Personal Finance: Nice profits, nasty charges

LOOK OUT for the Easiest Sell of 1999. Anyone with a bit of cash is likely to be greeted by their financial adviser with a long-winded version of the following: "Hello, and would you like a with-profits bond?"

At this stage you won't even know what a with-profits bond is, but your adviser will convince you of its brilliance. And the case is compelling. A with-profits bond from a big life insurer will invest your cash in its giant with-profits investment fund, made up of a mix of shares and fixed interest investments. That will generate growth.

On top of that you get an income of up to 5 per cent per year - with no extra tax to pay, even for 40 per cent taxpayers. As interest rates on building society accounts plummet in 1999, that's exactly what you'll want to lock into.

IFAs are a notoriously conservative bunch, and I am convinced that in 1999 hordes of cautious investors will be offered the following solution for their spare pounds 50,000: stick pounds 12,000 in PEPs, assuming the customers are an equally conservative husband and wife; and the rest should go into one or two with-profits bonds from big name life companies.

The result? Happy customers and a beaming financial adviser. The usual level of commission paid to the person who sells you a with-profits bond is double that on a PEP (6 per cent against 3 per cent). So let's say you pay pounds 38,000 of your pounds 50,000 into the bond. That's pounds 2,280 for the adviser. And he'll only get a measly pounds 360 in return for recommending your pounds 12,000 PEP investment.

That's one "nasty". Another is a hefty penalty for leaving the party early. Some bonds will take away 10 per cent of your cash if you try to leave within a year. Most bonds have a sliding penalty scale over five years.

You can't do anything about the penalty. But you can do something about the commission charges. Several of the firms that sell discount PEPs also deal in with-profits bonds. They send you details of the available bonds, and you decide which one suits you. If you can make that decision for yourself, then you stand to save hundreds or even thousands of pounds, which can be added to your investment fund.

These firms advertise in the papers and include Hargreaves Lansdown (0117 900 9000) and Financial Discounts Direct (0500 498 477). Chartwell Investment Management gives away an excellent guide on the subject. Call 01225 446 556.