Open-ended investment companies

Investing in a variety of assets to generate areturn for investors

Open-ended investment companies (OEICs) are stock market-quoted collective investment schemes. Like unit trusts and investment trusts they invest in a variety of assets to generate a return for investors.

An OEIC, pronounced ‘oik’, is a pooled collective investment vehicle in company form. They may have an umbrella fund structure allowing for many sub-funds with different investment objectives. This means you can invest for income and growth in the same umbrella fund moving your money from one sub fund to another as your investment priorities or circumstances change. OEICs may also offer different share classes for the same fund.

By being “open ended” OEICs can expand and contract in response to demand, just like unit trusts. The share price of an OEIC is the value of all the underlying investments divided by the number of shares in issue. As an open-ended fund the fund gets bigger and more shares are created as more people invest. The fund shrinks and shares are cancelled as people withdraw their money.

You may invest into an OEIC through a stocks and shares Individual Savings Account ISA. Each time you invest in an OEIC fund you will be allocated a number of shares. You can choose either income or accumulation shares, depending on whether you are looking for your investment to grow or to provide you with income, providing they are available for the fund you want to invest in

Annuities

An annuity is an investment which will pay you an income for the rest of your life, no matter how long you live. This is achieved by handing over your pension fund to an insurance company in return for an annuity when you retire. The insurer then guarantees to pay you an income for the rest of your life via the annuity.

Increasing longevity means that your annuity will have to last you for possibly 20 or even 30 years of retirement, making decisions around inflation proofing your income very important.

Different types of annuity

In the UK, there are basically two types of annuity:

Pension annuities (compulsory purchase)

Purchased life annuities (voluntary purchase).

All annuities share the following characteristics:

They pay a level of guaranteed income;

They turn a lump sum into a stream of future income;

Lifetime annuities guarantee to pay an income for as long as you are alive, no matter how long you live;

When you die, payments stop, unless you have chosen a joint life annuity, a guaranteed payment period or a value protected (money back) annuity.

The ‘open market option’ – getting the best annuity
The annuity market is very competitive and rates differ between annuity providers. You can substantially increase your pension income by purchasing your annuity from the company which pays the most income. This is called ‘exercising the Open Market Option.’

Annuities have a number of important and valuable options that allow you to tailor the income to meet your personal circumstances. The most important options are as follows:

Single or joint
A single life annuity pays a secure level of income, but stops when you die. If you are married, it is possible to have a joint life annuity. This means that annuity payments will continue to your partner if you die first.

You can choose how much income your partner will receive after you have died. For example, a 50 per cent joint life annuity means that when you die, your partner will receive 50 per cent of your pension until he or she dies. But be aware that buying a guarantee will reduce the income payment slightly.

Guarantee periods
You can purchase a five or 10 year guarantee to ensure that if you die soon after annuity purchase, your spouse will continue to receive your annuity income for five or 10 years.

Buying a guarantee will reduce the income payment slightly, but this is a valuable option if you want peace of mind.

If you select a five year guarantee (which is the norm), and died two years after purchase, your estate would continue to receive an income for the next three years.

Annuity protection
It is also possible to buy a ‘money back’ or ‘value protected’ annuity. If you die before reaching age 75, and you have not received a certain amount of annuity payments by that time, the balance will be paid as a lump sum. This lump sum has the rather clumsy name of ‘an annuity protection lump sum death benefit’ and is taxable at 35 per cent.

At present the annuity protection option is only offered by a small number of annuity providers, mainly those which offer enhanced annuity rates.

Escalating annuity
A level annuity pays the highest income at the start and does not increase in the future, whereas an escalating annuity starts at a lower level, but increases each year. The increases can be constant, for instance, increasing by 3 per cent each year, or the increases can be linked to changes in the retail price index, more commonly known as index linking.

It is only natural to want the highest income, but you should not forget the effects of inflation. An increasing annuity may start lower, but it will pay out more income in the future. The corrosive effect of inflation should not be underestimated.

Enhanced annuities
If you are a smoker, in poor health or have a life reducing medical condition it is worth ascertaining whether you are eligible for an ‘enhanced’ annuity. This may pay a higher income because a medical condition, which is likely to reduce your lifespan, means that the insurer probably will not have to pay out for as long as for someone in good health.

There are three basic types of enhanced annuities:

Lifestyle annuities
These take into account certain behavioural and environmental factors, as well as medical factors to determine if you have a reduced life expectancy.

Any factor that may reduce life expectancy may be considered. These include smoking (10 cigarettes, or the equivalent cigars or tobacco, a day for the last 10 years), obesity/high cholesterol, hypertension/high blood pressure and diabetes.

Impaired life annuities
An impaired life annuity pays an even higher income for those who have significantly lower life expectancy. The insurer will require a medical report from your doctor (there is no need for you to have a medical examination).
Medical conditions such as heart attacks, heart surgery or angina, life threatening cancers, major organ diseases, such as: liver or kidney and other life threatening illnesses such as Parkinson’s and strokes will be considered.

Immediate needs annuities
These are designed for an elderly person who is terminally ill and about to enter a nursing home for the final years of their life. A lump sum payment will buy an immediate needs annuity, which guarantees payment of the elderly person’s care until they die. These annuities are expected to normally pay out for around two to three years only.

With profits annuities
With profit annuities pay an income for life, but the insurance company invests your pension fund in a with profits fund, (rather than fixed interest securities as happens with a conventional annuity).

A with profits annuitant therefore benefits from any future profits, but will also share in any of the losses in the with profit fund. You have to choose an ‘assumed bonus rate’ (ABR) of say three to 5 per cent.

As a rule of thumb, if the bonus actually paid by the insurance company exceeds the ABR, your income will rise. If it is less than your chosen ABR, your income will fall. This means that you have to be prepared to receive a fluctuating income, so they are only suitable for people who can afford to take this risk.

With-profits annuities have the normal annuity options, namely single or joint life, and a choice of guaranteed periods and payment frequencies.

Flexible annuities
A flexible annuity combines the advantages of an income for life with the advantages of a certain amount of flexibility and control over income payments, investment options and death benefits.

When a traditional (non-profit) annuity is set up, the options selected cannot be changed at a later date even if your circumstances change. For instance, if it is a joint life annuity and your partner dies first, the annuity cannot be re-priced to reflect the higher rates for a single life annuity. But a “flexible annuity” gives you income flexibility, investment control and choice of death benefits.

Essentials and indulgences

UK parents spend £28 billion on nation’s under-fives each year

UK parents spend around £35,000 on their children by the time they reach their fifth birthday, according to research released by Aviva. This adds up to a total of more than £28 billion[1] spent on the nation’s 4 million under-fives each year.

Varying expenses 
The study of more than 2,000 parents with children aged 0-5, discovered that parents typically spend £7,026 a year – or £586 a month – on essentials and indulgences for their youngsters. This includes the cost of everything from basics such as nappies and milk formula, to extras such as toys and baby ballet classes.

The cost of raising children to age five also differs widely across the country, with parents in London paying more than double the amount paid by parents in Wales and the North West.

Those in the capital say that they pay an average of £894 per month – or £10,731 per year. This is in comparison to a more modest £408 a month (or £4,901 annually) in Wales.

Under considerable pressure 
The research also revealed that parents feel under considerable pressure to spend on their youngsters. One in five (18%) say they feel compelled to spend in order to keep up with other parents. This is perhaps fuelled by the fact that more than a third (36%) of parents questioned say they know other parents who boast about how much they spend on their children. However only a modest one in seven (14%) admit to giving in to their children’s demands and buying things they don’t really need.

Making financial plans 
There is good news in that many of these parents with youngsters under six have made financial plans for their children’s futures, with more than half (52%) having opened a savings account in their children’s names, while 37% have opened a Junior Individual Savings Account (ISA) or a Child Trust Fund. A forward-thinking 8% have started saving for a house deposit for their children and the same have started a university fund for them.

Source data:
[1] Research carried out by ICM, surveying 2,002 parents with children aged 0-5 in November 2014. Figure compiled by multiplying the number of children aged under five in the UK, according to ONS mid 2013 data (4,013,861) by the average annual cost spent by parents on under fives annually (£7,026).
[2] Costs are based on mean averages across all respondents, although some parents will pay considerably more for certain expenses (such as childcare) while others will pay less.