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Life’s Like That!
“Life is really simple, but we insist on making it complicated” Confucius
With a climate of low interest rates some annual bonuses on long term investment products are likely to be reduced. However final bonuses reflect capital gains, which might do better. There's a lot to explain about how different investment products work with regards to bonuses and premiums. To help you evaluate your investment choices, Stuart Bell Chief Executive at Metfriendly (Met Friendly Society) explains further.
At Metfriendly, we offer our members the opportunity to “Save; Invest; Protect”. As a firm offering life insurance, you would expect us to offer protection policies. But it is the regular savings plans and lump sums invested in our “With-Profits Fund” that dominate our business.
We have just sent out benefit statements to all our members, including details of bonuses added to their savings and investments. We also sent a newsletter to explain how well we did last year, and how our bonuses work. Life assurance products differ from those offered by banks, and we do our best to explain this to our members.
Our savings and investment products include an element of life cover – in other words, a death benefit. Sometimes, it can be quite large as with an endowment savings plan. The “Sum Assured” is roughly the same as the premiums payable over the whole period of the plan – but it pays out on death, even if you were to die in the first month having paid us just one premium. Offering this benefit brings certain tax advantages, especially where you save for at least 10 years.
On other products, in particular lump sums, the life cover is much lower – usually just the guarantee that you won’t lose money even where the markets have fallen during the term of your investment. The “Sum Assured” at outset is the lump sum invested. Tax efficiency comes when you choose to invest through an ISA – and we then pay higher bonuses.
For these lump sum products, the similarity to banks, and the differences, are easier to grasp. The annual bonus increases the Sum Assured and is similar to the interest you will earn in a bank. But we don’t pay out all our profits in this way. We keep some back to pay a final bonus. You normally only need to invest for 3 years to get a final bonus when you cash in – but how much you get will depend on how markets have done – and there is a chance that we will reduce benefits if markets have fallen. We do, however, guarantee pay-outs after 10 years of investment.
The same principles apply to the endowment savings plan – we distribute part of our return as an annual bonus, and the rest as a final bonus (after saving for 5 years). But it is much harder to relate the annual bonus rate to an interest rate. We are adding bonuses to the whole Sum Assured, but we are only generating a return on the premiums we have already received. We do, however, aim for consistency in the annual bonus rates across all our products.
Of course, we admit that the different approaches can be difficult to fathom and we are always pleased to talk to our members. Fortunately, trust – supported by good pay-outs – is what most of our members are looking for. When we do explain things, it is easiest with our ISA, where we don’t have the complication of life cover and tax.
Our ISA has been going for 10 years now, and over that period has returned more than 6% per annum. In round figures, that is made up of 4% per annum in annual bonuses and 2% per annum added as a final bonus on cashing in. ISAs can be cashed in at any time – the return over the last 5 years has also exceeded 6% per annum.
Of course, the past is no guide to the future and the make up of returns over the next 10 years will be different. Low interest rates have already had an effect on annual bonuses. But final bonuses reflect capital gains, especially on shares. These have been very poor over the 10 years – and we hope to do better in the coming years.
For further information visit:
www.mpfs.org.uk
or call on
01689 891454
or Metphone
28192
