Q Can you envisage any circumstances where a single premium free-standing additional voluntary contribution (FSAVC) will grow as much as regular premiums over the investment period? Against my complaint, Abbey National is arguing that there won't be any difference and also asserts that the advice given by its independent adviser in favour of regular premiums was justifiable.
The Abbey says: "This regular premium was appropriately recommended as, according to our records, you had Pounds 2,000 on deposit and it is company policy for our consultants to advise that funds are available to cover emergency expenditure . . . I also believe that there is little difference in the charges between single and regular premium contributions over the investment period." In order to prove the point Abbey National asked the insurance company to produce a graph. This graph does show that there won't be any significant difference which ever way the premium is paid.
Is the Abbey right in what it asserts or pulling wool over my eyes by producing spurious graphs? If the latter is the case, where do I go for help?
A The simple answer to your first question is yes.
The best way to illustrate this is by way of an example. Let's assume that Mr Smith wants to take out a FSAVC policy, pay Pounds 250 per month and that he will retire in 15 years' time. He can either pay the premiums monthly or as a "recurring" single premium of Pounds 3,000 once a year.
Mr Smith needs to know which type of policy has the lowest charges over the 15-year term. There are two ways of doing this; a reduction in premium or a reduction of yield calculation, respectively, RIP and ROY. Bacon Woodrow prefer RIP to ROY because we think it is more readily understood by our clients.
RIP works as follows. The premiums payable over the term of the policy are rolled up at an assumed rate of interest to give a notional pension fund. The same calculation is then done again, but this time making an allowance for the actual charging structure of the policy to be analysed. The projected policy proceeds are then compared with the value of the notional pension fund. The difference between the two values, expressed as a percentage of each premium paid, represents the RIP. This tells us on a consistent basis how much of each premium is absorbed in the policy charges and not invested on behalf of the policy-holder.
I have set out the RIPs for Mr Smith (table A), using the charging structure of a leading insurance company's FSAVC policy which was available in 1991, the year you bought your FSAVC from Abbey National. However, the difference between regular premium policies and recurring single premium policies is much more marked if the premium payments are disrupted, for example, due to redundancy.
Let's assume that Mr Smith pays his premiums for five years but then he is made redundant. I have set out the RIPs for Mr Smith (table B) assuming that he stops his premiums after year five and draws his pension after 15 years. Table B illustrates why we always advise private clients to set pension policies up on recurring single-premium terms. The charging structure of single-premium policies is generally lower than that of regular premium policies. They also offer greater flexibility in the timing and size of contributions and their charging structure does not generally penalise the policy-holder on variation of premiums, early retirement and transfer.
However, where does this leave you regarding your problem with Abbey National and your second question?
Unfortunately, RIP and ROY calculations are sensitive to the level of premium, premium frequency, interest rate and policy term assurance. Therefore, since I understand that you pay premiums monthly, the figures provided by Abbey National are meaningless and you are right to be sceptical. What you require from the Abbey is the RIPs and ROYs for monthly and single premium policies assuming the actual rate of premiums you are paying, the anticipated term to your normal retirement age from 1991 and using the policy charging structure prevailing that year.
Finally, if the area sales manager fails to give you a satisfactory response, write to the compliance officer at the Abbey. If this proves unsatisfactory, write to the Abbey's Financial Services Act regulator, sending copies of all previous correspondence.
Andrew Warwick-Thompson is a lawyer who works for Bacon Woodrow, the international firm of actuaries and consultants. Readers wishing to put questions to him (no names will be published) should write to the 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 will be accepted for the advice offered.