Savers who want to benefit under the Government Special Saving Incentive Scheme (SSIS) can opt to save in a deposit account or an investment-based account over the five years of the scheme. Most financial institutions are offering products under one or both broad headings.
In Business This Week last week, the deposit accounts on offer from the banks and building societies were examined. This week the investment-type accounts on offer from the financial institutions are assessed. Investment-type Special Savings Incentive Accounts (SSIAs) offer participation in a number of different fund types - high equity content (high risk) to no equity content (low risk). Each month contributions are converted into units within the chosen fund. The value of these units is determined by the performance of the assets in the funds. Therefore, the investor must realise the unguaranteed nature of most SSIS investment accounts - the value of the units can fall as well as rise.
The growth in the value of a saver's funds will come from the investment return earned by their fund, less the charges levied by the financial institution over the savings term. The interaction between these two factors will determine the return to the saver at the end of the five-year savings term. The Government subsidy of £1 (#1.27) for every £4 saved each month will be invested with the saver's funds.
Decide on a level of risk: Investment-type SSIAs offer the prospect of returns ahead of the return available on deposit accounts. But these investments involve risk and, depending on the risk level of the chosen account, can be volatile.
Savers should decide the level of risk they want to take, choosing broadly between low-, medium- and high-risk products. The level of risk with any product will largely depend on the asset mix in the investment fund. A fund with a high content of technology shares, for example, would be considered a high risk compared with a fund comprised of cash, government bonds and property, which would be relatively low risk. Savers should look for accounts that allow switches to more secure investments over the life of the account (see Table 1). For example, a saver could put part of their monthly savings into a cash fund and divide the balance between different investment funds within the same account, switching into a cash/secure fund later if they became uncomfortable with stock market volatility. Do you get better returns from investment SSIAs? Some advisers recommend investment SSIAs on the basis only of potential investment returns, citing the superior past performance of unit funds compared with deposits. However, Mr Norman Barry of Becketts Employee Benefits and Personal Financial Consultants advises caution, stating that this approach ignores three important points:
Past performance of individual unit funds is no guide as to their future returns. Indeed, some funds being cited in support of equity-based investment are no longer open to new savers. But past performance is useful because it can give some indication of the capabilities of the fund managers concerned.
The cited past performance is not the return achieved by savers in those funds, as plan expenses such as bid/offer spreads (effectively an entry charge), management fees and other charges are not taken into account.
The savings term of SSIAs is relatively short for equity-based investments. Because savers are investing each month over the five-year period rather than in one lump sum, the average investment term for the monthly saver is just 21/2 years.
The impact of charges on investment SSIAs: The 28 plans from financial institutions covered in Table 1 apply a variety of different expense deductions or charges to the customer. These include annual management charges within the fund, bid/offer spreads and policy fees. Therefore, not all the contributions are used to buy units. Some institutions apply different expense factors to the saver and Government contributions.
The individual components of the charges are complicated and vary from institution to institution. But all that matters to savers is how the combination of charges on the products they have chosen will reduce their investment return. This is called the reduction in yield (RIY). Table 1 shows the RIY over 5 years for each plan, based on an assumed £100 per month contribution. In the plan with the lowest cost - from Quinn Life - the returns for the saver will be reduced by 1.1 per cent per annum, while the plan with the highest charges - Acorn - will reduce the savers annual returns by a whopping 7.6 per cent each year over the five-year term. The average RIY is 2.4 per cent per annum.
The RIY is like a handicap - the investment fund needs to earn this return first, simply to cover the charges, before it can make a return for the saver. Some plans have more frontended charges - charges applied at the beginning of the five-year term - so their RIY will be higher in the earlier years and will fall over the term of the plan. Table 2, page 3, shows how encashment values at the end of five years can vary due to charges. It is important to consider more than charges: Savers should not assume that the plans offering the lowest charges will necessarily produce a competitive investment return. They need to assure themselves that the fund manager to whom they commit their monthly savings has a proven track record of achieving solid returns.
Savers can check on the performance of a variety of funds and fund managers against their competitors over a sustained period from industry tables, which are published periodically and with intermediaries. While past performance cannot be taken as an indication of future performance, it provides an indication as to the capability of investment managers against their peers. Independent, informed advice, can offer good guidance to savers. At the end of the day, savers who choose their account on a combination of low charges and a potential solid investment performance should get good returns.
Using Table 1: Check that the charges for the products you are considering are reasonable compared with its competitors, that the institution is offering a choice of fund and the flexibility to switch between funds without excessive additional charges.
Then check out the comparative investment performance of the institution through advice from an independent intermediary or through weekly published surveys of fund performances.
Bonus Offers: In Table 1 some plans "jump" in the value ratings, particularly at the five-year stage - the Tusa Go Investment Plan jumps from being a one-star value-for-money plan in years one to four to a four-star plan at the end of five years. This is because substantial bonuses are added to the plan at the end of the fifth year.
However, investors who cash out early will not benefit from these bonuses. These types of plans will only suit savers who have a high degree of certainty that they can save for the full five years, Mr Barry advises.
