Services
Product Descriptions
Life Assurance
Life assurance products come into two main categories:
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Term Assurance
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Whole of Life Insurance
Term Assurance
Term assurance provides the selected level of cover in the event of Death and/or diagnosis of a specified Critical Illness before a predetermined date or age.
As a rate driven contract Term Assurance policies do not offer a cash in value and have no investment element. Premiums could be guaranteed or reviewable.
Term Assurance can take a number of different forms as follows:
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Level Term Assurance - Sum assured remains level throughout the term
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Decreasing Term Assurance - Sum assured decreases throughout the term
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Gift Inter Vivos - Decreasing Term Assurance that reduces in line with a specific schedule, suitable to protect Gifts (Potentially Exempt Transfers, PETs) often arranged for the purpose of Inheritance Tax Planning and normally placed in Trust
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Family Income Benefit - Works on the same principle as Decreasing Term Assurance but is designed to pay a regular income from the date of death until the end of a specified term. Obviously, the longer the life assured lives the lower the total payout. Often used as a cost effective Family Protection plan or could be used to protect maintenance payments received from an ex-spouse for their children
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Mortgage Protection Plan - Decreasing Term assurance plan designed to protect mortgages and is flexible enough to cope with changing mortgage interest rates. Therefore, the plan will normally payout whatever the outstanding mortgage balance is at the date of death subject to a maximum mortgage interest rate, normally either 10% or 12% depending on the product provider.
Some policies offer additional benefits such as:
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Waiver of Premium Cover
Typically means that in the event that the life assured is incapacitated for a period of normally six months or more the premium is paid by the life insurance company until the life assured is able to return to work or until the termination of the policy, whichever occurs first.
The definition of disability can vary according to occupation. For example, you may be offered an "Own Occupation" definition. Which means that if you are unable to perform substantial duties relating to you own occupation you will likely be eligible to make a claim. Less favourable is an "Any Occupation" definition, which means that you may be expected to find alternative employment which you may be able to undertake despite your disability. These definitions become particularly relevant if your incapacity becomes long term.
Your independent financial adviser can help you select the most appropriate cover and advise you further.
Terminal Illness Cover
Gives the option for the life assured if terminally ill to receive benefits prior to death where the prognosis is that death will occur within either twelve or eighteen months (depending on company).
Indexation
With some policies you have the option to select different levels and types of indexation. For example, you may choose to set up your plan to increase either the sum assured or the premium by either a fixed percentage or by RPI (Options vary dependent on the company and product).
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Whole of Life Insurance
As its name suggests, Whole of Life insurance provides cover on death or diagnosis of a specified Critical Illness for the whole of the individual's life regardless age or future health, just so long as they keep their premiums up to date.
This type of insurance is often used to provide protection where the length of time for which cover is required might be difficult to determine or is indefinite. Often people take out a Term Assurance plan only to find that they still require the cover at the end of the term. If the individual's health has deteriorated in the meantime, it may be expensive or even impossible to re-insure. Whole of Life insurance avoids this problem.
Sometimes Whole of Life Insurance is used to fund a future Inheritance Tax Bill by selecting a sum assured to match the likely Inheritance Tax bill. The cover is placed in trust to the beneficiaries of the estate so that they can then pay the tax bill without having to sell assets such as the family home to pay for it. Whole of Life assurance can include optional indexation benefits and Waiver of Premium Protection where required and will sometimes include Terminal Illness Cover.
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Critical Illness Cover
Critical Illness cover is an option that since its inception in the 1980's has become an important part of a household's protection.
Critical Illness cover is designed to pay out a lump sum benefit in the event of diagnosis of a serious (critical) illness. Companies offer lists of varying illnesses that are covered but all include the ‘big three' which are Heart Attack, Cancer and Stroke. These are normally accompanied by other conditions such as failure of both kidneys, Liver failure, loss of limbs, blindness, Multiple sclerosis, Permanent and Total Disability, etc.......
Less people die suddenly these days due to the advances in medical science, instead many people live on with the conditions described above, but may not be able to work. This puts their standard of living and that of their families at risk. Critical Illness cover offers a means to maintain a reasonable standard of living. For example, it may allow an individual to repay a mortgage or other debts. Alternatively the lump sum benefit could be used to make necessary renovations to the home to help them cope better with a disability.
The options of Waiver of Premium, Terminal Illness Benefit and Indexation are also available under these contracts.
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Income Protection (PHI)
Income protection is often known as Permanent Health Insurance (PHI). PHI is not to be confused with the short term protection you might receive from an accident and sickness policy most commonly sold by the banks and building societies to protect your mortgage payments. These provide cover for a term of either one or two year's maximum and are annually renewable contracts.
Permanent Health Insurance (PHI) offers cover from the date of inception to the stated retirement date and cover is guaranteed throughout the term so long as premiums are maintained. This is far more comprehensive than Accident & Sickness cover policies and with only a few exclusions, normally restricted to self inflicted injuries, drug and alcohol abuse, war & riots, HIV infection and complications of pregnancy.
The cover can be offered with a variety of deferred periods at the beginning of incapacity ranging from 1 day to 52 weeks. This makes it adaptable to an individuals circumstances. For example, if your employer provides full pay in the event of incapacity for the first 6 months, then you would not require cover until after your employers benefits cease. This makes it much more cost effective than other types of insurance.
This cover is normally underwritten on the basis of age, occupation and health, but there are some policies which do not underwrite on the basis of occupation, nor do they discriminate between smokers and non smokers. This means they may be more competitive for individuals who fall into either of these categories.
Some policies may even offer a modest investment element which means that when the policy reaches its termination date (normally the planned retirement age), there may be a maturity value. The amount payable at maturity will depend upon the investment return of the fund. Remember that the value of your investment may go up or down. The amount available will not be guaranteed and these arrangements should not be relied upon as savings plans. The amount received back at maturity may be less than the contributions paid.
PHI policies normally offer the option of Indexation and Waiver of Premium is normally provided at no extra cost. The option of guaranteed or reviewable premium rates is normally available. Reviewable premium rates may be assessed on the claims history of the company and national morbidity rates, but not usually on the individuals personal claim history.
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Pensions
Pensions are savings funds which, with the assistance of generous tax relief allow individuals to build a fund of money which can be used to provide a lump sum and income at the point of retirement.
New legislation known as Pensions Simplification, introduced a raft of changes to retirement planning on 6th of April 2006. The new legislation aims to bring all the different pension regime's under one set of rules. Briefly the main features are as follows:
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Tax relief on contributions up to the prescribed limits below:
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20% minimum regardless of whether the member is a tax payer or not. Higher Rate tax payers benefit from up to 40% tax relief, (please note the additional information below regarding higher earners over £150,000)
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Tax Free Cash Sum (Also known as Pre-commencement Lump Sum) at retirement of up to 25% of the value of the fund
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Income in retirement which can be taken in a number of ways using the Traditional Annuity, With Profits Annuity, Unsecured Income Drawdown, Phased Retirement and Alternatively Secured Income (David Allen Financial Management will be happy to discuss some of these option with you in more detail upon request). Retirement income is treated as "earned income" for tax purposes and will be chargeable to Income Tax at the individuals highest marginal rate.
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Lifetime Limit - Currently £1.75 million (£1.8 million in 2010/11). This is the maximum fund size of an individuals pension pot during an individuals' lifetime*
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Personal Contributions of up to 100% of salary*
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Employer contributions of up to £245,000 in the 2010/11 tax year (subject to acceptance by the local inspector of taxes)
From 6 April 2011 new rules come into play which will restrict the tax relief available to those earning over £150,000. This will taper the tax relief available to the end that those earning £180,000 or more will receive just 20% tax relief on their contributions.
Further special anti-forstalling rules were then announced in the budget on the 22 April 2009. These are designed to stop large one off contributions in anticipation of the rules being implemented in 2011 and affect those:
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whose income is £130,000 or higher; and
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who have changed their contribution arrangements (whether size of contribution or provider) since 22 April 2009 and
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whose total pension contributions exceed £30,000 or the average of their last three years ' contributions (whichever is smaller)
Therefore prior to April 2011, any one-off annual contributions exceeding £30,000 or the average of the individual's last three years' contributions (whichever is the smaller) will be restricted to basic rate relief at 20 per cent.
It is essential that individuals, particularly the self employed who are affected by these rules, take specialist independent financial advice to protect their position.
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Self Invested Pensions (SIPPs)
A Self Invested Personal Pension as the name suggests, allows self investment into a wide range of asset classes in addition to the default pension funds available in the plan. The assets include**:
**List not exhaustive
SIPPs can be useful for people running their own business where they wish to buy the business property. Rather than paying rent to a third party you may prefer to use your pension fund to purchase the property and then let the premises back to your business.
Potential benefits include:
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No Capital Gains tax on property (and other assets) held in a SIPP
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Rental payments benefit from business tax relief
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Income tax relief on contributions
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Cash held in a pension can provide the deposit or 100% of the purchase costs
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SIPPs can borrow up to 50% secured against the scheme assets for property purchase.
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SIPPs can purchase commercial property already owned by the member or their company
Alternatively, you may just prefer to take control of the investment of your pension by choosing your own assets from the range of permitted investments listed above.
* Rules and limits may be exceeded (subject to product rules), but will likely incur significant tax penalties.
Retirement Options
Lifetime Annuity: this pays a lifetime income (either fixed or increasing) with the option of forgoing some income to take a tax free cash lump sum. The annuity can be arranged either as a single life pension or a joint life pension with your spouse, should this be appropriate. It is customary to build in a minimum payment period e.g. 5 years. A standard guaranteed Lifetime annuity may be appropriate/suitable for those who are of reasonable health and normal life expectancy.
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Enhanced Annuities: are available to people who have reduced life expectancy as a result of some medical condition or past/present lifestyle. Enhanced Annuities may offer a higher initial rate but are unlikely to be available unless you suffer from poor health, you are a smoker, or have been involved in heavy manual work during your working life.
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Annuity with Value Protection: available since the 6th April 2006 and provides the option at outset whether to protect the full value of your annuity or a proportion of it. The annuity policy is then written containing a value to be protected. The value protection period ceases on reaching age 75, i.e. a lump sum would only be payable on death before 75. The maximum lump sum payable under value protection is the initial value of the annuity purchase price less the sum total of the gross income paid. When a dependents pension is also selected the lump sum will be payable in addition to the dependent’s pension. N.B Any lump sum payable is subject to 35% tax. The cost of value protection varies per individual and depends upon a number of factors including your age and state of health.
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Unsecured Pension (previously known as Pension Fund Withdrawal) is suitable for those with large funds, requiring flexible income. Essentially the fund remains invested in a variety of asset classes and income is withdrawn, as it is needed, between minimum and maximum levels. Ultimately the benefits must be crystallised at age 75 by purchasing an annuity, but one can stay invested for longer by way of an Alternatively Secured Pension, which is Pension Fund Withdrawal from age 75. This would tend to suit individuals with a medium-higher risk profile. Unsecured Pension and Alternatively Secured Pension can be suitable for smaller funds where the life expectancy of the individual is limited - maximising potential death benefits.
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Phased Retirement: this involves the use of tax-free cash as "income" and thus, for a given level of income, one can reduce the overall liability to income tax. This option is likely to be suited to a higher rate taxpayer with an additional source of income e.g. from investments. Phased Retirement and Unsecured Pension may be combined to provide a flexible package of benefits.
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Investments
Investments can take different forms including the following:
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Individual Savings Accounts (ISAs)
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OEICs
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Unit Trusts
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Investment Trusts
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Venture Capital Trusts
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Enterprise Investment Schemes
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Structured Income or Growth plans
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Insurance Bonds (onshore & offshore)
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National Savings & Premium Bonds
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Discretionary Fund Management
Some of the above use mutual funds managed by fund mangers making the more specialist investment decisions for you, while your adviser selects the most appropriate funds based upon charges, performance, your individual attitude to risk and your investment objectives, i.e. growth or income. Others take advantage of special tax concessions. ISAs Individual Savings Accounts enjoy major tax advantages;
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No tax paid on the income you receive from your ISA savings and investments
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No tax paid on capital gains arising on your investments
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You can take your money out at any time (but some types have a notice period)
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You do not have to tell the Inland Revenue and Customs about income and capital gains from ISA savings and investments.
In the 2008 Budget, the Chancellor announced changes to ISAs that became effective at the start of the 2008 tax year. The highest profile was the change to investment limits as the Government eliminated the mini and maxi components.
Now, there are just two types of ISA, the cash ISA and the stocks and shares ISA. Your overall allowance for both in 2009/10 is £7,200 (or, from October, £10,200 if you are aged 50 or over in the tax year of the contribution). Included in this there is a limit of £3,600 (£5,100 for those 50 and over) which includes the cash element within a stocks and shares ISA. Within these limits, there is flexibility. You can, for example, now put the maximum £3,600 in a cash account and £3,600 in a stocks and shares account. Alternatively, if you place, for example, just £2,000 in cash, you can use the entire remaining balance - £5,200 - to invest in stocks and shares. If you don’t need cash at all, you can put the full allowance into stocks and shares.
You can also transfer existing cash ISA holdings to a stocks and shares ISA without impacting on your current tax year allowance. So, if you have £10,000 already sitting in cash ISA plans then this amount can be moved to a stocks and shares ISA, yet leaves your allowance of £7,200 still available. This presents an opportunity to those who have accrued cash savings in their ISAs during the recent downturn in the fortunes of the stock market. Likely, with the lowest Bank of England Base rate ever, the interest you are earning will be disappointing.
However, if you view this money as a long term investment and working on the principle of buying at the bottom and selling at the top, it may now be time to consider a transfer to stocks and shares ISAs to benefit from the expected upturn in stock market returns (the value of your investments may go up or down). If you would like to discuss this with one of our qualified and independent advisers then please contact us by phone on 01228 711881 or e-mail: info@davidallen-ifa.co.uk
The only other change is that we have finally seen the back of PEPs. Although no new money has been invested in PEPs since 1999, the distinction remained. PEPs are now part of the ISA regime and the plans can be consolidated under one product wrapper. Existing PEP holders should see little difference, but do check with your adviser if you are unsure.
OEICs OEIC stands for open-ended investment company. An OEIC has a company structure, so that when you invest, you will hold shares. It's open-ended, which means that the fund can get larger or smaller, depending on the number of investors who wish to buy or sell shares. Many investment funds in the US and Europe have a similar legal structure.
OEIC's are a relatively new form of investment vehicle. They are increasingly replacing unit trusts, which are very complex in legal terms - having originally been invented to protect the assets of knights who were away on the crusades! One advantage of an OEIC fund is that it has a single price, directly linked to the value of the fund's underlying investments. All shares in the fund are bought and sold at this single price. This contrasts with unit trusts, which have different buying and selling prices.
Unit Trusts
A unit trust is a pooled fund for investors to buy shares. This limits risk for the savers as their pooled money is spread over a range of investments. Unit Trusts are different to investment trusts because unlike an investment trust where there are a set number of shares which fluctuate in value, a Unit Trust can shrink and grow according to demand. Basically the value of your investment always reflects the value of the underlying assets. Unit Trusts entitle an investor to participate in the assets of the trust, without actually owning those assets. The fund's assets are protected by an independent trustee and managed by a manager.
Investment Trusts
Investment Trusts are companies whose value fluctuates with demand for their shares on the stockmarket. The cost of an investment does not necessarily equal the price of its underlying assets, rather the perceived value. The idea is that you invest in an Investment Trust and make money depending on how the trust's investments perform. Of course, depending on the skills of the fund manager and/or the state of the economy the investment may also go down in value resulting in a loss. Venture Capital Trusts
VCTs are quoted limited companies whose purpose is to invest shareholders' funds in smaller unquoted trading companies, (including AIM listed stocks) having potential for growth, with a view to making profits. Most VCTs are run by investment managers and raise their funds from private investors. Investments of up to £200,000 in VCTs offer significant tax incentives to investors: ·p Income tax relief at 30% on up to £200,000 pa subject to their having sufficient income tax payable to absorb the relief. (investment must be held for full 5 years to obtain tax-relief) No income tax on dividends No Capital Gains tax on realised investment gains within the VCT and no liability to personal capital gains tax on disposal. Enterprise Investment Schemes
An EIS is a government backed scheme that provides a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies. There are five current separate EIS tax reliefs:
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Income tax relief at 20% of the amount invested subject to their being sufficient income tax payable to absorb the relief and provided an EIS qualifying investment is held for no less than three years from the date of issue. The minimum subscription is £500 and the maximum is £500,000. Individuals may elect to treat their subscription for EIS shares, up to their maximum annual allowance, as if made in the previous tax year, thereby carrying income tax relief back one year.
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- Tax on gains realised on a different asset can be deferred indefinitely, where disposal of that asset was less than 36 months before the EIS investment or less than 12 months after it. Deferral relief is unlimited, in other words, this relief is not limited to investments of £500,000 per annum.
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No Capital Gains Tax payable on disposal of shares after three years, provided the EIS initial income tax relief was given and not withdrawn on those shares.
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Loss Relief - If EIS shares are disposed of at any time at a loss (after taking into account income tax relief), such loss can be set against the investor's capital gains or his income in the year of disposal or the previous year.
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Inheritance Tax Exemption - EIS Investments are generally exempt from Inheritance Tax after two years of holding such investment
Structured Products
Generally a pre-packaged investment strategy which is based on derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuances and/or foreign currencies. The variety of products just described is demonstrative of the fact that there is no single, uniform definition of a structured product. A feature of some structured products is a "principal guarantee" function which offers protection of your initial investment if held to maturity.
As such, structured products were created to meet specific needs that cannot be met from the standardized financial instruments available in the markets and are designed to provide returns for investors seeking either a fixed level of income or growth.
Structured products can be used as an alternative to a direct investment or as part of the asset allocation process to reduce risk exposure of a portfolio.
National Savings
NS&I offer a range of savings and investments which are backed by HM Treasury, therefore your capital is 100% secure, however much you invest.
Premium Bonds
Premium Bonds are an investment where, instead of interest payments, investors have the chance to win tax-free prizes. When someone invests in Premium Bonds they are allocated a series of numbers, one for each £1 invested. The minimum purchase is £100 (or £50 when you buy by monthly standing order), which provides 100 Bond numbers and, therefore, 100 chances of winning a prize. You can hold up to £30,000.
Insurance Bonds
An insurance bond (or investment bond) is a single premium life assurance policy used for the purposes of investment. Bonds can provide income or growth and have access to a wide range of investment funds. The tax advantages offered by bonds often attract investment normally after the tax free ISA limit has been used. For example, both basic and higher rate tax payers can withdraw up to 5% of the initial investment each year as ‘income' without any immediate liability to income tax.
This is because the ‘income' is considered repayment of capital by HMRC and so is not taxable. This makes insurance bonds an attractive investment vehicle for Higher Rate tax payers. Basic rate savings tax (20%) is paid from the fund so for most Basic rate tax payers there is normally no additional liability unless the gain takes them into higher rate, in which case they will be liable to the difference between basic and higher rate tax. Tax on any gain is deferred for up to 20 years. Insurance Bonds are often used in conjunction with Inheritance Tax Planning using trust based products such as Discounted Gift Trusts and Loan Trusts.
Discretionary Fund Management
Discretionary Fund Managers offer cost effective investment for investors with, typically, over £100,000 to invest. The advantages include:
Constant portfolio analysis and consistent investment processes.
Investment supported by a large research department.
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Portfolios stay closely aligned to the desired profile.
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Access to funds & assets not normally available to private investors.
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Hands off investment management for the private investor.
Fund Managers exist ‘closer to the market’ and can switch funds quickly Important Information
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The value of your investments may go up or down
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Past performance is not necessarily a guide to future returns
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Some financial products do not achieve a surrender or maturity value
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Before purchasing a financial product we recommend that you seek advice from an Independent Financial Adviser
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Before making a decision you should take the time to study any illustrations and Key Features documents which you should have been provided with prior to applying for any financial products
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