IF you had to guess at the most likely reason for disappointing investment returns, you would be forgiven for blaming the investment performance itself. But that is not always the case.
Over recent months, I have had a number of situations where the actual structure of the investments was the culprit.
In one case, one of my UK clients was persuaded by the Royal Bank of Scotland to put some money into a regular savings ISA. His bank had rightly identified that he was a higher-rate taxpayer but a ‘cautious investor’, and the fund selected was indeed in line with his attitude to risk. And of course, an ISA is tax free for UK residents. However, when you looked into the charging structure in place, and compared it to the fund’s investment performance, the charges had wiped out all of the growth. In real terms, his tax-free savings would have been losing money as inflation gnawed away at his capital value.
In another example, a new client had an old pension policy dating back many years and, sadly, he had a very short life expectancy. Because his policy was a very old type, on his death only the premiums paid would be returned to his widow. They amounted to a few thousand pounds. This was a fraction of the fund value available to purchase pension benefits; or, in his case, to transfer to a new pension plan that would pay 100% of the fund value tax free, on his death, as most modern contracts do.
Before he became my client, one local resident had invested money in a Spanish compliant offshore investment bond. Then he had a change in circumstances, and needed access to his money to return to the UK. He had found a property he wanted to buy but could not sell his apartment in Spain. No problem, the bond had sufficient value. However he then discovered that, because of the way it had been set up, his bond still had a sizeable early-encashment penalty. This was due to the excessive level of commission his adviser, (another bank) had built into the contract. So the surrender value was still less that the amount invested, despite his funds showing some growth!
Whilst it is not always possible to remedy the situation, as I was able to in the first two examples, it is always worth reviewing pension and investment plans, just to make sure they are offering the best structure for your circumstances.
If you are contemplating new investments now, make sure you understand how the charges work and that your adviser is not building in high levels of commission for themselves which you will end up paying for through the plan charges.