Zombie funds are proving to be a bit of a dead loss for investors, and they certainly aren’t a good vehicle to invest in to save to buy a pension annuity income with. There are about ten million savers trapped in with-profits funds that are now closed to new investors, and these continue to receive pretty poor pathetic returns, according to a recent report from Money Mail.
Many policies are actually delivering less than half the growth of stronger insurance funds, leaving many investors some tens of thousands of pounds out of pocket. Some will see no profit at all on their money despite saving for ten years or longer. Yet these insurance companies continue to rake in charges and commission knowing that investors are trapped by some harsh financial penalties known as market value adjustments (MVA’s). These are supposed to reflect falls seen in the stockmarket, but merely provide something of a get-out for insurers’ appalling ongoing investment management.
These ‘zombie funds’ hold more than £110 bn of pension fund savings, mortgage endowments and other life assurance savings. But they are now run by what some call vulture companies, interested in doing little more than running down the various funds at minimum cost. Money Mail has recently trawled through reports sent by insurance companies to the watchdog, the Financial Services Authority (FSA), and they compared their performance figures with that of one of the strongest firms that has kept its with-profits fund open to ongoing business, the Prudential.
On a 25-year endowment plan taken out by a man aged 29 who has saved £50 per month, Prudential is paying out £37,738, while National Provident Life (NPL) pays only £25,099. Given that the investor contributed £15,000, the actual profit is £22,738 with Prudential and £10,099 with NPL. With a 20-year pension plan, savings of £200 per month produced a pension fund of £96,328 with Prudential, but only £63,440 with Pearl. Deduct the £48,000 contributions made and Prudential’s profit is £48,328 compared with £15,440 with Pearl. Converted into an annuity, this would leave the Pearl saver around a third, or about £2,300, worse off every year for the rest of his life, and that’s even with the best annuity rates.
The other area to have been hit hard is with-profits bonds. Potentially, this is probably worse because at least savers with endowment plans and pensions have a fixed-term contract from which they can ultimately escape. However, some of these with-profits bonds have no fixed term and there is no escape unless investors pay a hefty exit penalty. These bonds are typically sold to retirees who invested a lump sum hoping for a reasonable income. Instead, many bonds pay no income and have delivered little growth.
Other with-profits funds which have really let down their investors include AMP, Axa Equity & Law, Britannia Life, Crusader, Equitable Life, Life Association of Scotland, Royal Life, Scottish Provident, Scottish Mutual as well as Sun Alliance. With-profits were widely sold to consumers in the 1980′s and 1990′s by insurance salesmen looking for large commission payments. When investors bought these products, they were promised their money would be put into a managed fund investing in a mixture of shares, property and fixed interest. But many closed funds these days have changed their investment mix so they hold very little in shares, and this means that when the market starts to recover, these funds will not benefit. As an example, the £5.2 bn NPL fund has 80% in bonds and nothing in shares. This compares with the Prudential fund which holds 51% in shares, 30% in fixed interest, 14% in property and the balance in cash.
Meanwhile, these with-profits funds are lucrative for the insurance industry. On a £5 bn fund, a 1% annual management fee gives the firm £50 million per year. Experts are accusing companies of providing poor administration for trapped savers, suggesting that these zombie funds are a complete disaster for investors, giving poor returns and big exit penalties if you cash them in. And to make things even worse, their administration is pretty diabolical.
So, if you are invested in these types of funds but have a while to go before buying your pension annuity, it might be worth seeking advice to see if better returns might be available in the remaining years to retirement. After all, this will lead to a better annuity income.
