I have just received an offer from my bank for an investment that offers me an extra allocation if I invest now. How do these extra allocation investments work? Are they real or is it a gimmick? This one says it will give me 102% of the amount of capital I invest.

Extra allocation rates are a 'sales lure'. You normally find them attached to a pension or investment bond so that probably includes everyone in the UK. Let me explain how they work. An insurance company prices up its charges for the investment it is selling to you.

Once they have done that, they can now distribute these costs and charges to you the investor. There are different ways they can cost out their investment.

The normal (and cleanest) method is to charge you up front a clear and explicit charge. Other methods are to charge on an ongoing basis per year and of course there is the other which is the old hidden investment charges.

The method you are referring to above is quite common but for the layman it appears clean and 'nice' when it's actually the reverse, if not very misleading. Instead of charging you up front for the cost of the advice and the product you are purchasing, the firm offer you 102% of your capital to be invested into investments and they simply layer the charges and 'extra allocation' onto your plan over five years.

You might think this is good but of course the charge is actually higher than normal and moreover can be a percentage of the value of the value of the investment (which is rising) as opposed to the initial value which is lower.

Many investors believe they are getting a good deal but they only need to call the insurance company the day after investing and ask for the surrender value and you will soon see how meaningless the 'extra allocation' actually is. I have seen penalties as high as 9% being charged the following day.

This is simply the set up costs that would have been charged over the five years being taken out of the investment now, because it is being encashed and they need to take that money back.

If you had believed you were paying a fee of 9%, would you have invested? That’s unlikely. In fact many of these investments can often be sold on the back of you exiting an investment that is charging you a penalty for leaving.

Advisers can often tell you that the extra allocation going into the new scheme is indeed compensating for any investment penalty exiting one the other. This is highly misleading. More often than not the exiting scheme charging the penalty, is a scheme that gave you the 'extra allocation' when you bought it, and you are now going from frying pan to fire.

To ensure you are not mislead, ask the adviser selling you the investment to point you to the key features document, and in particular the section which shows what you will receive if you encashed the following day.

Their reaction will be most interesting! Another method is to approach a fee based independent financial adviser who will look at your situation and give you advice independent of commission. That way you can be rest assured they will find the most cost effective contracts available to you, and you can be doubly assured it won't be a plan with an' extra allocation'.

There are other methods of companies hiding fees and that’s within a structured contract. You will see them everywhere at the moment: '4x the growth of the FTSE, 6% per year income as long as the FTSE grows by 'x' are the general headlines'. These schemes are an outstanding method for companies to hide costs and profits as you will never be able to see how they bought the guarantees and potential returns as they are hidden inside complex derivatives.

If only investments were easy!!

For advice on investments call Peter on 0845 230 9876 or e-mail info@wwfp.net