With-Profit Investors Preparing to Escape

With-profit bonds were one of the most popular types of investments a few years ago, with over 495,000 policies sold in 2001 alone. Now ten years on, investors remaining in with-profits are desperate to release their capital but with high exit penalties, known as market value reductions (MVRs), it has been expensive to make withdrawals.

During 2011, £15 billion held by almost 500,000 investors in with-profits bonds will reach its tenth anniversary, triggering a penalty-free exit period for many of them. Research shows that there are about 90 with-profit bond funds that have penalty-free exit dates this year with many of them paying a typical bonus of just 1% in 2010, less than the average ISA.

A few years ago, the standard with-profits fund was 66% invested in equities, with the remainder invested in a mix of property, fixed interest and cash. Today with-profits funds are significantly different with only 33% invested in equities and a larger amount invested in fixed interest.

With-profits funds were designed to allow investors to access the stock market but with a guaranteed return of their investment plus any bonuses they were paid. They work on the concept of holding back investment returns in the good years in order to pay out consistent annual bonuses when the investment returns within the fund are not so good, a concept commonly referred to as smoothing. The generous bonuses paid out in the 1980s and 1990s to with-profits investors meant that the majority of with-profits funds had to invest more and more in fixed interest to support the guarantees they had promised to investors.

As independent financial advisers, we would always recommend that any investment is reviewed regularly to ensure it continues to meet the needs of the investor, both with risk profile and financial objectives.

If you have investments within a with-profit fund, we would recommend that you consider utilising a possible exit strategy if there is a penalty free option. This should be discussed with a genuine independent financial adviser.

Contact Alexander Price Ltd on 01202 840900 for more information.