Junk bond

By THIS IS MONEY
Updated:

 

On June 24, 1999 my husband invested our savings in an Investment Bond with Scottish Mutal after receiving advice from a financial adviser at the Woolwich, where we hold an account. He had taken early retirement and needed a monthly income. For the first three years the bond gave a good return with a bonus, but over the last two years we have had no bonus or even interest on the money and payments are now being taken from out capital. The Woolwich has advised us to take 7.5% each year instead of a monthly income so that we may at least get some interest. We have been told that when Abbey National become involved, the bond became a less successful investment and Woolich is looking in to this matter. We have had no notification from Woolwich, Scottish Mutal or Abbey National that they had taken over this bond. Should someone have told us? To take our money out will cost us £15,000. JT, Southsea

Ben Willis at Chartwell Investment says: The important question both of you should be asking yourself is: should we encash the bond?

The Woolwich has advised you to take withdrawals of 7.5% per annum from the bond, but because there is no bonus rate and your investment is not growing you are, in fact, taking 7.5% of your capital each year.

If you are looking for income combined with, at least, preservation of capital, you will have a long wait before your bond starts providing this again - indeed it may never happen. If you encash you are looking at a penalty (known as a market value reduction - MVR) of £15,000. Therefore, you have a number of options available to you. These are:

1. Sit tight and hope that the bond's performance improves and bonus rates are declared again - this is unlikely to happen for a good few years yet as Abbey recently stated that their first priority was to reduce the MVRs on Scottish Mutual policies before declaring bonus rates.

2. Sit tight and hope that the bond's performance improves and reduces the MVR penalty - again, this will be a slow process because the fund will hold a small level of equities and it is this part of the fund that will determine MVRs - e.g. if equity markets perform well then the equities within the fund will boost the fund's performance and in turn the MVR will reduce.

3. Encash the policy and suffer the MVR - this is a big step but and it is always hard to suffer a loss but this option should be seriously considered, as by doing this you can then access your remaining capital.

You can then reinvest this in an alternative investment vehicle that provides a regular income, such as a Distribution Bond, and if you reinvest into the right investment you may find that over 5-10 years you could make up most, if not all and more, of your loss.

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