Familiar with the Beatles?
Well this song title on the 1969 Abbey Road album is a perfect analogy of the burden of investing into a pension via a custodian wrapper called an insurance bond or offshore investment bond.
A Full Rucksack
Anyone who has been involved in hiking, camping and mountaineering will know just how much a heavy pack slows you down. How many times have we questioned whether the burden is worth it for any perceived added safety?
Let’s refer to the offshore investment bond custodian sold by advisers who offer clients “Free Financial Advice” and let’s imagine a loaded rucksack. The road to retirement is a long one; far more like a marathon rather than a sprint.
The Race is Fixed
Let’s ask two runners of similar abilities to run a marathon for us- Imagine the top triathlon brothers Alastair and Jonathon Brownlee. They normally finish close to each other but will they if they are carrying differing loads? Alastair will have a 50kg rucksack on his back and Jonathon will have a belt pouch.
“The race is fixed’’, I hear you all cry!
Yet, that is exactly the problem faced by investors that take advice from commission based advisers who place their investments into an insurance bond or offshore investment bond. The high charged (loaded) investments inside the bond don’t stand a chance against lighter loaded alternatives that are just as accessible on the market- but ones that do not pay out large commissions.
Charges
Most rucksacks are sold as being light to carry, i.e. in our analogy the bond charges are sold as having just 1% pa fees, with a small annual fee. The reality is that the rucksack is useless on its own without the gear. In our case, the gear is the actual investments. Once these are factored in, the underlying fund charges and insurance company fees can be anything from 3.4% to 4.3% pa.
Even worse, some of the fees are usually based on the initial investment or the current value if higher. Let’s think about this for a moment! If the investment fund goes down, the fees stay high, which means percentage charges increase in real terms. What was once 4% becomes even higher. Win – Win for the insurance companies and this lightweight rucksack is now heavy.
The Tough Choice
When the going gets too tough, Alastair has a decision to make. Does he soldier onto the end, or does he start again by changing the rucksack to get a better time than he would have done. He will never catch Jonathon, but he may get a better time by ditching the first rucksack.
That graphically illustrates the hard decision that people, who are locked into these insurance bonds / offshore investment bonds, are having to make.
There is a penalty to get out of these highly charged products but there is worse ongoing pain if people remain in them. Anyone in these products should get a proper cost benefit analysis before it is too late and the race is well and truly lost.
Have a look at this video:
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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