The high price of choosing the wrong savings scheme

There are startling differences in performance, says Nic Cicutti

Choosing the wrong insurer to look after your money can cost tens of thousands of pounds, according to a new survey out this week. A combination of high charges and poor performance could actually leave investors nursing a loss after 10 years, the report on unit-linked savings plans points out.

Among the most startling difference in returns identified in the joint survey by Money Marketing, a financial magazine, and the accountancy firm KPMG, is the pounds 51,061 produced on a pounds 10,000 investment over 10 years by Skandia Life's Gartmore Honk Kong Fund. The same money invested for 10 years in the Allied Dunbar American Property Fund would have fallen to pounds 8,947.

Unit-linked schemes are investment products used for a variety of purposes, including pensions, mortgage repayment schemes and savings plans. Sold by life insurance companies, they differ from with-profits endowment schemes in that they are more directly linked to the value of the equities in which they invest.

In recent years, unit-linked schemes have gained in popularity as some savers have become wary of the "smoothing" of investment returns promised by with-profits schemes.

This survey of unit-linked schemes, aimed at financial advisers, has used a new yardstick, originally developed by the Office of Fair Trading, allowing savers to assess at a glance the 58 companies which have taken part in the survey.

Products are rated on a sliding scale from A+ to C- for three different characteristics - the amount paid back on early surrenders, mid-term surrenders and final maturity values. These characteristics allow savers to check both the charges levied on products and their actual investment performance.

The three ratings are grouped together to allow savers to see instantly which companies are good or bad. Generally, a company which manages to achieve a BBB rating or above can be considered reasonable.

Sandra Grandison, editor of the report, says: "The survey will enable financial advisers and consumers to judge the merits of the most suitable products not only by identifying companies that provide good returns on investments and have competitive charging structures but also by comparing [them] against each other.

"It should be remembered, however, that these ratings are not the only areas to be considered. Product design, flexibility and service must also be taken into account."

The new rating system raises the question of what weight to give each individual aspect that it describes. For example, investors who are convinced that the stability of their financial lives is such that they are not likely to want to surrender their policies early can opt for a lower first letter (B- or C+) in return, where possible, for a higher final letter (B+ to A+).

Alternatively, savers who believe that low charges are more important in the long-term than a fund's past performance can pick accordingly.

That still leaves the question of whether one is better served by looking at charges first and performance later, or vice versa.

John Jenkins, an actuary at KPMG who produced the report says: "My own personal feeling is that charges are the first thing to look at. It is asking a lot of a fund whose charges are 1 per cent higher than another to outperform it by that amount each year for 25 years."

However, Roddy Kohn, an independent financial adviser at Bristol-based Kohn Cougar, says: "Performance is one of those subjective pieces of information where you can prove anything with statistics. But the truth is that the right performance will outweigh charges."

Copies of the survey are available (pounds 3.75 inc P&P) from Money Marketing Customer Services, St Giles House, 50 Poland Street, London W1V 4AX. Or call 0171 292.3707.

PICK OF THE BUNCH

Past performance - managed fund

10-year maximum investment plan (MIP)

Company Early surrender (2 years)/

mid-term surrender (5 years)/

maturity (10 years) Clerical Medical AAA

Friends Provident BBB

M&G Life BBB

Norwich Union BAA

Scottish Amicable AAB

Skandia Life BAA+

Standard Life BBB

Typical surrender and maturity figures

2 years 5 years maturity

C to C- pounds 720 pounds 3,886 pounds 11,767

C to B pounds 1,101 pounds 4,366 pounds 12,440

B to A pounds 1,483 pounds 4,846 pounds 13,113

A to A+ pounds 1,864 pounds 5,326 pounds 13,786

Based on male aged 29 investing pounds 70 a month.

Own charge projections - 25-year mortgage protection plan

Company Early surrender (3 years)/

mid-term surrender (10 years)/

maturity (25 years)

Abbey National Life BBA

Clerical Medical BBA

Equitable Life A+A+A+

Legal & General BBA

Norwich Union BBB

Scottish Amicable BBA

Scottish Widows A+AA

Standard Life A+A+B

Typical surrender and maturity figures

3 years 10 years maturity

C to C- pounds 1,083 pounds 11,324 pounds 58,820

C to B pounds 1,747 pounds 12,466 pounds 62,173

B to A pounds 2,412 pounds 13,598 pounds 65,526

A to A+ pounds 3,076 pounds 14,731 pounds 68,880

Based on male aged 29 investing pounds 100 a month. Assumes investment growth of 7.5 per cent, retail price inflation of 4.5 per cent and earnings rising at 6 per cent.