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Copyright 2003-2004

“PRE - PACKAGED” INCOME PLANS NOT ALWAYS THE BEST DEAL ( Personal Finance March 1999)

Investors utilising lump sums to generate income and capital growth are faced with a wide variety of “Income Plans” from which to choose. Nearly all the Assurers and Investment Houses offer their own versions which go under all sorts of different names.

It is important for investors to realise that these products are made up of two different types of products packaged together. In the first instance there is usually an annuity which requires a portion of the original lump sum and pays back this capital together with interest as an income over say a five year period. At the end of five years this portion of the original capital is depleted. The balance of the original capital is put into a capital growth investment (usually an endowment or unit trusts) and at the end of five years this capital is available to the investor hopefully having grown sufficiently to make up for the depletion of the capital utilised for the annuity.

It is important to note here that these Income Plans are not to be confused with the infamous “back to back” schemes where an annuity is purchased and the income therefrom (in part or whole) is used to fund the recurring premiums of a capital growth investment. The legitimate “Income Plan” invests the funds into the capital growth portion up front (rather than recurring premium) and definitely has a respectable place in contemporary financial planning.

The disadvantages of purchasing a “pre-packaged” Income Plan from one company are many. By also splitting the funds between an annuity and a capital growth investment, a good independent financial adviser can structure a “tailor made” Income Plan for their client. However, the adviser can “shop the market” for the best annuity and the most suitable capital growth investment which may well come from different companies as the company offering the best annuity rate does not necessarily always offer the best investment. The adviser can even take it a step further and spread the investment portion of the capital between a spread of different investments from different companies resulting in a superior overall product.

Despite the flexibility of “tailor-made” Income Plans there are often cost savings too, as the combined charges on a separate annuity and a separate capital growth investment are usually lower than the charges for a “Pre-packaged” Income Plan. Before rushing into an Income Plan from one company, investors should consider the recommendations of an independent financial adviser who can often add value to their clients investment. comment