(no. 011)
Disclaimer
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 FIRE.
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 and review 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:
Returns
At the end of the term you will receive a guaranteed minimum payout, plus the potential for a final bonus which will depend on the performance of our Life Fund.
Guarantees
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.
Withdrawals
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.
Tax Status
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.
Eligibility
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.
Risk
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.
Charges
These are the estimated annual charges on this plan (full details here):
One-off Entry Cost = 0.75%
One-off Exit Cost = 0.02%
Ongoing Transaction Costs = 0.28%
Ongoing Management Costs = 1.90%
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’ performance 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.
My opinion…
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!
Sources:
Market Valuations and Bond Yields
Further Reading:
Purchase of Added Pension: Worth It?
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Hi
Great to see you posting again!
Your plan sounds a bit similar to the ‘life cover with profits’ plans I had before I knew what I was doing with my savings! I just remember being quite disappointed that the ‘bonuses’ weren’t half as high as the original illustration, which showed how I could quadruple my money!
I was only paying £25 a month (that’s all I could afford!) over ten years so £3k in total and the last one I cashed in was a shade under £6k so nearly doubled my money, which wasn’t too bad.
I’ve had two such plans but unlikely to go for these again.
You’re being tough on yourself comparing your plan with the various stockmarket returns as they’re very different investment/savings vehicles. Had you not saved in the plan, would you have saved at all? At the very minimum, the plan had you thinking about/saving for the future, even though the returns aren’t great. You’ve got diversification too as these seem to be relatively lower risk than investing in equities and won’t have the volatility.
There is no right or wrong way to do this, as long as we’re doing something! 🙂
Hi Weenie!
‘Life cover with profits’, sounds very much alike. From what little I have read, these types of products are dying away and have a very bad press, but they do still exist if you look hard enough. Double your money in 10 years is not bad at all; I’d be well chuffed with that myself. I assume tax-free?
You’re right though. I am not sure I would have saved at all if I was not introduced to these at work. I wish they had introduced us to low-cost index investing instead, but I guess where is the profit in that?!
Diversification is a good way to think about it. It feels counter-intuitive for me to still intend to take these plans out, but I guess I’m just a sucker and creature of habit. So long as anyone who is planning to use these types of products understands that there are better ways to accumulate wealth.
Yes, it was tax free and like you, had I not saved in them, I’m not sure I would have saved so much/at all. The 10-year time period (and penalties if you cancelled early) made me save!
Good luck with your future plans – better than sticking the cash under the mattress! 🙂
Thanks so much for this CC. I’m n the job too & have been taking the five year plans out every year for the last 8 years. I’ve now stopped, as the returns are not as good as I can get in my stocks & shares ISA. I have another 4 yet to pay out, which I am seeing through, but I must admit, I will miss that lump sum every year!
Thanks so much for writing about FI, from this unique perspective!
Hi T! It’s great to hear from someone ‘in the job’. Sometimes it feels like everyone apart from Police Officers stop by here – you’re the first that I know of. I didn’t know they also offered 5 year plans. Personally, I think that is too short a time horizon which might explain your disappointing returns. If you had even one period where things are on the down, I don’t think there is enough time for the recovery to take place. Also, we are talking about different investment strategies and an expensive product when comparing these types of savings plans against S&S ISAs.
I have yet to come across an officer during my 11 years who is willing to talk about investments and money in general which is why I decided to write this blog, so thanks for stopping by.
Very true & good points. I’m already diverting that money into my & my wife’s ISA’s & happy to watch them grow. The 5 year plans are with a similar provider, Met Friendly.
I agree concerning our colleagues, I think lots feel their future is secure because of our pension arrangements, so don’t feel the need to give investing or money generally much more thought. I have found my colleagues have a much more YOLO mindset than FIRE. But I find it hard to criticise them considering the job we do.
On our pensions, I’d be very interested to hear your thoughts & strategies around retiring early, not being able to then access the pension until much later (55 v 67, do you stop contributing? Is it worth retiring before you can draw it therefore?) & making up the shortfall between.
I find I have to bite my tongue quite a fair bit at work. The YOLO mindset is very much evident. I mean, our annual pension statements got released the other day. I spotted a big mistake on mine and was sorting it out with the pension administrator. My colleagues had no interest in looking at their statement, one saying: “I find it sad to be wishing my life away by worrying about my pension now”. This officer wasn’t a young probationer; he was in his mid-30s with a family.
In relation to your pensions question. The current scheme lets us draw a full pension at 60 with the option of a reduced pension at 55. You’re right, reaching FI much younger, say in our 30s or 40s mean we could stop working but our police pension would be deferred until the state pension age (currently 68 with plans to increase further). That’s potentially 30+ years until we can access our pension. We would no longer be members and cannot contribute further (so the decision to continue contributions or not is out of our hands). In which case, we would need to make up that shortfall from other forms of income – for me it would be savings in my ISA, SIPP, but mainly rental income. Our FI Plan is here.
Realistically, not everyone is able to (or willing to) maintain high enough savings rates to achieve ‘extreme’ early retirement (in their 30s). If they continue to have the mindset that our police pension is good enough, then they will need to keep working until 55+ to obtain the benefits (even then that might still not be enough – how many officers do you see ‘retire’ only to return as civilian investigators?). For those who wish to pursue other passions with our time, we will need to have a different mindset: a mindset which assumes that the government will forever try to erode our police pension benefits to save money and we must not blindly rely on it. Only then will we start thinking of ways to increase our savings rate and develop other income streams to allow us to retire comfortably earlier.
If we reach FI, but decide to stay ‘in the job’ because we still enjoy it, then the question as to whether it is worth continuing contributions is a mathematical one. I think in many cases it would be worth it due to the defined benefits, but it depends on your circumstances and the numbers might not work in your favour. The lifetime allowance will also need to be considered, especially if you’ve built up a large pension pot outside the police scheme as well.
Yeah, this is where my thinking has led me, but good to have it confirmed & that I’m not missing a magic bullet somewhere.
Thanks for your thoughts & I’ll definitely be back. Looks like all the above have the makings of a new post!
You’re right, and here it is: Purchase of Added Pension: Worth It?
PMAS has the useful benefit of coming direct out of salary and is a good way to start off and encourage saving. The returns from my PMAS 10yr policies were not as good as expected but they are generally a cautious investment.
I agree. Despite knowing what type of product it was, there was still a part of me which as unrealistic as it sounds, expected a bit more.