Bond cash frozen for years

Published on Saturday 18 October 2008 15:01

INVESTORS have been told they must wait for three and a half years to get all their money out of what many believed was a simple deposit account or risk losing up to quarter of their nest egg, writes Teresa Hunter.

Up to 9,000 investors bought into an AIG Life UK Premier Access Bond on the advice of private banks, wealth managers or financial advisers, where money was then injected into a so-called "enhanced fund" which held out the promise of superior returns.

However, the fund suffered significant withdrawals in September as concerns about AIG US broke, at which point AIG Life UK effectively froze the fund, placing a moratorium on withdrawals. It has since decided to close the fund on December 15.

Simon Galbraith, who invested 800,000 after selling a property and waiting to buy another, said: "I was told it was a straightforward deposit account which allowed me to withdraw my money whenever I wanted."

In fact, the money market fund invested in the high-quality debt of triple and double A-rated companies and the value of many of these investments has plunged as the credit crisis deepened.

Investors have been informed that half their savings will be transferred to another AIG fund, from which withdrawals can be made. The remaining half will be transferred to a New Protected Recovery Fund.

They are then being given the option of leaving it in the fund for a further three and a half years, at which point its immediate parent, the American Life Insurance Company, will guarantee to at least repay the deposit as it stands on December 15, 2008.

Alternatively, they can opt to encash their holdings, but they have been warned that in this case assets will be sold. In the current market, the expectation is they may only fetch between 50% and 80% of the value of their investments, and they will see the value of their investments cut accordingly.

An AIG spokeswoman said: "It is impossible to say for sure what these assets will be worth, but clearly it is not a good time to be selling them. However, our marketing material made it clear that although these were instant access investments, in exceptional circumstances the company could limit withdrawals. These are very exceptional circumstances."

Galbraith, who works for a software company, said: "I was told my money would be safer in this bond than with an ordinary bank account, because it was backed by the world's largest insurance company. It was explained to me that it worked just like any other instant access deposit account. I had no idea it was invested in corporate debt. And neither did anyone else I have spoken to. I am shocked to discover the fund is in difficulties. People are frightened and upset.

"I am having to live in rented accommodation because I cannot now get access to the funds to buy again."

An AIG spokeswoman said the company literature clearly spelled out that the money was invested in company debt. She said: "Investors can withdraw their cash if they wish. We will not prevent them. All we are saying is that the parent company will in three and a half years' time guarantee to pay them what their investment was worth at December 15."

But Galbraith added: "A good chunk of my investment will have been effectively frozen for four years, with disastrous consequences."