The five worst places to keep your money



They roam the savings landscape like behemoths from another era – the hordes of outdated funds and savings plans in which hundreds of billions of pounds remain invested.

And, just like the monsters of the Jurassic Period, these savings dinosaurs have enormous appetites – in the form of fees and charges that eat into investors’ returns.

Estimates by Telegraph Money put the sums languishing in “legacy” investments at a staggering £450bn. Separate research by broker Hargreaves Lansdown arrived at a similar figure of £400bn.

Unsure how to identify the dinosaurs that could be at large in your portfolio? We list them – and their defining characteristics – below, and explain how, when and where you should move your money.

These complex savings plans, extremely popular from the Seventies onwards, are the biggest dinosaurs.

They were sold by life insurance companies as relatively low‑risk investments, designed to deliver steady returns over set periods.

To achieve this the fund held onto excess profits in the good years to cover bad periods, which was called “smoothing”.

They were sold for a variety of purposes including as pensions, bonds and – in the form of endowments – to pay off mortgages. Salesmen frequently exaggerated likely returns.

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The funds fell out of favour after returns tanked following the stock market crash in 2000. Some insurers stopped “bonus” payments altogether.

Few people buy these investments today, and existing plans – locked up in what are dubbed “zombie funds” – are managed to minimise risk rather than produce good returns.

But there is a staggering amount of money invested. According to consultants AKG, £220bn is held by 12 million savers.

How to escape and where to go

Call your with-profits provider to ask for a “fund valuation” and a “surrender value”. Any difference in the amount is the effective exit penalty you are being charged.

Balanced funds, or multi-asset funds, which hold a mix of property, shares and bonds, are considered the closest alternative.

Stakeholder pension funds: £100bn

Launched in 2001, the stakeholder pension was billed as “revolutionary” due to its low costs – but it has failed to move with times.

These deals typically capped charges at 1.5pc for the first 10 years, dropping to 1pc thereafter, and were indeed cheap at the time.

But by today’s standards they are expensive, with the average pension fund charge standing at around 0.5pc.

The higher charges and the fact that modern options offer more investment choice is the reason these deals are dinosaurs to ditch.

Laith Khalaf of Hargreaves Lansdown analysed the performance of stakeholder pension funds and found nine in 10 have failed to beat the UK stock market over the past decade.

“This isn’t too surprising. Many of these funds were built to be average, so when charges are deducted, the result is often disappointing,” Mr Khalaf said.

How to escape and where to go

The modern day self-invested personal pension (Sipp) gives savers the freedom to pick from a wide range of investment funds.

Broker charges for administrating the Sipp vary depending on the size of your pot, but are typically 0.3pc or £300 on £100,000. You will pay management fees on the funds you hold, but the Sipp wins hands down compared to the stakeholder pension.

Closet tracker funds: £50bn

Millions of savers who invest in “actively managed” funds pay extra fees in the hope that a professional investor will generate high returns.

But an alarming number of funds consistently fail because they are not “active” enough.

Instead, these funds copy the wider market – a phenomenon known as “closet tracking”.

Hargreaves said as the problem is so widespread it could not put a figure on the amount of money at stake.

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But authoritative research carried out in February by SCM Private, a fund group, estimates £50bn is held by savers. The firm found 36pc of UK funds simply mimic the FTSE All Share index. The analysis covered £137bn of UK funds.

Gina Miller of SCM said a “shocking number of funds” were “not designed to beat the market”.

How to escape and where to go

One way to check whether you’re invested in a tracker is to look at the “active share”, shown as a percentage figure on fund literature. It is a useful indicator of whether the fund’s holdings are significantly different from the index. The higher the number – the more active the fund is.

Investors have two options. Buy a cheap tracker fund, which can cost as little as 0.1pc, or put your faith in a fund manager that has a proven track record for beating the stock market on a regular basis.

Investing directly with a fund manager: £75bn

It sounds counter-intuitive, but investing directly with a fund manager such as M&G or Jupiter, is typically 33pc more expensive than buying the same fund through a middleman, such as a fund shop or broker.

Although fund management firms no longer promote their funds to direct investors they are sitting on billions of pounds in legacy assets on which they are making gigantic profits, with £75bn still invested.

A regulatory change, introduced last year, which banned commission payments, has reduced costs of going through brokers still further – making the holdings with fund managers even worse value.

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For instance, the M&G Asian fund costs 0.98pc a year through a broker, such as Charles Stanley Direct or Trustnet Direct. Brokers also apply their own fee, which in both cases is 0.25pc. Therefore the total costs stands at 1.23pc – with no upfront fee.

The same fund purchased directly through M&G costs 1.73pc, which works out nearly a third more expensive. It also has an upfront charge of 4pc.

The difference seems small but over the long term, while also taking into account investment growth, the savings by switching to a low cost broker are huge.

How to escape and where to go

Tell the fund manager you want to transfer by giving them a call. Then visit to find the cheapest fund shops for different investment amounts.

Child Trust Funds: £5bn

Up until April, six million young savers were trapped in child trust funds. They can now escape to Junior Isas, an extension of the adult Isa system.

Child trust funds (CTFs) were introduced by Tony Blair’s Labour administration, which gave parents of every child born from 2002 seed money of £250. Children were also given another £250 when they turned seven, while some less well‑off families received more.

But in 2010 the scheme was closed and then replaced by Junior Isas in November 2011, which offer better interest rates and choice.

• One fund for my child – which one should I pick?

• A CTF that turned £1,000 into £4,944 in 10 years makes it hard to switch

It has taken until this April, however, for it to be possible to switch CTFs to a Junior Isa.

The reason why CTFs are viewed as poor value is because three in four are “stakeholder” accounts.

Most invest in tracker funds and charge an excessive 1.5pc a year. Purchasing the same tracker fund via a Junior Isa can reduce the annual charge by at least 50pc.



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