Beware of fraudulent investment bond sales that could cost you Â£ 20,000 within five years
Hundreds of thousands of savers are misled into locking their money into a clearance sale of fraudulent bonds.
One of those expensive investment bonds is being sold every business minute to unwitting savers who don’t realize that they are locking up an average of Â£ 50,000 at a time for half a decade.
The high fees on these bonds mean that investors might be worse off after five years compared to what they might have earned if they had invested in a common equity fund. And anyone who wants to withdraw their money faces a fine of Â£ 4,500.
Thousands of savers are caught in a fraudulent bond clearance sale
Despite this, more than 186,000 people have been invited to subscribe to investment bonds in the past 12 months. There is growing concern that this is due to the massive bribes paid to sellers – Â£ 4,000 on a typical investment.
Jason Witcombe, independent advisor at financial planner Evolve, said: âThere are still a lot of people selling bucket-load investment bonds.
âIf, as an advisor, you are only there for the money and don’t care about your clients, this is what you would be selling.
âThe fees are all bundled together so that an advisor gets a colossal commission up front, but it’s built into the pricing structure – it looks like you, as an investor, don’t pay anything at all. ”
Investment bonds are old-fashioned insurance policies, originally created as a long-term home for a lump sum of cash. They are issued by insurers, but mainly sold through banks and independent financial advisers.
Isa funds can offer much better returns than investment bonds
Their high fees, harsh exit penalties, and punitive tax burdens make them inappropriate for most investors.
But some advisers routinely ignore dozens of cheaper options when savers hand them a pot of money. Most are probably better off in regular funds invested through an Isa, where savers get tax-free growth and income and can access more than 2,000 cheaper equity and equity funds. .
Just under Â£ 9 billion was invested in investment bonds in 2011, or around Â£ 50,000 per investor. These savers run a very real risk of negative returns, even when the stock markets rise.
A lump sum of Â£ 50,000 invested in a typical investment bond could earn as little as Â£ 47,802 after a year due to high exit fees and taxes, even if the underlying investments increase by 6% on the period.
In contrast, Â£ 50,000 invested in a typical Isa equity and equity fund would be worth Â£ 50,682 on its first anniversary, after standard fees and 6% growth.
This gap is widening over time. After 20 years of steady 6% annual growth, the Â£ 50,000 lump sum would be worth Â£ 97,574 in an investment bond. The Isa is believed to have reached Â£ 116,968. Typically, an investment bond offers only a handful of investment options, usually funds managed by the insurer, and the money is taxed 20 percent before anything is done. paid.
So even retirees who don’t pay taxes can’t escape.
Higher rate taxpayers are charged another bill of up to 20% when the obligation is cashed and wealthier wage earners pay 30% more.
Why do advisers have so many obligations?
An impending crackdown by the city regulator is expected to ban the commission.
The Financial Services Authority (FSA) wants to remove any incentive for advisers to push people into potentially inappropriate investments such as these.
But the new rules won’t come into effect until next year. In the meantime, some unscrupulous advisers are taking as many last-minute commissions as possible on investment bonds, putting savers at risk. One advisor described it as a âfire saleâ.
Patrick Connolly, independent financial advisor at AWD Chase de Vere, said: âThere will be advisers whose basic investment regime is investment bonds, probably for many years – and the reason is. is that bonds pay a higher commission than other products. ‘
Dennis Hall, independent advisor at Yellowtail Financial Planning, has not recommended an investment bond for ten years.
He says the charges are “designed to cause confusion” and he wants the FSA to take urgent action, rather than wait until the commission is banned in 2013.
Prudential, a major player in investment bonds, says it’s “misleading” to compare fees on investment bonds with a common equity fund, which he says has a wider range. hidden costs.
His spokesperson insisted that there are many cases where bonds remain the right option for savers, such as estate and tax planning.
Legal & General, another provider, says it already offers a commission-free version of its obligations “for clients who prefer to pay for advice.”
A spokesperson told Money Mail that the insurer is hoping for even greater interest from investors when the bonds become less opaque following the commission ban.
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