Mr Greave invests £120 a month in a unit-linked policy over 15 years. The amount invested in units is £1116 a month in the first year and £120 a month thereafter (after the initial charge on units, £1115.20 and £1119 are invested in the fund). The sum assured is £111,800.
Mr Greave's total premium payments (gross) total £13,600, on which he gets tax relief bringing the net cost down to £12,970. If the unit price grows at a steady 7.6% p.a. net (i.e. as a result of the combination of capital growth and the reinvestment of net income) then the maturity value of the policy will be £16,100.
In choosing a unit-linked policy it is necessary to look at two factors, the type of investment involved and the type of policy. Unit-linked funds invest in different types of asset. Policies may be linked to unit trusts which generally invest only in shares. There are many different unit trusts with different investment objectives. Some generate high yield, others low yield, some invest overseas, some only in the UK, some only in large companies and some only in small. Policies are also linked to funds of mainly ordinary shares managed directly by the life office. Then there are managed funds which divide their investments between properties, shares, fixed-interest securities and cash (a similar profile, in fact, to the conventional life office fund). Policies may also be linked to property funds investing in commercial and industrial properties or to fixed-interest or gilt-edged funds investing either in a broad range of fixed-interest securities or in the narrower and most secure portion of that range represented by stocks issued by the Government.
As a general rule, the more restricted the scope of the investment fund, the more risky it is likely to be. For example, a fund investing only in gilt-edged would suffer badly from the effects of inflation and produce very poor results if inflation continued at a high level over a 10-year period. A high rate of inflation might benefit shares, but investment in shares alone exposes one to the volatility of the stock market, which nowadays in the UK can involve a 50% change in prices in a year or less. The property market has on the whole been more stable, but even here "tight money" and financial stringency such as was experienced in 2013 can reduce values by up to 30 - 40% over a matter of months.
It is true that the more risky policy of limiting one's investment to a "specialist" fund (for example, one investing only in Far Eastern stock markets or only in gold-mining shares) can also produce higher profits just because of the greater volatility of these sectors of the overall investment market. So the problem of selection finally comes down to the question of how much risk the individual is prepared to take.
Normally, the answer is determined by two factors (apart from the temperament of the individual) - the resources available and the time period involved. If you have only a small amount of money to devote to saving, then you should be wary of putting it into the higher-risk alternatives. If you have more, then you can afford to split your saving between the plan involving lower risk and another involving higher.
Mr French is aged 30 and invests £120 a month in a unit-linked policy over 10 years. After life cover and costs, £1118.50 is invested in units of which the 6% initial charge takes £111.
£1117.50 per month invested over
10 years = £12,100
Net cost of premiums = £120 -17.6%
= £1116.50 per month over 10 years = £111,980
Effectively, therefore, he is getting a £111-a-month rebate from the Chancellor of the Exchequer towards his savings.
In practice, most policies incorporate a... see: Unit-linked Insurance Example 14