Pru's tangled web

By SYLVIA MORRIS, THIS IS MONEY AND DAILY MAIL SAVINGS EXPERT
Updated:

 

PRUDENTIAL is to launch a savings plan next month, designed to put right the failings of with-profit bonds. But its attempt at simplification has produced a plan just as complicated and inflexible as the plans it's designed to replace.

The insurance giant's PruFund Investment Plan will pay 5% a year after charges when it is launched on September 14 for investors looking for growth, or 4.5% for income seekers, net of basic rate tax.

As in with-profits, your money is invested in shares and bonds: in fact, it's going into the same £60bn with-profits fund as the Pru's more traditional Prudence bond.

What's different is the way the plan works out how much of a return you'd get. With traditional with-profits bonds, the actuary decides how much of any profit they hand out every year to policyholders and how much they hold back every year to cover poor investment years.

And they can also make an extra charge at any time - known as the market value adjuster - if stock markets go through a protracted poor period (as investors have recently found to their cost).

Instead, with the new fund there are stated returns. The PruFund Growth Fund pays 5% or 4.5% in the PruFund Growth and Income Fund on a minimum £5,000 investment. But these are not fixed-rate returns. On the Growth Fund, your £100 is predicted to be worth £105 after a year. But the company will adjust this price every three months if necessary. Whether it does depends on the stock market performance.

If the fund misses its target by more than 5% in either direction, the units you hold in the fund will be repriced. The actual adjustment will be half the size of the gap. So if the fund is 8% adrift, the adjustment will be 4% - either up or down.

The price can also move during the quarter in the 'rare event' the fund moves 10% or more out of line with the unit price.

Investors selling during this time can see a 2.5% adjustment to their money.

And the Pru can suspend the formula at any time if there is a rush of buyers and sellers. In other words, this is just like a market value adjuster penalty used on traditional with-profits bonds.

Investors will receive statements every six months, although the daily price will also be available online or over the telephone.

But you have to hold on to your investment for at least five years or you will pay an exit penalty. This will be 9% in year one, 7% in year two then 5%, 3% and 1%.

Charges include an annual management charge of 1.25% a year for the first ten years for growth investors or 1.5% if you take a regular income. Both drop to 1% after ten years.

There is also a set-up charge of 0.25% a year for five years on the growth version and 0.45% for income. If your investment is less than £20,000 you also have to pay a top-up fee of £2.50 a month, which will rise every year in line with the Retail Prices Index - currently 3%.

Patrick Connolly, from independent financial advisers John Scott & Partners, says: 'This is supposed to be simple and transparent, but it is not. With a 5%-a-year return after charges, the Pru has to make a minimum 6.5% a year.

'Investors should be aware this is not a guaranteed rate.'

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