Many people have historically invested money in a “with-profits” bond – they were popular amongst investors as they were viewed as a “lower risk” investment.
By managing the underlying “with-profits” fund the fund manager could “smooth” the returns enjoyed by investors by keeping back some of the profits in the good times, to allow them to continue paying bonuses in the bad times.
How do Investors benefit from a With-Profits Investment?
An investor would typically benefit from investing in a With-Profits bond in two ways.
Reversionary or Annual Bonuses
The fund manager would typically declare an annual bonus rate applicable to their with-profits fund – this would be a reversionary bonus as a percentage of the initial amount invested as well as a percentage bonus based on previous bonuses already received (a kind of “compounded return” if you like.)
The second way to benefit from investing in a with-profits fund was through the potential payment of a terminal bonus.
In recent years, with UK and world stock markets falling, the bonus rates payable have been very low; in many cases no bonus has been paid.
As a result of the size of the fall in stock markets many life companies are applying “market value reductions” to any surrender from their with-profits fund.
These Market Value Reductions can see the final surrender value cut by anything between 10% and 20% – every plan is different.
The reason for this is to protect remaining investors and to ensure that those people surrendering their with-profits investment are paid a fair amount based on their participation within the fund.
With-Profits Investments – any real future?
With-Profits funds have fallen out of favour with many professionals and investors over recent years. By their very construction they are not “open” in terms of the internal costs and charges involved in running the underlying fund – especially when compared to a “unit-linked” fund where the charges and costs involved are explicit – the investor can see exactly what the costs incurred in running the fund have been.
Another area of concern for many investors is the underlying asset allocation within the with-profits funds. Many funds have reduced their equity content substantially, taking cash and fixed interest positions. This overly-cautious approach to fund management could be to the detriment of future returns within the fund, and hence, lower bonuses.
I Want to Cash In My Investment – Can I Avoid this Market Value Reduction?
There may be a possibility to avoid this MVR on exiting the with-profits fund you are invested in. Many policies were issued with a “MVR Free” guarantee – typically this would be the 10th anniversary of the investment. Many policies offered this guarantee – it was in fact one of the main selling points which many investors may have forgotten about or were not aware of.
Every company is different – some offer the MVR free option on day of the 10th anniversary – some offer it for up to 28 days following the anniversary.
In all cases we strongly suggest that you check the policy document and other papers provided at the time you took out the investment to see what, if any, MVR free guarantees apply to your with-profits plan.
Should I cash in my with-profits investment?
Shrewdcookie does NOT give financial advice – you must take professional independent financial advice before surrendering any investment as there may be tax and charge implications of which you are not aware. The purpose of this article is to bring to your attention the possibility that you may be able to exit your with-profits investment avoiding an unnecessary penalty!
Please tell us your experiences!
We are keen to hear from people who have avoided MVR on surrendering their with-profits investment – please tell us your story below.