Understanding French assurance vie misconceptions
"It’s wise to read between the financial media lines" says Robert Kent of Kentingtons. Here's his monthly feature for The Connexion readers...
This month, the editor sent me an article she had come across in the mainstream French press about assurance vie and asked me what I thought. Given that many people living in France have an assurance vie, including foreign newcomers so, no doubt, many Connexion readers, we agreed it was an interesting topic.
The article headline read: “Since the beginning of 2020, [savers] have withdrawn €5.2billion from their assurance vie and are opting for safe and liquid investments.” This is not so much misinformation, more misrepresentation and misdirection.
In 2019, we saw €26billion added to assurance vie investments, adding to the massive €1.715trillion (as of January 2019) already invested that way (source: Fédération Française de l’Assurance). The €5.2billion figure mentioned represents just 0.305%.
Given that many people live off their savings in their assurance vie, €5.2billion actually seems incredibly low. It is a good attention-grabbing story because €5.2billion sounds like a scarily huge number. In internet speak, this may be referred to as “clickbait”. Interestingly, the last sentence adds “€1.76trillion remained invested in assurance vie at the end of July 2020”.
There is no analysis of this statement – it is somehow completely detached from the rest of the article. However, this is quite an increase from January 2019, so Covid-19 and the resulting economic consequences are clearly not stopping investors at all, contrary to what the headline might lead you to deduce.
The second part of the heading – “safe liquid investments” – is interesting, because I find myself wondering what those might be. Banks were having liquidity/solvency issues before Covid-19 and the pandemic-weakened economic environment is hardly helping.
Of course, there is a compensation scheme, known as the FGDR, or Fonds de garantie des dépôts et résolutions (garantiedesdepots.fr), offering support of up to €100,000 per depositor. Surely, there are huge amounts of completely spare cash sloshing around sufficient to support this for every single depositor? No, this “guarantee” is on a first-come first-served basis, so fingers crossed!
Conversely, certain assurance vie investments, with a fonds en euros, are backed by assets held in escrow, euro for euro (or pound for pound, in a fonds en GBP). This means that for every euro you invest, the provider must put a euro into a segregated account (to which they have no access) to support your capital in the event that they fail. No getting in line and no fingers crossed. The article does, however, bring up some good points. One of the issues with this unrivalled level of protection is that this is great for the investor (as they are taking none of the risk), but less good for the assurance vie providers, who are taking all the risk.
This is leading providers to restrict access or even close these funds to new savers altogether. Clearly, having billions in accounts they cannot touch is worrying in these times of government demands of solvency and liquidity, so many are directing savers into unités de compte, essentially non-guaranteed funds, which are usually linked to global stock markets. Therefore, for those who want zero market exposure and an absolute guarantee on their savings, this structure no longer works well.
Investment and interest
You can invest in cash and fonds en euros, but interest rates mean that returns may be below water (meaning charges outweigh the gains) if the charges are high. Some months ago, in this space, we explained how the fonds en euros worked and why they were still useful, but it is not logical to hold all your money this way.
What this means is that there is no dichotomy between the need to have funds without an escrow-backed guarantee, since it makes no sense to hold long-term savings in an arrangement that is not earning a respectable return. This does not mean that everyone should get all of their money out of the fonds en euros. They remain a vital part of security and financial planning, but lower returns mean that a certain percentage needs to be somewhere else, earning better returns.
We have seen advisers talking these funds down, ceasing to offer them, or making the costs so high that they are not attractive. This tends to be by those who earn commission, so make sure you only take independent advice to get a truly impartial view.
Moving everything to cash makes no sense at all, because doing so would only serve to seriously limit the security/protection for your capital, absolutely guaranteeing a derisory return while losing all the benefits for reducing taxation, further reducing the net return and, moreover, missing out on inheritance and succession benefits. That makes the article not only misleading but a danger to its readers’ financial wellbeing.
Very careful financial planning is essential, ensuring that you have many forward years of income requirement in a place prioritising security, such as the fonds en euros. This needs to be well balanced with something designed to achieve higher returns, while minimising any possible risk to capital. In conclusion, if you have an assurance vie, all in escrow-backed fonds en euros, there is no reason to worry.
However, there may be a need for action to rebalance what is inside, in a way that is comfortable for you. If you are a new saver, start off this way, with a portion in fonds en euros and the remainder in something that will earn you a decent return.