MetLife guaranteed products any good?
|Financial Advice | General
Asked by Highwall, submitted
24 March 2011.
What is your view on met life guaranteed products? How does it work and who provides the guarantee?
Answered by Justin on 25 March 2011
MetLife's guaranteed products work by investing your money in one of three index-tracking funds (which, to varying degrees, split your money between stock markets and fixed interest) and then applying capital guarantees to those funds every one or two and a half years. The idea is they protect you from losing money and help 'lock-in' gains as you go along.
To explain this more clearly let's take a look at MetLife's guaranteed pension plan - The Retirement Portfolio. This is a personal pension that offers access to the above guaranteed funds, both pre-retirement and during retirement when you're drawing an income - this is referred to as the 'Secure Capital' option. You can also opt for a 'Secure Income' option during retirement which guarantees a minimum level of income while leaving your money invested.
So, suppose you're 50 now and plan to retire at 65. You could transfer your pension(s) into MetLife's Retirement Portfolio and choose one of the Secure Capital funds. This means your pension fund will grow based on performance of the chosen fund and you can elect to lock-in any growth each year (capped at 10%) or every two and half years (uncapped) to give a new minimum fund value guarantee. At each 'lock-in' date, your guarantee will be the greater of the previous guarantee and current fund value - and the guarantee itself applies when you reach retirement after 15 years at age 65..
For example, you invest £100,000 and opt for the annual lock-in. After a year the fund has risen 15% in value, so your minimum guarantee rises to £110,000 (because it's capped at 10%) and the fund is worth £115,000. The fund the falls gradually over the next few years to £90,000 (so guarantee remains £110,000) until rising again to 110,000 in year 7. Over the next year the fund rises by 5% to £115,500 and your guarantee rises to the same level...and so on until year 14 when your fund is valued £150,000 and the guarantee is £140,000. The market crashes in the final year and your fund falls to £120,00 - but you'll have a £140,000 pension fund at retirement thanks to the guarantee.
The secure income option promises a fixed minimum rate of income (dependent on your age) for life while allowing you to leave the money invested under the secure capital option. In the above example the income rate for a 65 year old is 4.25%, so you'll receive 4.25% of £140,000, £5,950 a year. The income is deducted from your fund, but is based on the 'Secure Income Base, which is the greater of your initial investment at retirement (£140,000 in this example) and the fund value at every 'lock-in' review. So, if you fund falls you'll just receive based on the guaranteed £140,000, but if it rises you'll receive 4.25% of the new guaranteed amount.
If you die under the secure income option, the death benefit is the greater of your fund value or initial investment less income taken.
This all sounds pretty good, so what's the catch? In a word - charges.
The problem with investment protection is that it costs. And the cost could end up outweighing any benefit.
In the above example, you'd pay an annual pension charge of between 0.5% and 0.7% (depending on amount invested). You'll also pay between 0.5% and 1.95% a year for the secure capital index funds (the shorter the period guaranteed, the higher the cost). And on top of this there'll be fees or commissions for financial advice. So, if you want protection over 10 years on the conservative index fund (I can't really see the point in buying protection for longer periods) on a £140,000 pension pot you'll pay a 0.7% annual pension fee, fund charges of 1.95% and probably IFA commission of 0.5% - total annual charges of 3.15%. This is a colossal amount and if we assume 6% annual returns before charges they'll wipe out over half your investment growth.
You might beg to differ, but I just don't see the point of paying such high fees for protection. You could get similar funds (without protection) within a stakeholder pension or low cost SIPP for well under 1% a year.
The secure income option in retirement could, in theory, make more sense if you'd like to draw income from your pension rather than buy an annuity. The MetLife route should prevent you from running out of cash to pay a lifetime income.
But compare the 4.25% for a 65 year single life income to current level annuity rates of around 5.5% and you're around 1.25% a year worse off. Yes, your pension fund could grow, in which case so could your income, but I think the chances of this are fairly slim after income and charges are deducted.
Under the secure income option protected fund charges reduce to between 0.55% - 1.55% (depending on fund chosen) but add in the annual pension charge and adviser commission and you'll still probably be paying over 2% a year in charges while being invested in fairly cautious funds.
The guarantee is provided by MetLife as far as I can see, so if they fail the guarantee fails. In the event of default you should be covered by the Financial Services Compensation Scheme for 90% of what you're owed with no upper limit.
In summary, I don't particularly like these types of product. I guess they have their place and some people may well be quite happy to pay for the peace of mind that protection can bring. But the cost of protection is so high on periods of around 10-15 years I'd rather take a bit of sensible risk and pocket the savings.