Money news, advice and predictions for savers and spenders.
By Jeremy Gates
When the world's financial markets crumpled last year, many small investors might have felt safe in the knowledge they had cash salted away in with-profits policies held at big insurance companies.
These supposedly 'bomb-proof' investments are designed to 'smooth' returns over the years to guard savers against wild upheavals in stock markets such as we have seen recent months.
They are sold to investors with a life policy, which pays a lump sum if holders die while holding the bond.
All told, there's £400 billion sitting in an estimated 10 million with-profits bonds in Britain, with providers of the stature of Prudential, Standard Life, Friends Provident and Legal & General. The money is invested in a mix of shares, fixed interest and property portfolios, with annual bonuses added to the account and paid out when the policy matures.
Annual bonuses, and the final payout, are decided by actuaries at the insurance giants, according to profits earned or losses sustained during the year.
Not long ago, with-profits bonds promised a pretty good return. At the end of the 1990s, many investors saw interest rates were falling, and with providers such as Scottish Mutual offering a 10% bonus at the end of year one, bonds looked a good place to stash cash for the longer term.
With bad timing, I bought several profits bonds at that time to provide safe and steady growth up in the years up to my retirement, with a payout to pay off the mortgage if I pegged out in the meantime.
None of the policies has done much over nine years, but the best by some distance has been the Mutual Investment Bond with Liverpool Victoria (since restyled as LV=) which slowly turned £5,000 in 2000 into £6,684 by June 2008.
Could it survive apocalypse 2008? In May, I read the latest LV= report on its fund with some foreboding to find the value of its shares was down 28.3% and property holdings by 21.8% - while fixed interest showed a 7.2% rise.
If managers of the fund had got enough of my money into fixed-interest investments like gilts ahead of the storms, I reckoned, I might still survive a disastrous year.
However, my latest statement shows a dent in the crash helmet that I hoped LV= might provide.
In a year, the value of my bond has fallen back nearly £200 to £6,499.
But if I want the money back tomorrow, the cash-in value has plunged far below that figure to £5,463 - thanks to the application of a swingeing Market Value Reduction (MVR) to stop me and many others from making any such request.
That would mean that in nearly a decade, my £5,000 would have earned just £463 profit. I could have beaten that in a building society account, with instant access at all times.
The Death Benefit remains at £6,499 - but it seems rather drastic to have to die to recoup money that was sitting happily in my bond this time last year.
All this, I'm afraid, rather confirms the warning signs flagged over with-profits policies with increasing regularity by leading financial advisors Hargreaves Lansdown.
"Despite what they promise, with-profits policies haven't worked very well in the volatile market of the last 10 years, which is bad because that was largely what they were designed for," says HL's head of advice Danny Cox.
"Apart from one or two providers - like Prudential and Wesleyan - I am afraid most products in this sector have been poor performers. Legal & General is not as good as it used to be, and some are really pretty poor.
"If you want to take much value out, you probably won't get it until you've died. Too many providers like NPI, Scottish Mutual and Equitable Life paid out massive bonuses in the past, which is bad news for investors still in."
Cox fears that with-profits policies were fatally holed beneath the waterline by the stock-market plunge in the wake of the dotcom boom in 2000-03.
At the worst time, bond managers were selling shares at low prices to get into fixed-interest investments like gilts, and have usually produced poor returns since then. The Prudential Pru Bond has been a notable exception to the rule.
"In times of extreme volatility in share prices, the so-called 'smoothing' of returns hasn't given investors the protection they hoped to get," says Cox.
Can I do anything to escape the trap with my with-profits bonds have proved to be?
To investors who want some cash, but don't want to pay that hefty MVR, LV= offers annual withdrawals up to 7.5% of the fund without penalty. However tax rules allow only a 5% withdrawal before a liability emerges for any investors still paying tax on income.
The alternative for with-profits bond-holders is to try to discover if their insurer offers a specific date, or a timespan when money can be withdrawn free of any MVR penalty.
"This information can be extremely difficult to find, because insurance companies often don't want you to have it," Cox says.
"The added complication is that different rules apply to different batches of bonds. The same provider might return the money without penalty from one tranche, while another product in a different tranche on their books won't get the same treatment."
The one good thing to come out of the with-profits bond fiasco since 2000 is that investors are left with an easier choice: if they want stock-market exposure, they should choose a successful managed fund. And if they want no risk at all, it's best to stick to cash and products like National Savings.
The one unexpected bonus from my portfolio of with-profits bonds was a tranche of free shares at Standard Life, who supplied another one of my bonds.
But minimal profits from those will hardly persuade me to buy any more with-profits bonds for a long time.
:: Information: Hargreaves Lansdown (0117 317 1690 and www.H-L.co.uk).
Poundnotes
:: At least 1.4 million pensioners must work in their retirement to make ends meet, says Dean Mirfin at equity-release specialist financial advisor Key Retirement Solutions.
He points out that 17% of pensioner households earned income from work during 2007-08 - a sharp rise on the 12% figure recorded a decade earlier.
Gross pensioner income (from all sources for over-65 year olds) in 2007-08 was £366 per week, with 48% of that from State benefits. This compares with £277 per week a decade earlier.
Mirfin says: "These new figures will not come as a surprise to anyone, as State support is decreasing and pensioners have to become more self-reliant.
"With falling retirement provision ahead, we expect the percentage of income coming from State benefits to fall further behind the cost of living."
Mirfin claims that equity release could typically provide an additional weekly income of more than £78, lifting average net pensioner income from £308 to £386.
Norwich Union, a leading provider of equity-release products, believes the market could double to £2.4 billion by 2013, as more older people take cash out of bricks and mortar.
KRS enquiries: 0800 531 6010 or download the guide to equity release on www.keyrs.co.uk/equity-release-guide.
:: The giant American fund manager Vanguard, which has specialised in low charges on its funds since launching a tracker mutual fund in 1976, is entering the UK market at a time when many shell-shocked investors won't want too much of their money grabbed by investment professionals.
It has teamed with Alliance Trust Savings Fund Supermarket to offer Vanguard funds within a share-dealing or ISA account, with a flat fee of £12.50 for an online trade or £20 for telephone or postal trades, in additional to annual fees charged by the fund manager.
There are 11 funds on the Alliance Trust savings platform.
Tom Rampulla at Vanguard Investments UK says: "Alliance Trust shares our philosophy of producing a low-cost, value-oriented service, and this shows the direction in which the UK market should move.
"We do not pay for distribution, and are committed to making Vanguard's funds available to UK investors in ways which do not erode returns through high and unnecessary charges."
:: Savers are managing to put away an average 6.83% of income, or £209 per month - the highest proportion ever measured by the National Savings & Investments Quarterly Savings Survey since it launched in December 2004.
However, the NS&I survey says saving could get harder as recession bites: its survey said 39% expect to save less than they are managing to currently, and 32% of savers fear that they do not have enough money to cope with an emergency.
NS&I says the savings boost is particularly marked among the 55-64 age group, who must be stashing away spare money ahead of their upcoming retirement.
London has the highest percentage of income saved, 7.98% - compared with 7% in Scotland, 6.73% in the North-East and 5.87% in the South-East.
Regions with the highest percentage of people regularly saving are London and Yorkshire and Humberside, both 51%.
:: The latest sign that easy-access savings rates are rising again is the Coventry BS eSave account for over-50s paying a market-leading rate of 3.25%, says Kevin Mountford, head of banking at website moneysupermarket.com.
"Five other easy access accounts have launched in the past three weeks, and another five providers have upped rates on existing easy access accounts," Mountford says.
"This level of activity is unusual, given that Bank of England base rate hasn't changed since March. But it's great news for savers, particularly those who don't have money they can afford to lock away in a fixed-rate account."
:: High-five savers:
Phone No Rate Account Period Deposit Interest paid
Clydesdale Bank via branch 5.00% (F) Five Year Bond Five Years £2,000 Yly
Halifax www.halifax.co.uk 4.75% (F) Web Saver Five Year Bond £500 Yly
Ruffer Bank 01372 736700 4.52% Fixed Rate Bond Five Years (P) £10,000 Quarterly
United Nat'l Bank 0800 218 2266 3.50% Three Month Gold Deposit Three Months £1 Half-yearly
Coventry BS 0845 766 5522 3.0% Poppy Save None £1,000 Yly
:: Top-five borrowers
Phone No Rate Period Max% Adv Fee Incentive
HSBC 0800 494999 2.49% discounted for two years 60% £249 Yes
First Direct 0845 610 0100 2.89% variable for term 75% £799 Yes
HSBC 0800 494 999 2.95% variable for term 75% £799 Yes
Co-Op Bank 0800 633 5286 3.24% to 31/09/12 75% £ 995 Yes
Loughborough BS (FTB) 01509 610707 3.39% for two years 80% £449 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).
