Question
Scottish Friendly offers a Moneybuiler plan where saving £50 month (increased by 20% a year over first five years) for15 years gives a minimum guaranteed lump sum of £14,795. Is this good way to invest or are there better alternatives?Answer
In my view there are plenty of alternatives that will potentially be much better.
The Scottish Friendly Moneybuilder plan is effectively a type of endowment (technically it's called a 'qualifying policy'). As with most endowments there are two big potential drawbacks: high initial charges and the money being invested in a 'with-profits' fund.
Rather shockingly your first two years of contributions are taken in full as charges, so surrender within the first two years and you'll get back zilch. The underlying with-profits fund also seems to charge 1% a year. According to Scottish Friendly's illustration the net impact of these charges would be to reduce a 5% annual return to just 2.4% - that's pretty expensive.
The plan itself pays tax on income and gains (at around basic rate) but there's no further personal tax to pay if you hold until maturity.
Based on your £50 contribution (which rises by 20% a year over the first 5 years) at maturity after 15 years you would have contributed a total of £16,200. The guaranteed minimum you'll get back is £14,795, with any amount above this depending on investment performance of the with-profits fund.
While with-profits isn't a bad concept - spread your money across shares, bonds and property then hold back some profits each year to smooth returns (during bad years) over time - it tends to be far too opaque. Finding out exactly how your money is invested within the with-profits fund and how it's performing is difficult - at best you might be told once or twice a year (to prove my point the 'how we invest your money' document relating to the Moneybuilder plan doesn't specify exactly what the with-profits invests in nor the actual split between different assets such as shares and bonds). And much of your potential return might rest on a final bonus paid at maturity (in effect your share of held back profits), which is unknown until that time.
The plan also offers nominal life cover (as qualifying policies are obliged to do), so double check how much this is (the minimum allowed is three quarters of the total premiums paid over the term, so £11,700 in your case).
If you've already started the plan you'll have to weigh up whether it's worthwhile taking a hit short term (due to the first two year's contributions being taken as charges). If you haven't then I'd give it a miss.
Potentially better alternatives (although no life cover) include using your ISA allowance via a discount platform/broker to hold low cost stock market tracker funds and corporate bond funds (or multi asset funds that combine both plus others). There's no guaranteed minimum return, but costs should be significantly lower (certainly under 1% a year in total).
Scottish Friendly offers a Moneybuiler plan where saving £50 month (increased by 20% a year over first five years) for15 years gives a minimum guaranteed lump sum of £14,795. Is this good way to invest or are there better alternatives?Answer
In my view there are plenty of alternatives that will potentially be much better.
The Scottish Friendly Moneybuilder plan is effectively a type of endowment (technically it's called a 'qualifying policy'). As with most endowments there are two big potential drawbacks: high initial charges and the money being invested in a 'with-profits' fund.
Rather shockingly your first two years of contributions are taken in full as charges, so surrender within the first two years and you'll get back zilch. The underlying with-profits fund also seems to charge 1% a year. According to Scottish Friendly's illustration the net impact of these charges would be to reduce a 5% annual return to just 2.4% - that's pretty expensive.
The plan itself pays tax on income and gains (at around basic rate) but there's no further personal tax to pay if you hold until maturity.
Based on your £50 contribution (which rises by 20% a year over the first 5 years) at maturity after 15 years you would have contributed a total of £16,200. The guaranteed minimum you'll get back is £14,795, with any amount above this depending on investment performance of the with-profits fund.
While with-profits isn't a bad concept - spread your money across shares, bonds and property then hold back some profits each year to smooth returns (during bad years) over time - it tends to be far too opaque. Finding out exactly how your money is invested within the with-profits fund and how it's performing is difficult - at best you might be told once or twice a year (to prove my point the 'how we invest your money' document relating to the Moneybuilder plan doesn't specify exactly what the with-profits invests in nor the actual split between different assets such as shares and bonds). And much of your potential return might rest on a final bonus paid at maturity (in effect your share of held back profits), which is unknown until that time.
The plan also offers nominal life cover (as qualifying policies are obliged to do), so double check how much this is (the minimum allowed is three quarters of the total premiums paid over the term, so £11,700 in your case).
If you've already started the plan you'll have to weigh up whether it's worthwhile taking a hit short term (due to the first two year's contributions being taken as charges). If you haven't then I'd give it a miss.
Potentially better alternatives (although no life cover) include using your ISA allowance via a discount platform/broker to hold low cost stock market tracker funds and corporate bond funds (or multi asset funds that combine both plus others). There's no guaranteed minimum return, but costs should be significantly lower (certainly under 1% a year in total).
Read this Q and A at http://www.candidmoney.com/askjustin/862/scottish-friendly-moneybuilder-worthwhile
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