With-profit funds worth a gamble?

Oct 19 2007 By Jeremy Gates

Every autumn, as nights draw in and conkers fall from the trees, the annual updates arrive on four with-profit bonds which I took out in 1999/2000.

The plan was to get life cover on my mortgage, put a bit of ballast in my portfolio if shares collapsed - and possibly to land a demutualisation bonus in an industry ripe for consolidation.

With Standard Life, the gamble delivered a few free shares. But my Standard Life £5,000 bond, bought in 2000, would pay only £5,507 if cashed-in tomorrow.

I'm not alone in feeling a bit ripped off by with-profits bonds offered by the big life insurers. Regular savers into Standard Life with-profits pensions have seen payouts slump 60 per cent in five years - and experts warn that payouts from with-profits policies could fall for the next 15 years.

Yet with-profits bonds, usually invested in shares, cash, bonds and solid UK Government gilts and fixed interest, once seemed the safest port in economic storms.

By "smoothing" annual returns - holding over earnings from good years to boost returns in tougher ones - they should keep savers sleeping happily at night. Then came the collapse in shares in 2003 - and with-profits bonds have been in difficulties ever since. Now the Government's City watchdog, the Financial Services Authority, is warning the big providers they must treat policyholders fairly.

It says some fail to give "timely information" to those trying to review funds management - and says investors find it difficult to get advice from advisers, who may ignore the sector altogether in case clients claim they were badly advised.

Despite the bad publicity, the Association of British Insurers reckons that more than £320billion is invested in with-profits funds of big life insurers, through pensions, bonds or endowments.

Endowment holders can cash in their chips any time. But savers with bonds like mine - either from a one-off lump sum or regular premiums - find it harder to get advice. On top of that, they may face the penalty of a Market Value Reduction (MVR) if they ask for their money back. Standard Life would fine me £465 if I cashed in my bond.

Do the big with-profits funds still open for business, from providers like Prudential, Norwich Union, Legal and General and Standard Life, have much to commend them?

Patrick Connolly, at financial adviser Towry Law, says: "Prudential's Pru Bond is still a leader in its field with a good record.

"Some investors also like to withdraw five per cent each year from a with-profit fund tax-free - although higher rate taxpayers can get caught with a tax bill when their policy is eventually cashed in.

"At Towry Law, we do not put clients into with-profits funds. The product lacks transparency and flexibility, and attracts high charges which hit performance.

"For people already in with-profits bonds, there may be an argument for staying in - because a maturity date is near, or because of a penalty if they try to get out."

However, Robert Levy, sales and marketing manager at Healthy Investment, a Manchester-based friendly society, thinks the FSA criticism is "a bit broad brush".

Healthy Investment's Tax Exempt Savings Plan, limited by law to a maximum £25 per month or £270 per year, sells well to children who missed out on Child Trust Funds (CTFs). Many parents or grandparents put them into a Healthy plan, so they are not at a disadvantage to younger brothers and sisters with CTFs.

Says Mr Levy: "There is also strong demand for with-profits products, he says, from savers in their 40s and 50s seeking an additional lump sum when they retire."

If you hold poorly performing bonds with major companies, there is little doubt your money could do better elsewhere.

Personally, I can't bring myself to escape until they drop those penalties on the payouts.

Key questions on your funds

What are the bonuses being paid?

What are the recent bonuses?

What are the prospects going forwards?

What is the asset allocation of underlying fund?

What is financial strength of provider?

Is provider committed to with-profits market?

'I'm not alone in feeling a bit ripped off by with-profits bonds that are being offered by the major life insurers'