With Profits

With profit investment products were very popular from around 1980 through to 2002 however since then problems first with low-cost endowment products and then with-profit bonds have lead to a decline in popularity.

Many investors now feel that their with-profits investments are not performing well and certainly bonus rates are now very low in most cases.

Some with-profits funds are better than others, many are now closed to new business, usually because their financial strength is too low for the FSA to permit further sales.

If you are concerned about your with-profit investment(s) Contact Us or use the Enquiry Form.

Some of the factors we will consider when we review your with-profit investment will be

• Current value
• Penalties if you withdraw your money
• Guarantees and how you can benefit from them
• Annual bonus rate
• Terminal Bonus
• Market Value Adjustment
• Principles and Practices of Financial Management
• Financial Strength
• Investment allocation of the underlying fund

Many investors ask us "Why has With-Profits gone wrong". Up until 2002, the with-profit funds of many life assurance companies were very attractive

• Many companies had very strong funds. This meant that they could afford to pass on almost all of investment returns to policyholders whilst at the same time having deep reserves in case anything went wrong
• Past performance had been very strong
• Market value adjustments had often never been applied in the history of the fund
• Annual bonus rates were high
• Terminal bonus rates were high
• Generous allocation rates were offered to attract new investment
• Sometimes additional guarantees were provided
• With profits funds "smoothed" the investment returns of their underlying funds

This lead many investors and some advisers to conclude that with-profits were simple and fail-safe.

Unfortunately , many people failed to understand the with profits were medium-risk investments and that smoothing had it's limitations.

In 2002, the underlying investments into which with-profits were invested had fallen and markets were slow to recover. Many with profits funds were substantially weakened by this as they attempted to maintain value for investors. Many investors withdrew money and in some cases, this was to the detriment of the remaining investors. To maintain financial strength most with profits funds took the following actions

• Annual bonus rates were cut, in some cases to nil
• Terminal bonus rates were also cut, again, in some cases to nil
• Market value adjustments were applied, in many cases for the first time in the history of the fund
• The underlying investments were switched into lower-risk alternatives. This limited the funds potential for recovery

Even several years on, most fund managers are now much more cautious. There is still the potential for a high return but in most cases only if a high terminal bonus is paid when money is withdrawn. If however, markets continue to fall, the mechanism of with profits can offer very little protection to investors.