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COBS 13 Annex 3 Charges

This annex belongs to COBS 13.4.1 R (Contents of a key features illustration)

1R

Charges

1

Appropriate charges information

1.1

Appropriate charges information comprises:

(1)

a description of the nature and amount of the charges a client will or may be expected to bear;

(2)

an 'effect of charges' table; and

(3)

'reduction in yield' information.

1.2

Where a firm does not include a projection within its key features illustration the charges information can be on a generic basis.

Exceptions

1.3

An effect of charges table and reduction in yield information are not required for:

(1)

a life policy without a surrender value, but an appropriate warning must be included to make it clear that the policy has no cash-in value at any time;

(2)

a SIPP;

(3)

a stakeholder pension scheme, if the following is included instead:

“There is an annual charge of y% of the value of the funds you accumulate. If your fund is valued at £500 throughout the year, this means we deduct [£500 x y/100] that year. If your fund is valued at £7500 throughout the year, we will deduct [£7500 x y/100] that year.”

(4)

a stakeholder product that is not a stakeholder pension scheme, or a product that will be held in a CTF where the relevant product and the CTF levy their charges annually, if the following is included instead:

“There is an annual charge of y% of the value of the funds you accumulate. If your fund is valued at £250 throughout the year, this means we deduct [£250 x y/100] that year. If your fund is valued at £500 throughout the year, this means we deduct [£500 x y/100] that year. [After ten years these deductions reduce to [£250 x r/100] and [£500 x r/100] respectively.]”

where (in the case of (3) and (4)) ‘y’ is the annual charge and ‘r’ is the reduced annual charge (if any).

1.4

Reduction in yield information is not required for a without profits life policy with guaranteed benefits (except on surrender or variation), a life policy with a term not exceeding five years or a life policy that will be held in a CTF.

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2

Effect of charges table

2.1

Each ‘effect of charges’ table must be accompanied by, or refer to:

(1)

a statement that all relevant guarantees have been taken into account (if there are any);

(2)

a warning that one effect of the charges referred to is that a retail client could get back less than they invest (if that is the case); and

(3)

the rate of return used to calculate the figures in the table.

2.2 The effect of charges table:

(1) for a life policy, personal pension scheme or stakeholder pension scheme must be in the following form:

R

Note 1A

Note 2

Note 3

Note 4

Note 5

Note 6

At end of year

Total paid in to date

With-drawals

Total actual deductions to date

Effect of deductions to date

What you might get back

£

£

£

£

£

1

...

5

10

...

(2) for any other packaged product must be in the following form:

R

Note 1B

Note 2

Note 3

Note 5

Note 6

At end of year

Investment to date

Income

Effect of deductions to date

What you might get back

£

£

£

£

1

5

10

...

(3) must be completed in accordance with the following notes:

R

1A

(a)

This column must include the first five years, every subsequent fifth year and the final year of the projection period.

(b)

Figures may be shown for every subsequent tenth year rather than subsequent fifth year where the projection period exceeds 25 years, or for whole of life policies.

(c)

For whole of life policies, should the projected fund reach zero before the end of the projection period this must be highlighted.

(d)

For an alternatively secured pension figures must be included for each year for a term of ten years.

(e)

If there is discontinuity in the trend of surrender values, the appropriate intervening years must also be included.

(f)

Figures for a longer term may be shown.

1B

(a)

This column must include the first year, the fifth year and every subsequent fifth year of the projection period.

(b)

For an alternatively secured pension figures must be included for each year for a term of ten years.

(c)

Figures for a longer term may be shown.

2

This column must show the cumulative contributions paid to the end of each relevant year.

3

This column must show the cumulative withdrawals taken or income paid to the end of each relevant year (if any). The column may be omitted if withdrawals or income are not anticipated or allowed.

4

This column is optional. If it is retained, it must show the total actual deductions to the end of each relevant year calculated using the following method:

(a)

apply the intermediate rate of return for the relevant product to the figure in the ‘effect of deductions to date’ column for the previous year;

(b)

subtract this figure from 2the figure in the ‘effect of deductions to date’ column for the year being shown; and

2

(c)

add the resulting figure to the figure in the ‘total actual deductions to date’ column for the previous year (if any).

5

This column may be deleted if the product is a without profits life policy with benefits that are guaranteed except on surrender or variation, a life policy with a term not exceeding five years, or a life policy that will be held in a CTF.

If this column is not deleted, the ‘effect of deductions to date’ figure must be calculated by taking the accumulated value of the fund without reference to charges and then subtracting from this figure the figure in the ‘what you might get back column’ for the same year.

6

This column must show standardised deterministic projection of the surrender value, cash-in value or transfer value, calculated in accordance with the rules in COBS 13 Annex 2 (Projections) at the appropriate intermediate rate of return to the end of each relevant year.

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Exception

2.3

An effect of charges table may be amended, but only if and to the extent that is necessary to properly reflect the nature and effect of the charges inherent in a particular product.

G

2.4

The effect of 2.3R is that, for example, the column labels and explanatory text may be adjusted to reflect the nature of the contract. For instance:

The column titled ‘What you might get back’ might be replaced with ‘What the transfer value might be’ for personal pensions, or ‘Open market value’ for income withdrawals or short-term annuities.

The withdrawals column may be called ‘Total income taken’ for income withdrawals or short-term annuities.

The table may be titled ‘What effect will the deductions have?’ for income withdrawals or short-term annuities.

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3

Reduction in yield

3.1

Reduction in yield (‘A’) is ‘B’ less ‘C’ where:

(1)

'B' is the intermediate rate of return for the relevant product; and

(2)

'C' is determined by:

(a)

carrying out a standardised deterministic projection to the projection date, using ‘B’; and then

(b)

calculating the annual rate of return (‘C’) (rounded to the nearest tenth of 1 %) required to achieve the same projection value if charges are left out of account.

3.2

A firm must present reduction in yield as ‘A%’, as part of a statement which explains that ‘charges and expenses have the effect of reducing your anticipated returns from ‘B%’ to ‘C%’, or in some other appropriate way.

3.3

If contributions will be invested in more than one fund in a single designated investment or made by an initial lump sum payment that is followed by regular contributions, the reduction in yield must be:

(1)

calculated separately for each fund or for the single contribution and the regular contributions (as the case may be); and

(2)

presented:

(a)

on a fund by fund, or single contribution and regular contribution, basis, together with a statement which explains the nature and effect of a reduction in yield, the reason for the inclusion of more than one reduction in yield figure and the reason for the differences between them; or

(b)

(if the reduction in yield results are so similar that one figure could reasonably be regarded as representative of the others), as a single figure together with a statement which explains the nature and effect of a reduction in yield, and that the reduction in yield figure given is representative of the reduction in yield figures for each of the funds or for the single and regular contributions (as the case may be); or

(c)

through a single figure combining the separate figures for each fund or contribution in a proportionate manner, with an appropriate description.

3.4

Where a firm is calculating reduction in yield information, it must:

(1)

disregard charges related to mortality and morbidity risks; or

(2)

(where the requirement in (1) produces figures that are misleading) include a statement with the reduction in yield information that it has been calculated taking into account charges related to mortality and morbidity risk.