Investors warned to dump outdated 'zombie' products

8 September 2017

Investors have been warned to check their portfolio for old or outdated investment products that could be dragging down their returns.

With news from financial services watchdog, the Financial Conduct Authority (FCA), that it is continuing its investigations into the fair treatment of longstanding customers of Abbey Life, Countrywide Assured, Old Mutual, Prudential, and Scottish Widows (it’s no longer looking into the actions of the Police Mutual), Hargreaves Lansdown is warning investors to check their portfolios no longer contain products which may now have become bad investment vehicles.

Danny Cox, chartered financial planner, at the financial services firm comments that the FCA’s announcement is a “timely reminder of how important it is to keep an eye on products you held for some time”. He adds that: “What once seemed like a perfectly healthy choice might have turned nasty while your back was turned.”

Here are the products Mr Cox recommends investors should avoid:

1. Child trust funds

Since the introduction of Junior Isas in November 2011, Child trust funds (CTFs) have fallen out of focus somewhat, but at one time there were more than 6.3 million children with one. The Treasury no longer publishes information on how many CTFs are out there, so it is not known how many have been transferred into Junior Isas since.

CTFs typically offer lower interest rates than Junior Isas, are more expensive, and have less of a variety than Junior Isas as many providers simply don’t offer them. If you’ve got a CTF, consider transferring it to a Junior Isa promptly.

2. With profits funds

With profits funds pool investors’ money and aim to give you a return linked to the stock market but with fewer ups and downs than investing directly in shares, according to the Money Advice Service.

But Mr Cox says they  have opaque charging structures, are tax-inefficient, and can experience market value reductions. They have little going for them these-days but it is important to consider the costs, tax and loss of guaranteed returns before you withdraw your money out of one.

3. Old personal pensions

Personal pensions, particularly ones from before the turn of the millennium tend to have higher charges for transferring out of the scheme compared to modern self-Invested Personal Pensions (Sipps).

However, changes in have resulted in making transfers cheaper as if you are over the age of 55, the fee for personal pensions is capped at 1%. This came into effect on 31 March this year. The same rule will apply for workplace pensions from 1 October 2017. 

But before you transfer your money, check if you have benefit entitlements with the older pension, such as a guaranteed annuity rate – this may prove more beneficial than transferring as annuity rates are at historic lows at present.

4. Funds bought directly from a fund group

Until recently, funds bought directly from a fund group had double the annual management charge compared to what could be bought through a platform. These 1.5% legacy charges do remain in some cases but can be transferred to a platform and converted to an unbundled share class. This could halve the fees at no cost, and with no tax implication, according to Mr Cox.  

5. Instant access cash accounts

According to Hargreaves Lansdown, 80% of savers haven’t moved their instant access Cash Isa provider for three years. This means the vast majority of savers are languishing on poor rates.

Plus, in a climate with 2.6% inflation,  any account paying less than 2.6% will see your savings eroded.  

For those who don’t want to play a game of account-hopping to keep the best rate, fixed-rate Isas can provide more certainty. Stocks and Shares Isas could return even better rates, but your money won’t be protected by the Financial Services Compensation Scheme (FSCS).

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