Comparing Savings and Investment

comparing protection | savings & investment | pensions | mortgage products | intro

Main Providers

Banks, building societies and the Government are generally seen as secure repositories for deposit-type savings and investments. Although some National Savings products offer market rates of return, the general return is low. However, the risk with such investments is also low. It should not be overlooked that banks and building societies are commercial organisations open to market forces, and so can flourish or fail as can any other trading organisation. Generally, the greater risk is with the 'newer' companies who may over extend themselves, perhaps being swallowed up by larger concerns or even ceasing involvement in certain sectors. The other side of the coin is the greater freedom now available to building societies and friendly societies to offer a wider range of products, where both product and performance may attract interest away from the traditional sources

Comparing products and providers

Investment objectives:

• Product investment objectives should match your financial goals as closely as possible.

• Factors to be considered:-

  Are your needs savings, investment and/or protection? Are your goals short, medium or long term. How much do you wish to invest? Will the investment need to be accessible quickly - or can the money be tied up for a long period? What is the tax situation?

Surrender values

• It should be appreciated that 'surrender value' for one product will not necessarily mean the same as it will for another - terminology can be confusing

• With profits products have an 'unknown' surrender value because of the nature of the investment.

• Unit linked products will have a clear surrender value because it is calculated on the bid value of quoted unit prices.

• Deposit based products will fall somewhere between the above two in terms of ease of calculation, as the surrender value will depend on interest earned to date, less any penalties for early surrender.

Charges and commission

• All products will have a charging structure depending on some or all of the following factors:-

  Amount and frequency of contribution or involvement. Term of the contract. Ease of access or notice period required. Type of contracts i.e. investment, savings, and protection. Unit linked products generally have explicit charges built into the contract and calculated as a percentage of the value of units. The exception to this rule is the unitised with profit fund which generally allows the actuary to control the unit price in certain circumstances to inhibit the withdrawal of funds. With profits products have implicit charges, taken into account in the calculation of bonuses. Deposit accounts and National Savings products also work on an implicit charge basis. Shares and gilts generally have dealing charges calculated by a combination of flat rate and percentage charges relative to the scale of the purchase or sale.

  
  

• Commission payments are one of the reasons charges are incurred on products, as they increase the cost of selling the product. Where commission is paid on up-front indemnity terms in particular, the cost is heavy, and will usually be funded by reduced allocation of contribution over the first few years.

Risk and accessibility

• Risk needs to be viewed in terms of:-

  Comparative product investment risk. Your perception of risk The size of the portfolio and its capacity to accept different levels of risk in its balanced spread i.e. how much loss of capital is acceptable, will such a loss affect anything else, such as spending plans. Specific factors such as loss on surrender, investment sector risks, opportunity cost of different choices.

• Accessibility is to a certain extent a factor in risk assessment in that the easier the access, the lower the return, and vice versa.

• Accessibility must also be differentiated in terms of time scale in that an emergency fund should have instant access whereas this is not necessary for long term accumulation. Consequently, product accessibility needs to match your plans closely.

Tax treatmet

• Does the product pay out:-

  Gross of tax Net of tax. Tax free.

• You should take into account your current tax rate - will the income tax liability or capital gains tax liability which could arise from the investment take you into the next tax band or over the allowance limits. If this is the case, alternative products may need to be investigated and compared with the key requirements for the product.

• It should be made clear that decisions should not be taken solely for tax efficiency. The tax element should be merely one of the underlying factors which needs to be considered.

Comparing similar products from different providers

• Assuming that a number of providers supply the 'same' product which will fit your circumstances, a number of factors will need to be considered:-

  Charges, including surrender value performance Consistency of investment performance, including bonuses Policy options, and whether they are any additional charges Product guarantees. Flexibility e.g. stopping and re-starting premiums, investment funds available, switching facilities, changing the amount of regular premium.

• The final decision will depend on the prioritising of needs for particular features i.e. those that do not appear as a specific 'need' should not have any weight in the decision making process. Your financial adviser will be able to help you by providing information on all these aspects as well as advice.

Comparing Providers

• The Notes given under Protection also apply here

• In addition, specific attention should be paid to:-

  Consistency of fund performance Consistency of the fund manager's ability to react to the various investment pressures Size of the fund The underlying investment base i.e. where shares are held, size of individual holdings, how active is the management. With investment performance in particular sector funds may be compared against relevant indicators and indices to measure performance.

REMEMBER You should not use any information contained on this page as the basis of any action until you have discussed matters with your financial adviser.