Charges cut early value of savings

The charges associated with regular premium savings plans that are written as whole-of-life policies will have a significant, negative impact on the early values of the policy because they are so heavily front-loaded.

Ark Life has changed its pricing structure so that only the first

six months worth of contributions are lost to charges and commissions, but other companies such as Hibernian and New Ireland (up to 24 months), Irish Progressive (20 months), Eagle Star and Friends First (18 months), Irish Life (16 months) persist in taking up to the first two years worth of contributions, with none of the policyholder's money allocated to the investment fund. This isn't a problem if life cover is the prime motivation behind the policy, but it does represent bad value if you thought your policy was mainly for savings purposes or if you were never sure in the first place that you could maintain the premiums (which are usually double a straight term-assurance policy.)

But it isn't just regular savers who should be conscious of charges. Even lump-sum investors should be aware of the impact that charges can have on their investment.

GA Life, the latest newcomer on the life assurance scene has relaunched its Portfolio Bond, a five- or 10-year investment bond to which they are adding a first anniversary bonus of 1-1.5 per cent of the value of the bond (depending on whether you invest less than or more than £15,000.)

The table shows how this bond would perform against others on the market if they all performed at a steady 7 per cent per annum is a perfect example of the effect of the different charging structures being applied by a number of life companies.

The examples are £10,000 and £50,000 lump sums invested for five years and 10 years each. Because of charges such as commission, the company's initial set-up costs, ongoing management fees and policy fees, the difference between the top and bottom performers after the £10,000 has been invested for five years is £439 and after 10 years, £1,172. The difference between the companies after the £50,000 has been invested for five years is £1,827 and after 10 years, £5,958. (GA Life's own maturity values are artificially inflated because of the first-year bonus, which amounted to £107 for the £10,000 investment and £750 for the £50,000 which it has included in its figures.) Companies such as Ark Life and Irish Life (and Equitable Life, which has the lowest charges of all) are usually quick to point out that their lower initial charging structures mean that early encashment values, say, over the first five years, are inevitably better than the likes of GA Life, Eagle Star and the others. This, they say, is of great benefit to anyone who is forced to cash in their bond before maturity. However, higher annual management costs have a longer-term negative impact for Ark and Irish Life and their final maturity values will nearly always be lower than the others, even if they all achieve exactly the same annual growth rate.

Those considering buying an investment bond should check the pricing structure and the current and past performance of the fund manager before they opt for any single provider. A fee-based, independent financial adviser or broker will be able to provide all this information, and because he/she is not relying on a commission payment from the insurer, will also include products from the bank assurers and The Equitable Life, neither of whom pay broker commissions.