Stay away from over-50s plans. That’s the unequivocal warning from consumer champions Which?.
Recall your 50th birthday and you may also recall being simultaneously bombarded with invitations to join these plans in return for the lovely gift of a fountain pen.
Between asking “How the hell did they know I’m 50?” and filing the bumph in the recycling bin, you may have wondered what these schemes are for and how they actually work.
They are particularly bad value if you are in robust health and looking forward to a ripe old age
Though they pussyfoot around the issue with phrases like “planning for your future” and “leaving something for your loved ones”, they are basically life insurance policies that promise to cover the cost of your funeral when you die.
These schemes are run by well-known, trusted names including the AA, Post Office, all three top supermarkets, and such insurers as Aviva and Standard Life. They are strongly promoted and on TV are endorsed by familiar faces including Michael Parkinson and Gloria Hunniford (moonlighting from her other role as presenter of the BBC show Rip Off Britain).
Now, though, Which? has taken a closer look and is warning against them in the strongest possible terms. Its language couldn’t be more blunt. Chief executive Peter Vicary-Smith says: “For most people, over-50s plans are incredibly bad value.
“They are inflexible and, for the majority of customers, they will pay out far less than you have paid in.”
Using quotes obtained this autumn, Which? found that if a 60-year-old man paid premiums of £15 a month until he was 90, he would pay in a total of £5,400. The average over-50s plan, however, would pay out just £2,980 – little more than half that sum.
If he had paid the same monthly amount into a cash ISA with a rate of four per cent, he would have built up three times that amount, at £10,313.
What’s more, if he wanted to take back some or all of the money, he could easily withdraw it from a cash ISA. If he changed his mind after committing to an over-50s plan and stopped making payments, he and his family would receive nothing.
Insurer Legal and General spells this out, saying: “As the plan has no cash value at any time, you will get nothing back if you decide to cancel the plan after the first 30 days of applying.”
The one advantage of these plans, says Which?, may be for people who are in poor health and cannot get conventional life insurance, as applicants are guaranteed to be accepted for over-50s plan, with no medical required.
By contrast, they are particularly bad value if you are in robust health and looking forward to a ripe old age. Each plan pays out a fixed sum that is agreed at the outset, and you have to keep paying either until you die or reach the age of 90. So the longer you live, the worse the deal becomes.
Which? has named and shamed some of the worst-paying funds, based on a monthly premium of £15. With all these funds, it says, a four per cent cash ISA would outperform the lump sum payout within 12 or 13 years.
The poorest deal is with Nationwide Building Society, with a payout of just £2,650. This is followed by Aviva and the Post Office, both paying £2,712, then LV and Standard Life, both paying £2,815.
Peter Vicary-Smith’s obvious conclusion is worth repeating: “For those who want to leave their family a cash sum, our advice is to steer well clear of these plans and to put your money in a cash ISA instead.”