There are small investors and then there are very small investors. The Irish Times received a query from a reader in the latter category who has no lump sum but can spare £50 to £100 (€63 to €127) per month. He is anxious to get started on some kind of personal investment plan but doesn't know what's available and how to get the best product.
Common sense dictates that the sooner you get started on any kind of investment and the longer you stick at it, the better. At this level, brokers agree that you have to keep up the investment for at least six or seven years before you will see the benefits. It's important to remember, as they say very quickly at the end of radio advertisements, that past performance is no guarantee of future returns. But when personal investment plans or PIPs are being marketed they do quote past and estimated future returns to give clients some idea of the prospects of the plan.
PIPs are managed funds with broad portfolios, mainly of shares but also including property, bonds and cash. While they offer a limited risk for investors, there is still no underlying guarantee.
The big insurers such as Standard Life, Canada Life, Norwich Union, Irish Life, Eagle Star, Ark Life, Friends First and New Ireland all have investment products that small investors can avail of. When you decide on the sum you are going to invest, you can call around and get quotes on the estimated return after a decent period, say 10 years. With PIPs, the policyholder can opt to indexlink the plan as a protection against inflation. Most plans have an indexation of 5 per cent, which means the monthly payment increases by 5 per cent each year or by the rate of inflation if it is higher.
The customer also needs to establish what charges are attached to the policy. There is usually a policy fee of a fixed amount per month. With the New Ireland Savings Account, the policy fee on a premium of £100 per month is £3.25. Then there is the management fee, in this case 1.6 per cent per annum.
The other standard charge is the bid offer spread, which is around 5 per cent per annum. The units within a particular fund are priced every day and then bought or sold every day. The difference between the bid price and the offer price is split and passed on to the policyholder.
The projected return on a monthly investment of £100 in New Ireland's Savings Account over 10 years with an annual growth rate of 8 per cent is £17,801. Investment vehicles with projected returns along these lines and higher are available from all the big houses, with minimum premiums as low as £30.
Another consideration is tax. At present taxes are paid within the fund and the investor gets a tax-free lump sum when they cash out.
This will all change with new legislation for the industry coming into effect on January 1st next, so it's important to ensure the person who sells you the plan explains how the changes may affect you.
Most PIPs allow the policyholder to increase, decrease and even suspend the monthly payment without penalty, so it's worth ensuring you will have that flexibility. These investment vehicles are ideal for someone who isn't looking for a big bonanza and just wants their money to work for them in the hands of the experts.
