First of all, it feels like quite a while since I posted something. Free time to work on this blog is getting more difficult to find having to juggle work and family. I guess this serves as a reminder to me as to why reaching FI is important to us. I have also decided since my last post to study for a promotion exam in October. I felt whilst I remain as a Police Officer, I want to make the most of it and promotion will give me the ability to increase my field of influence in a positive way before I decide (if ever) to call it a day.
This post links back to Our FI Plan where I spoke about the Regular Savings Plans I took out with Police Mutual Assurance Society (PMAS) way before I learnt about index investing and FI/RE. I need to point out that this is a not a sponsored post and it is by no means intended to be free advertisement for Police Mutual. The reason why I have decided to document how my plans perform is that there is so little real information out there. Even when I discuss this topic with Police Officers who have been ‘in the job’ longer than I have, they are always coy about how much they saved and how much they got back in return. Remember, this is merely a snapshot of the plan’s performance based on when I took it out, when it matured and the market conditions in the period between, i.e. it could perform better or worse if you take the plan out at a different time.
Although this post is related to a product offered to Police Officers, I would imagine similar products are still available from other providers (albeit becoming rarer to find due to how expensive they are!).
What is it?
It is a savings plan where monthly contributions are made to it. Any Police Officer, Police Staff or their families can take out this Regular Savings Plan. The product summary from the Police Mutual website is as follows:
The guaranteed minimum payout varies with age because of the cost of life cover included in the plan and, for some, it may be less than has been paid in so it’s always worth checking with us first.
The plan is designed to help you save for a minimum of 10 years. You can cash-in your plan at any time but this should be as a last resort as you may get back less than you’ve invested.
The plan meets HMRC qualifying policy rules so you can save without having to pay any additional tax. HMRC’s rules allow you to save up to £3,600 in a 12-month period into qualifying policies. The value of tax benefits depends on your individual circumstances and tax rates or legislation which could change in the future.
Serving or retired Police Officers, Staff and Specials, as well as partners and the wider family of Police employees. You must be over 16 and the plan must mature before your 80th birthday.
This product is 3 out of 7, which is a medium-low risk class. This rates the potential losses from future performance at a medium-low level, and poor market conditions are unlikely to impact our capacity to pay you.
With one-off costs coming to 0.77% and ongoing costs of 2.18%, these plans are not cheap. It’s no surprise really. It is an old-fashioned with-profit fund which is in effect acting like an endowment policy.
Now, it would be very easy for me to say that Police Officers are being mugged off (excuse the pun) because most are bad with money and have very little (if any) understanding about investing their money. Is Police Mutual taking advantage of their (my own included) ignorance? Perhaps. At the same time, we are all adults, capable of doing our own research and learn about investing if we choose to. Police Mutual and the Regular Savings Plan product they offer exist because clearly there is a market for it.
So, how did my first plan perform?
I took my first plan out in 2008 and set it to mature in ten years; maturing this year. I paid in £43.33 per month over those ten years, paying in a total of £5,199.
The Guaranteed Tax-Free Value (also the Life Insurance Value) was £5,344.
At the end of the term, I received £6,407.18 tax-free into my bank account.
This gives an annual compounded rate of return (before inflation) of approximately 4.1% (after costs).
How does it compare?
The FTSE 250 started 2008 at a value of approximately 9,881 and ended up at the beginning of 2018 at about 20,243. This gives an annual compounded rate of return (before inflation) of approximately 7.5% (before costs).
The S&P 500 started 2008 at a value of approximately 1,378 and ended up at the beginning of 2018 at about 2,823. This also gives an annual compounded rate of return (before inflation) of approximately 7.5% (before costs).
The Vanguard FTSE All-World started 20013 at a value of approximately 37.16 and ended up at the beginning of 2018 at about 63.16. There is only five years worth of data to go back to, it is not really comparable but I thought I would include to give you an idea. This gives an annual compounded rate of return (before inflation) of approximately 5.5% (before costs).
It does feel unfair to compare the Police Mutual Savings Plans with the above indexes. They are completely different things, one carrying higher costs, lower risk and lower returns and the other offers lower costs and higher risks and potentially higher returns.
I think a fairer comparison would be to check the UK 10-year bond (gilt) rate for 2008. This would be seen as closer to a ‘guaranteed’ investment like the savings plan (although note that it is not totally risk-free; governments can default on their debts). This reveals that the UK was offering a 10 year bond with a yield of about 4.5% back then (the US about 3.5%). However, this would have required a lump sum investment to lock in this yield. For monthly contributions, without having to over-complicate things, the average government bond yield between 2008 and 2018 was 2.5% for both the UK and the US.
I said this in one of my earlier posts:
“Given what I know now, I wouldn’t have taken out these plans, but instead invested the money in passive index tracker funds.”
My monthly contributions of £43.33 to a tracker providing 7% annual compounded return (rounded down for costs) would have generated £7,670.88 instead of £6,407.18. That’s over £1,000 more! However, this is with the benefit of hindsight. The markets could have tanked for a sustained period and I could have lost money, resulting in the Savings Plans performing better due to the guaranteed returns.
It would appear that my obvious conclusion is that these plans are not worth it and should be avoided at all costs. However, I’m going to disappoint many professional investors out there by saying that I do not regret taking out these plans. Having given it some thought, I am quite happy that they form part of my overall wealth. In fact, as I have now reached the annual tax-free limit to save into these types of plans, my wife will be taking out policies in her name going forward. My reasons are as follows:
- The risk and reward ‘feels’ okay to me. Yes, the numbers might not add up, but finance is so much more than just numbers (see: behavioural finance). It offers the security of a guaranteed payout (with life insurance added in) and the potential for some market gains. The tax-free element is a mute point because we can invest in a stocks and shares ISA tax-free without this product.
- Overall, it represents a very small portion of our wealth and gives us a peace of mind to use it to form part of our FI Plan. We will also continue to invest in low-cost index funds, but to know we have a guaranteed payout out at least once a year going forward for the next 20 years is a nice bonus. By the time we reach FI, it will mean we will still have at least another 15 years of these sayings plans maturing which could go towards our travelling fund or simply re-invested.
- It is an easy and relatively low-risk risk way of saving money for people who are not very good at it (deducted directly from salary by the employer). I am not against people investing money even at a high cost, so long as people understand that there are cheaper ways to invest and make an informed decision about where such a product fits into their overall investment strategy.
I hope this post illustrates something which I think is important as you continue on your journey towards FI. So long as you get the basics nailed down (reduce your expenses, increase your income, invest wisely and insure against disaster), then there really is no right or wrong way to do this. There will always be a more optimum way or a mathematically better way, but you can sometimes get so stuck in the detail that no action is taken. We are all on our own unique journey and it’s great that there are so many blogs now to learn from.
Okay, feel free to comment and blast me for still feeling positive about this really expensive product!