This was actually the original post re-posted as I had inadvertently left Burty1969's real name in, though I had deleted his email address. I dont think Burty cared but TMF deleted it. Hence the re-post and messages probably now out of sync. (TMF, it may have been easier just to delete his name)

To: geoffb@offshore-rebates.com
Subject: Fool Boards Reply - Re: Offshore Pensions/l-term savings plans

Burty1969 replied to your message at
http://boards.fool.co.uk/Message.asp?mid=6621844
and opted to have it emailed to you.

Subject: Re: Offshore Pensions/l-term savings plans

Dear Geoff,

New to this board but it appears you are very knowledgeable about certain issues (amongst others about the schemes of Hansard, FPI etc, which I just started with). See herewith below link to the discussions, but on another (wrong) board. I would very much appreciate if you could reply to me with your thoughts about it. Thanks in advance!

Burty

http://boards.fool.co.uk/Message.asp?mid=11101795&sort=whole.........



Dear Burty

Thanks for the message

Just to set the scene slightly so we all know what we are talking about, these are not pension schemes at all. They are whole of life insurance policies with a fixed payment term of years. All they do is to provide a vehicle in which you may accumulate a lump sum of money which you can later use to fund your retirement, buy an annuity, or otherwise use as you will.

However there are much cheaper ways to do this and the main trouble I find with any of these plans is simply one of cost. I don?t personally know anyone who works in the industry who would buy one of these themselves and in fact I have several people who do currently or have worked in the industry as clients myself, if that?s any indication of how they invest.

The second problem I have with these plans is this rubbish about fixed terms and ?initial units? etc. Why would anyone need to have a structured vehicle that obligates you to pay into it for a very long time and penalises you if you should have the gall to ask for your own money back? The bog standard reply is ?some people need the discipline?.? Do you? I don?t. I find people have never been more aware that they need to provide for their old age and they will do so willingly as they know no one will do it for them. They just need help in finding a good and cost effective way, and to be looked after.

Or imagine if you are unhappy with the way its be going, or with the service you receive. Or maybe you have a change of circumstances and you should stop contributing, you are told you are in arrears and you are told your policy might be made paid up if you don?t ?pay up the arrears? within 90 days. Arrears? It?s your own money for God?s sake, not theirs. Can you imagine a bank writing to you to ask why you hadn?t put any money in your account for a month or two if it had no debits linked to it? Of course they wouldn?t. By using one of these plans you are handing your powers and freedom of choice to them, and not an inconsiderable sum for the privilege.

You don?t say how much you are putting into the plan but if you have a look at the policy terms and conditions you will note that 1.5% per quarter (6% in year one right? Plus another 3% in year two, so 9% total) is payable on the contributions you made during the first 18 months BUT it is paid every year on these contributions throughout the entire term of the plan. All 25 years in your case. Let?s assume for easy working that was ?1000 a month. ?18000 x 9% = ?1620 pa. X 25 ?40,500

Additionally you have the 1.2% pa which is on the mirror funds. A mirror fund is basically a life company fund which invests in the underlying fund of the same name run by the managers of say Thames River Capital, Baring, Investec etc. Those underlying funds also have an annual management fee and so you are effectively giving your money to a life company and paying them dearly for the benefit of them passing your money on to a fund management company. Those underlying fund fees may be 1.5% pa or they can be higher, 2% is not uncommon, and you have to add this to the 1.2% pa. So assume that the underlying fund has an annual management charge of 1.5% then you?ll be paying a total of 2.7% in addition to the annual drag on your performance from the ?initial charge?. The reduction in yield caused by this may not look much now, but this is like heading for the North Pole and starting off a yard off course. By the time you are well down the road you are off course.

Should you wish to get out of this plan at all then I would draw your attention to first paragraph 1.10 of the Policy Provisions which basically says if you stop, after 90 days we?ll make it paid up, but the fees continue whether you pay in or not.

Should you wish to get out altogether, I would draw your attention to page 2 Paragraph 5, sub paragraph 5.1. Which says you may surrender the plan any time after the initial period is finished. This should be read in conjunction with page 6 table 1 of the Policy Terms which states that the surrender penalty should you wish to cash in or stop a 25 year plan with 24 years left is 87% of the money you put in during the first 18 months. With 23 years left you?d forfeit 84%, 22 years is 81%, 21 yrs is 78% reducing to 6% in the final year.

Since you would have paid year 1?s fees in year one anyway, you?d then have to hand over 87% of the remainder of your money if you stopped in year 2 of a 25 year term. Who can actually see 25 years ahead though? Who hasn?t encountered unexpected twists in life? I am personally still paying an endowment bought in 1988 for a mortgage I don?t have, and keep getting letters telling me I must increase it as there will be a shortfall on the projected maturity. I haven?t lived in UK since 1992. Would I have bought that endowment had I known this in 1988? No I wouldn?t.

I appreciate you probably didn?t understand all of the above at the time but why anyone who did understand it would subject themselves and their savings to these conditions is beyond me. These plans are sold not bought and the commission is safe once you have made the initial contributions. Ie your financial loss and no one else?s if for any reason you don?t complete the term.

When I have clients ask to save on a regular basis into something like you have, I tell them to save directly into a fund or funds. They could possibly even be the same ones you?d be paying a life company to put your money into for you, but we have no insurer to pay, no huge upfront commission payment to fund, and these people get a discounted entry fee which makes it cheaper than approaching them direct. Clients suffer no ?initial units?, no fixed term, almost certainly no exit penalties and are free to contribute what they want when they want and for as long as they want - within reason. When I say ?within reason? I mean I don?t think any company can cope with a different direct debit sum every month, but if an investor wants to add a bit extra one month, or to miss a month or two due to a change of circumstances, or just to stop altogether, then he or she is free to do that without any penalties of any type. If they should want all or part of that money back? No problem. Also there is no additional 1.2% pa to pay on top of the fund?s own underlying charges. I am not at all telling you this to promote my own business but to tell you what the alternatives are. If can do it, why can?t these others? It?s because of commission. Insurance plans pay large lumps of commission upfront. Funds pay commissions only on a basis of what is put in and when it is put in. This ensures you ongoing service. Who will service and advise you on your life plan in a few years time when the money was earned by the guy who sold it to you and he?s moved on? Only someone seeking to sell you another or more, that?s who.

I appreciate new people come along all the time but over the last 8-9 years I have lost count of the number of times I have written similar posts to the above. I really can?t see any reason why these plans are justified and no wonder numerous life companies have withdrawn from the market in recent years. Don?t buy these products. Almost any time an adviser calls you on the phone and wants to tell you how to save, the default position is almost always via a life company. These are salesmen not advisers.
Mostly the ?referral from your colleague? is because your colleague has been foolish enough to buy one and still thinks it?s from a great bloke or girl that came round to see him. If he knew all of the above would he be referring his friends and colleagues? I think not.

I can see the odd occasion, odd occasion mind you, that investing a large lump sum via a heavily discounted life bond might be justified over buying funds direct, (admin mainly) but I can see no reason to use a long term regular savings product from a life company other than to generate a big fat commission payment.

I would finally add that should you be a UK tax payer when you draw these benefits, withdrawals of profits on these plans now attract income tax at your highest marginal rate whereas for a straight fund if it has distributor status (ie pays out its dividends or yields as it goes rather than accumulates them all into the fund price) it attracts CGT at only 18%.

Isle of Man? The IOM is fine but the life companies seem to think everyone is a money launderer and make it administratively far more difficult to invest than when simply buying a fund.

I hope this is useful and may save someone some money

Kindest regards

Geoff