For MIP read RIP | Investments

For MIP read RIP

Insurance sales outfit City Financial Partners specialised in pulling young people off the streets, subjecting them to a high pressure sales routine and expecting them to sign up for a high commission paying policy.

In many cases, first-time savers emerged with a 10-year savings plan - known in insurance jargon as a maximum investment plan (MIP).

This week Lincoln Assurance, City Financial's owners, was hit with a £485,000 fine for mis-selling MIPs. It will also pay out £8.8m in compensation with an additional bill of up to £16m if more City Financial customers complain.

But a new Jobs & Money investigation shows it was not just Lincoln and City Financial which were guilty of selling the wrong products.

Major high street banks and top life companies also sold 10-year plans - in most cases to customers for whom a MIP was an expensive and inappropriate mistake. It was a mis-selling scandal that will bring further shame to a life insurance industry still reeling from the endowment crisis and personal pensions mis-selling.

In some cases, 10-year savings plan sales amounted to systematic and institutionalised mis-selling as other more suitable investments earned banks and salespeople a mere fraction of the return on the MIP.

Figures from Money Management magazine suggest that more than one million plans are currently held. These are worth around £10bn.

Concerns over MIPs centre on costs, the lack of flexibility and the tax treatment. In fining Lincoln, the FSA said: "The selling methods led to young, single customers being recommended unsuitable, inflexible 10-year savings plans when other more flexible products such as Isas were available."

Direct selling firms have been keenest at selling MIPs. But many IFAs have refused to touch them.

"As a long-standing IFA, I have never sold a MIP as alternative arrangements offer better value for money, better tax deals and greater flexibility," says Andy Dixon of Leamington Spa-based Beauchamp Financial Services.

He cites a customer who went to Allied Dunbar in 1998. "He ended up with a £50 a month high cost MIP. After one year - and £600 - his plan was still worthless. Now he has paid £2,650 and it is worth £1,835. His policy has to grow by 3.4% a year, just to stand still in value."

"Many MIP sales are impossible to defend," says Kevin Paterson at IFA Park Row. "Companies often gave sales staff a script which said they were halfway between a building society account and a long-term plan but with tax freedom. They are far closer to a unit trust and the tax angle is being economical with the truth as the funds are taxed internally."

But banks and others selling a £100 a month insurance-based MIP could earn £600 upfront. The same investment into a Pep or Isa style plan was worth just £36 to them.

Products came with beguiling names such as Moneybuilder or Prime Wealthmaker. Now the combination of falling share prices and high, often fixed, costs means these might be better dubbed Moneydemolisher or Prime Wealthdestroyer.

MIPs started off three decades ago as a bright idea. Harnessing the insurance industry's skills in stretching Inland Revenue rules, companies came up with the idea of a regular savings plan with the minimum life cover and the minimum time to maturity to fit in as a "qualifying policy." This produced LAPR - tax relief on life assurance premiums, which offered substantial gains when top tax rates were more than 80%.

LAPR was abolished in 1984. But insurers continued to sell the plans - often to the least suitable customers and with only the most rudimentary of checks.

Gary Harrison was 31 when a man from Commercial Union (now part of Norwich Union) called at his Peterborough home. "He was a very nice chap and he talked me into a £30 a month plan which has just matured. For my £3,600 I shall now get £2,620. I thought I must get at least the life cover of £2,700.

"He only ever offered me this plan. I know the stock market has been difficult, but what about the good years when I started?"

Mr Harrison was not told by the sales agent that 80% of his first year's £360 would disappear in charges. There was also a £2 a month fixed deduction, a 5% deduction for buying units - plus a 1% management charge.

This product has now been withdrawn. Norwich Union defends the plan as it offered a lower risk than a Pep because it could invest not only in equities, but also property, gilts and corporate bonds at a time when Peps could only invest in equities. But Nor wich Union was unable to explain why such an invest- ment spread should be so much more expensive.

Reading resident Jenny Embery, now 62, went to what was then the Midland Bank (now called HSBC) 10 years ago.

"All my money was in that bank and I wanted some help with boosting my retirement pay. I was working part-time for the Intervention Board, which looked after agricultural subsidies," she says.

But her savings ended up subsidising Midland Bank's profits. She was sold a £55 a month 10-year MIP with Midland Life (now HSBC Life), where half the first year's premiums disappeared into the insurer's coffers.

"I was asked what I could afford. The adviser pointed me to the insurance plan. There was no choice and I ac cepted it. It was called Moneybuilder and that's what I thought it would do. I was never aware I could lose my money," she says.

"I shall get £5,120 compared with the £6,600 I have paid in. The bank has asked me to continue with the investment. But I want out - I'll put the money towards a new car for my husband."

HSBC head of savings and investments Mike Watson says: "It was a policy with a structure in line with its time. We introduced Moneybuilder in 1988 and withdrew it in 1993 when better products became generally available."

But many continued to offer MIPs. Abbey National Life started selling 10-year plans in 1993. In common with most MIP providers, the majority of investors went into a managed fund. These invest in a range of stocks and shares, gilts, bonds, property and cash although the equity element is predominant. It no longer sells the plans.

Abbey National has been unable to tell Jobs & Money why the costs of this plan were so much higher than a unit trust Pep or Isa regular savings plan. But it said: "They are of particular benefit to basic rate taxpayers. It provides a cash lump sum at maturity with no further tax liability to basic rate income tax or capital gains tax."

Mr Watson at HSBC disagrees. He says: "The plans have some advantages for higher rate taxpayers." IFA Andy Dixon adds: "There are tax disadvantages for the average person."

And Amanda Davidson of Holden Meehan says: "These are only worth contemplating once the capital gains exemption and the Isa allowance is exhausted." But even around the time Abbey National Life was launching, IFAs were warning the plans were unsuitable for most people.

"They are a tax planning tool for the reasonably wealthy, not a savings vehicle for most people," said IFA Chase de Vere in 1994. Performance figures are hard to come by. Insurers are under no obligation to publish results, while magazines such as Money Management no longer publish surveys.

"We last wrote about them in January 2000. Many companies refused to supply details. Now so few are sold that we no longer carry figures," says deputy editor of Money Management, Nicole Pedersen-McKinnon.

But as the dire figures continue to come in, more consumers will be complaining.

In January 2000, IFAs Towry Law were quoted in Money Management saying: "From a technical point of view, 99% of these plans are unsuitable."

Unless you are part of the 1%, our guide to filing a successful mis-selling complaint can help gain you cash compensation.

What to do when you complain

Lincoln policyholders mis-sold 10-year savings plans will each pick up an average £1,809 in compensation. Lincoln reviewed customers to identify losers.

But consumers with other 10-year insurance-based savings plans will have to complain. The Financial Services Authority has no plans to force other insurers to check potential mis-selling.

To squeeze the maximum from the complaints procedure:

Start with either the independent financial adviser who sold the policy or the insurance company if the purchase was from a bank or tied agent. You cannot go to the Financial Ombudsman Service until you have exhausted this channel of complaint.

Never concentrate your complaint on financial losses alone. Most policy small print has a warning of losses even if it is written in insurance-speak.

Refer, however, to your attitude to risk. A strong line is that you were unaware you were entering a stock market-based investment as the documentation made the policy look like a safe savings plan.

Always look at the suitability of the product for your needs.

Question the tax angle in these plans if you were a basic or zero rate taxpayer at the outset and there was every expectation you would remain so.

Ask if a product with variable payments or with a pull-out without penalty would have been more appropriate. Mention the likelihood of variable income and of potential lifestyle changes such as marriage, children or divorce.

Consider whether there were other more suitable savings schemes with lower costs at the time even if they were not sold by the firm in question.

Check the relevance of life cover for your circumstances. Single people without dependent children rarely need cover, - neither do retired people, those who have paid off home loans or anyone with substantial cover already.

Case study

Health and Safety Executive manager Keith King wanted a tax free Tessa or Personal Equity Plan when he went to Abbey National in Harrogate in November 1995.

He came out with an Abbey National Life 10-year regular savings plan at £100 a month where half of the first year's premiums disappeared into charges. He also lost a slice of every subsequent payment. Since then he has invested £10,000 - but his plan is worth little more than £8,000.

Mr King, now 53, wanted "a fixed sum to be available in late 2005" to help repay his Abbey National home loan which matures in December 2005.

"I was told this was better than a Tessa or a Pep as it was tax free. The leaflet said it was 'simple and flexible'. And there was no suggestion I could lose," he says.

None of these statements were what they seemed. Mr King, who lives in Leeds, was not made aware that while the proceeds of the plan in 2005 would be paid without a tax charge, Abbey National Life paid tax throughout the policy's life at an undisclosed rate.

The flexibility seems to refer only to the ability to switch between a range of Abbey National Life funds. And there is no warning in the product literature that the proceeds could be less than premiums paid.

Out of each £100 invested, £2 goes in a monthly charge while a further £5 evaporates in the gap between what Abbey National Life charges him for units and what it then gives him. In addition, an extra 1% is taken for management charges.

There was £9,000 of built in life insurance but as a divorced man with grown-up children whose needs would be covered by his occupational pension scheme, he had no need of this. His pension plan would also pay out two years' salary. He has no idea of the premiums. His product particulars says "units will be cancelled to meet the cost. The life cover charge is variable at the company's discretion."

He says: "Now I realise I would have done better to have left my money in the bank. There was no clear warning in the literature that I could end up with less than I paid in.

" I just wanted a reasonable return on my savings to help with the mortgage. I went along to Abbey National with a degree of confidence thinking they would have my best interests at heart. They promised a good deal but I've ended up with an inflexible, tax-taking investment where the only guarantee is £9,000 if I die."

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