ANDREW WARWICK-THOMPSON answers your questions. Q) I suspect my feelings of despair are not unique. Being undecided as to the greater prudence of a financial adviser or an agony aunt I am writing to you!
My profile is:
Single woman, aged 50. Salary Pounds 27,000.
Pension disappeared on divorce.
Savings Pounds 40,000 in high-interest 60-day-notice account.
Endowment policy matures 1996.
Freestanding additional voluntary contributions Pounds 140 net per month.
Teachers' Superannuation Scheme contributions dating from 1986.
I have tried two "independent" financial advisers and found them to be unsatisfactory, in that they appeared to be transferring my money to accounts where they earned commission. I have moved to be nearer to my widowed father in North Kent but have not yet bought a home.
I do hope you are able to help me and those in a similar situation. Perhaps you are able to offer me a bona fide financial adviser.
A) I am sure that you are not alone in being sceptical about independent advisers. They have received a bad press recently.
You have not given me information about your planning horizons or objectives but I assume that it is your intention to retire at 60 and that you will want to buy a home in due course. I hope that the following general points of guidance will be helpful.
Since you lost pension benefits under your former husband's pension scheme on divorce your priority must be to build up your own pension rights under the Teachers' Superannuation Scheme. You can either do this by buying "added years" or by paying additional voluntary contributions (AVCs).
I note that you are paying contributions to a freestanding AVC contract. FSAVCs have the advantage over scheme-sponsored AVC contracts that you can choose your own provider and investment medium, but they have the disadvantage of very high charges as the result of commission payments paid to your adviser. Most scheme-sponsored AVC contracts are arranged on special terms which reflect either lower commission or nil-commission terms. Furthermore, you have the added peace of mind of knowing that the scheme trustees will have chosen the AVC provider on the advice of their professional advisers and will be keeping the terms and performance under review. For these reasons I generally advise pension scheme members to use the scheme AVC contract.
In your case, if you stop paying contributions to your FSAVC you may suffer penalties. Generally speaking, if the contributions to an FSAVC have been paid for more than two years the contract will have a "paid up" value if you stop the contributions. In these circumstances you might obtain better value for money by redirecting your contributions to the scheme AVC contract for the next 10 years (to age 60).
However, if the FSAVC has been in force for less than two years you may lose all credit for the contributions you have paid to date if you stop paying contributions. This is really a subject on which you need specialist advice. I suggest that you contact the scheme administrator for details of the scheme AVC contracts and enquire whether the providers can give you some guidance.
Either as an alternative or in addition to your AVCs you could consider buying added years using part of the capital you have invested in the building society. Added years have the advantage that you are buying extra pension benefits from the scheme. With the benefits bought by AVCs, the level is not guaranteed but will depend on a number of variables: the level of your contributions, the investment return net of expenses and the annuity rate prevailing when you retire. I suggest that you ask the scheme administrator for details of the cost of added years.
Regarding your investment in the building society, as a general rule, I do not advocate cash as a long-term investment because it performs poorly relative to other investments. In your own case, there is probably an argument for keeping a cash balance first as an "emergency fund" and second as a deposit for your home when you move into the property market, but any excess over these requirements should be invested elsewhere.
On the assumption that the principal purpose of your investments is to build up capital for your retirement, which is 10 years away, the best kind of investment is probably in equity-based unit trusts. You will need to obtain advice on which unit trusts to purchase from an independent specialist adviser, but most institutional investment funds in the UK invest in equities in the ratio 70 per cent UK and 30 per cent international. This is because as a UK investor your liabilities are in the UK and by investing predominantly in this country you reduce the risk associated with fluctuations in overseas currencies. I would not, therefore, wish to see your unit trust investments being much out of line with this benchmark allocation.
Unit trusts should be bought and held for a number of years; they should not be traded on a frequent basis unless they are invested in specialist sectors. You should invest in one or two good UK equity growth trusts and one general international trust, leaving these investments alone for two to three years, at least, before they are reviewed; don't let your adviser persuade you to trade on a more regular basis, it is unnecessary and expensive.
There are two types of risk associated with equity investment; market volatility and poor stock selection by the manager. The type of equity unit trust that you buy will determine the extent to which you are exposed to these risks:
* "Actively managed" trusts are subject to both types of risk.
* "Passively managed" trusts (often referred to as "indexed funds") aim to exactly replicate an investment market, eg the UK equity market, thereby removing the risk associated with poor stock selection.
* "Guaranteed equity" trusts are passively managed and, in addition, use the futures and options market to guarantee that the value of your investment will not fall. For example, such a trust might offer you an investment return of the greater of your initial investment and a percentage of the upwards movement in a market index (if any) over the next five years. Such trusts eliminate the risks associated with both market volatility and poor stock selection.
You should ask your adviser to explain the relative merits of all three of these kinds of trust before you decide which one, or combination, suits your attitude to risk.
On using insurance policies ("endowment policies") as investments, the simple advice is "don't". Insurance policies are good for providing protection, such as a lump sum for your dependants, but they make poor investments compared to, for example, unit trusts and PEPs. When your endowment policy matures in 1996 don't take out another one; if you want a regular savings plan to replace it, take out a unit trust PEP and if you need protection, eg as security for your mortgage when you buy a home, take out a term assurance policy.
Andrew Warwick-Thompson is a lawyer who works for Bacon and Woodrow, the international firm of actuaries and consultants. Readers who wish to put questions to him (no names will be published) should write to Personal Finance desk, The TES, Admiral House, 66 -68 East Smithfield, London E1 9XY (fax: 071-782 3200). No personal correspondence will be entered into and no legal liability accepted for the advice offered.