds, their performance through the Noughties was so patchy - hit by wobbly stock markets and new rules to cut risk - that many have imposed penalties called Market Value Reductions (MVR) on investors trying to get money out.
The providers are currently in the middle of the annual reporting season when they announce the rise in the value of With Profits policies, based on returns achieved in 2009.
The figures so far are hardly encouraging. If providers cut MVR penalties, or scrap them altogether, an exodus of savers is likely.
In January, Equitable announced its With Profits policies gained 5.5% in 2009. It didn't look good when London shares surged by more than 20% last year, and some managed funds delivered 20%-plus. Then, Aviva posted a rise of 6%.
Laith Khalaf, pensions analyst at financial advisor Hargreaves Lansdown, says: "In 2009, the sun was shining on the UK stockmarket, but Aviva failed to make much hay for With Profits investors.
"It's good news that MVR penalties are coming down, so investors can escape the fund at little cost."
Aviva will write to 50,000 customers to tell them the date when their withdrawals will be penalty-free.
Others, however, are less helpful. Liverpool Victoria (LV=) allowed penalty-free withdrawals on policies reaching their 10th birthday in 2009 for just one day.
Friends Provident removed all MVRs on policies taken out after 2001 last October, and it believes its policies lose only 2% on surrender.
Friends Provident also claims the cashable value of most customers' plans is 10% up on a year ago.
Standard Life has scrapped MVRs on bonds taken out between September 2001 and November 2005.
Laith says: "Generally speaking, the older the bond the more chance of a penalty-free withdrawal. Some policies have guarantee dates, like the 10th birthday, which offer a 'get out of jail' card by promising no penalty."
Is this a good time to dump With Profits?
If you ask a financial advisor, he will charge a fee, but London shares are already nearly 10% down on the recent peak, and further falls could see a rapid return of MVRs to block further withdrawals.
It is also clear that With Profits providers have sold shares to meet tough rules set by the Government - through the Financial Services Authority - to limit risk. Even if shares recover, little benefit might go to With Profits investors.
Laith explains: "In terms of investment returns, 2009 was probably an exceptional year, and yet payouts are not being significantly increased. I see limited potential upside from here."
Patrick Connolly, at financial advisor AWD Chase de Vere, says: "While With Profits funds can provide competitive returns against falling markets, when shares perform well they tend to get left behind.
"This happened in 2009. Although markets performed very well, many With Profits providers are not increasing bonuses, and some are reducing payouts from last year. There will be the usual cry to get out."
While AWD Chase de Vere does not recommend With Profits investments for new clients, Connolly thinks some investors should stay put.
If a policy has a maturity date, for instance, it is probably sensible to keep it, especially if there are penalties for surrendering.
"Some policies have guarantees that you could lose if you surrender. It is also important to know what bonus rate a policy is paying. If it is very low, or non-existent, you may be more inclined to surrender," he says.
Connolly thinks stronger providers - including Prudential, Aviva and Legal & General - can invest more in assets, like shares and property, that are likely to produce better returns over the long-term.
Endowments and With Profits bonds both include an element of life cover, which might have to be arranged elsewhere if a policy is scrapped. This could cause difficulties if there are health problems for policy holders.
However, where do you put money withdrawn from a With Profits Bond?
Connolly says: "It may be possible to make an internal switch within your policy. Some pension or bond products allow a switch from With Profits to another fund.
"If you like the diversification of With Profits funds - typically shares, fixed interest and property - a similar blend may be available in managed funds. Possible options include Investec Cautious Managed, Gartmore Cautious Managed, or distribution funds like L&G and AXA."
Laith Khalaf says: "Much depends on what you want from the money. Long-term investors building a pension might try a unit trust, either a cautious managed, or balanced managed fund."
Returns on cash in savings accounts are poor at present, while savers' options shrank further when National Savings & Investments scrapped its highest-paying Income Bond.
For tax efficiency, the best way to extract money from a With Profits bond over a period is to take 5% per year. This top-up to income is tax free, while leaving enough of the fund intact to benefit from future rises in the value of underlying investments.
:: Information: Hargreaves Lansdown (0117 900 9000 and www.h-l.co.uk); AWD Chase de Vere (01225 368 176 and www.awdchasedevere.co.uk).
Poundnotes
:: It's been a disastrous decade for pensions, says Richard Eagling at Moneyfacts. For example, a man who paid £100 gross per month into a balanced managed fund over 20 years got a pension income of £8,998 if he retired in January 2000. However, he would get only £2,542 if he started drawing a pension in January 2010.
To get the same pension as someone who retired a decade ago, somebody retiring today would have to have paid in around £355 gross per month - a steep figure for anybody earning something close to average wage.
There also seems to be little chance of pre-retirees (aged 55-64) beefing up pension contributions just before they retire. Aviva's first Real Retirement Report says that age group has average savings of only £8,593, while their average outstanding mortgage is nearly £16,700.
Two fifths of pre-retirees save nothing per month, and one fifth still owe more than £75,000 on their mortgage.
Clive Bolton, of Aviva Life, says: "There is growing disparity between the haves and have-nots when you look at the three ages of retirement: 55-64, 65-74 and 75-plus."
:: In the first six weeks of 2010, the average rate of the top five savings accounts sank from 3.04% to 2.89%, yet basic rate taxpayers need to earn at least 3.63% to keep ahead of inflation.
Kevin Mountford, at Moneysupermarket.com, says: "Many savers are earning less than 2.89%, so it is still worth moving your money to a better deal.
"Keep an eye on best buy tables and check the small print behind any good rate advertised, especially in the run-up to this year's ISA season."
Andrew Hagger, at Moneynet.co.uk, is similarly critical: "With the Bank base rate in uncharted territory since it hit the record low of 0.50% in March 2009, a number of issues must be frustrating savers, with ISA benefits now so small that they are hardly worth the effort.
"It is understandable that people are angry and frustrated, but no matter how much noise they make, neither providers nor the Government are in a position to offer beleaguered savers a quick fix."
:: Better news for homebuyers - with the volume of sales barely half that recorded at the peak in mid-2007, some lenders are trimming rates to attract both new buyers and re-mortgagers.
HSBC's online offshoot first direct has launched a best buy offset tracker mortgage at Bank base rate plus 1.89% (currently 2.39%), with a maximum LTV of 65% and £999 fee.
Meanwhile, Yorkshire BS is stepping up its campaign to boost its market share, and claims it now offers the best buy one, two and three-year fixed rate products. The one and three-year products offer maximum LTV of 75%, while the two-year has a 60% limit.
On the one-year fix, from 2.99%, the fee is only £195.
:: Northern Rock investors could soon lose the Government guarantee which covers every penny of their savings in the rescued bank, bringing them into line with the guarantee covering the first £50,000 which applies to every other bank and building society.
Kevin Mountford, at Moneysupermarket.com, says: "For those with more than £50,000 in Northern Rock, it is worth noting the current guarantee applies for three months after the announcement next week. In the case of fixed-term deals, the guarantee will run the length of the deal."
The Financial Services Compensation Scheme continues to protect the first £50,000 per person held with each different bank, and up to £100,000 for joint accounts.
:: High five savers
Phone No Rate Account Period Deposit Interest paid
State Bank of India 0207 454 4315 5.25% (F) New Hi Return Fixed Dep Five years £10,000 Yly
Saga 0845 850 0664 5.10% (F) Fixed Rate Savings £1 Yly
Secure Trust Bank 0800 408 2020 3.25% 120 Day Notice Issue 1 120 Days £1,000 Quarterly
Cheshire BS 0800 195 1514 3.25% 30 day Postal Saver 30 Days (P) £1,000 Yly
Investec Bank 0845 366 6333 3.24% High 5 Three Month (P) £25,000 Mly
:: Top five borrowers
Phone No Rate Period Max% Adv Fee Incentive
HSBC (Rem) 0800 494999 2.29% discounted for two years 60% £1,499 Yes
First Direct 0845 610 0100 2.39% variable for term 65% £999 Yes
ING Direct (UK) 0845 603 8888 2.89% for term 75% £695 Yes
Post Office 0800 707 6204 3.49% variable for term 80% £599 Yes
The One account 0845 610 1060 3.75% for term 75% none Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).
