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With-profits policies drag their heels

With-profits policies drag their heels

18/02/2011 13:52

Investors who wanted to beat the poor returns from building societies after the dot-com bubble burst 10 years ago saw with-profits bonds as a low-risk home for their money.

Holding shares, property and fixed-interest investments such as gilts, with-profits bonds are purchased with single or regular premiums and through endowments by homebuyers.

Their growth is boosted by annual and terminal bonuses. Bumper profits in good years are held over to ensure a reasonable level of earnings in poorer years by a process known as 'smoothing'.

In 2001 alone, some 495,000 policies were sold. Some 12 million people have £400 billion in with-profits bonds.

Each year, the big insurers report the progress of these funds - and the current reporting season is well under way.

This week Legal & General said it will maintain bonus rates at current levels and increase some payouts on plans reaching maturity.

On a £50-a-month, 25-year endowment policy, L&G is upping the payout from £34,486 to £34,750. On a 10-year, £10,000 lump-sum investment, L&G will pay £13,326, against £12,121 last year.

When they get their annual statements, however, many with-profits savers face some grim reading.

Too many policies are gaining value terribly slowly, while a handful are worth less now than 10 years ago. All this despite the near-doubling in the value of London's FTSE 100 of top shares since March 2009.

On many with-profits policies, annual bonuses are being cut or frozen. Bonuses of less than 1% a year - worse than the average cash ISA - are commonplace.

Part of the problem is that providers are struggling to absorb losses from too-generous payouts in previous years. Others switched money from equities in the Noughties to cut risk - and are largely missing out on rising share prices.

Figures from Money Management magazine show policies have delivered annual growth of a miserly 1.7% over the past 10 years. Poor performers include NPI, Colonial Life, Clerical Medical and Pearl Assurance.

One exception to the rule is Prudential's with-profits fund - which has delivered growth of 6.2% per year over 20 years for regular savers. Many savers who have parked redundancy lump-sums in the Pru's pot have few complaints either.

Patrick Connolly at financial advisor AWD Chase de Vere predicts fortunes in this sector could diverge sharply from here.

He says: "Legal & General, alongside Prudential and Aviva, continue to invest significantly in growth assets such as equities and property and are best-positioned among the providers to keep paying bonuses and making reasonably competitive payouts."

"It is also usually an advantage if a with-profits fund is still open to new money, because it tends to produce better returns than those which have closed. Closed funds have less incentive to produce good returns as they are not trying to attract new money."

Phoenix Group, a UK consolidator of closed life funds, has 6.5 million policyholders - more than three million holding with-profits policies from providers such as Pearl, London Life, Sun Alliance, NPI, Britannic, Scottish Mutual, Scottish Provident, Swiss Life and Century Life.

With all these companies, the original provider has left the life insurance sector, leaving Phoenix to run them off and produce an acceptable outcome for policyholders.

Phoenix will write to every policyholder, in eight different funds, between late-February and mid-May. It claims that only a quarter of its customers read annual statements in full.

Possibly the others know sad tidings may be coming their way. But Andrew Burke, deputy with-profits actuary at Phoenix, says that a tiny number of his customers - 1%- 2% - are likely to surrender policies ahead of maturity in any one year.

However disappointing the returns, it seems most of us keep paying regular premiums, or sit tight on single premium policies, in hope that a decent terminal bonus on maturity might compensate for small or non-existent annual bonuses during the life of the policy.

Burke thinks the chances of terminal bonuses are better over 25-year policies than on those which have lasted only 10: In the past decade, investment returns from many sectors have been poor.

He adds: "One attraction of with-profits policies is that once bonuses are added to the maturity value, they cannot be taken away. If you cancel a policy and invest the money in equities, you have no guarantee that its value will not fall."

"Alternatively, if you cancel and put the money you have released into cash, returns are currently low there too."

When they get their annual statements, these are among the options for policy holders to consider:

:: Ask a provider for an estimate of likely maturity value.

:: Check you don't have valuable guarantees in place which only pay out once the policy matures, or when it is converted into an annuity.

:: Check out the prospects of a good final/terminal bonus. The final bonus can make it worth hanging on.

:: Check if the policy includes life cover, which means a valuable life insurance benefit is lost if a policy is cancelled. Consumers in poor health might struggle to get a new life insurance policy elsewhere.

:: Does the policy have a Market Value Reduction (MVR) free date? If so, it means it can be cashed-in without having to pay an MVR possibly running into hundreds of pounds.

:: Many with-profits policies allow a penalty-free exit after 10 years. As many as 200,000 with-profits bond holders could get the chance to scrap their policies in 2011, without paying any penalty.

:: One option on poorly-performing policies may be to leave it paid up. You won't have to pay any more premiums, but money remains invested in the fund and there may be some life insurance benefits.

There is one other possible avenue for holders of single-premium with-profit policies: They can withdraw 5% of their original lump sum invested each year, with no tax implications unless they are higher-rate taxpayers.

I have three with-profits bonds - and the 5% lump sum which they pay each year exceeds the money which would be generated from the similar amount in a pension.

There might also come a moment when all three bonds can be cancelled without penalty - so the money which they contain is far more flexible than a pension pot.

Shellie Wells at Phoenix says: "It is essential to understand the policy you've got, and whether it still serves your requirements."

"If you don't really understand it, ask your provider for clarification and if you decide to take any action, seek independent financial advice."

:: Information: AWD Chase de Vere (0845 140 4014 and; Phoenix Group (0845 002 0344

The website has lots of useful information for with profits investors.


:: Yorkshire BS has unveiled two new deposit accounts with returns linked to inflation.

The Protected Capital Account is a five-year product linked to the Retail Price Index (RPI), offering either an annual income or maturity return option. The maturity return version guarantees savers the percentage change in RPI over five years, plus 1.5%.

The annual income version guarantees an annual return of 0.1% - plus the annual change in RPI over a year.

Simon Broadley, Yorkshire BS retail investment manager, says: "With interest rates at an historical low, and reports of rising inflation, we want to provide a product which maintains the true spending power of savings."

Investments in either product can be made within an ISA, to a limit of £5,100 in the current tax year. A maximum £85,000 can be invested in the account.

However, Kevin Mountford, head of banking at, says: "It's good to see providers tackling consumer concerns. However, the devil is in the detail and although inflation is currently high, the benefits will only be in the short term."

"Anyone considering inflation-linked savings products should balance the risk of variable rates against the certainty of fixed-rate products."

"Although the Yorkshire BS product has an ISA option, there are some attractive rates on fixed-rate ISAs and bonds - up to 4.75%. Over five years, returns from these may be higher, especially once inflation is under control."

RPI rose to 5.1% in January, the latest month for which figures are available, while the Consumer Prices Index reached 4%.

Enquiries: 0845 120 0100 and

:: Lenders are slowly increasing the choice of mortgages offering higher loan-to-value (LTV) ratios, providing some relief to borrowers with small deposits, says Louise Holmes at

There are currently 214 mortgages with a maximum LTV of 90% - against 185 in August 2010 and 144 a year ago.

The average two-year, fixed-rate loan with 90% LTV limit costs 6.09% - against 6.15% last August, or 6.48% a year ago.

Louise Holmes says: "Higher LTVs are making a steady return to the mortgage market, which is particularly helpful to first-time buyers who have struggled to find products which meet their needs."

"Over recent months some lenders have increased their rates and expanded their number of higher LTV deals, suggesting the market could be returning to a competitive rather than risk-based state."

:: Latest figures for inflation mean a typical UK household has to spend an extra £1,360 a year to maintain their standard of living from a year ago, says MGM Advantage.

In households with a main occupant aged 65-74 the corresponding figure is £849, according to the retirement income specialist.

MGM estimates the annual average household expenditure is £35,363. For those households with occupants aged 65-74 it is £22,081, and £16,278 for the over-75s.

Collectively, says MGM, UK households must find an extra £35 billion to maintain living standards of 12 months ago.

:: Consumers have racked up more than £120 billion in personal debts, says professional advice website

The research suggested that people will spend the first 45 days of the year, until February 15, working to pay the interest on these debts.

More than £58 billion is outstanding in credit-card debts alone, costing an average 16% in 2010.

:: High five savers

Phone No Rate Account Period Deposit Interest paid

Aldermore 045 604 2678 4.80% (F) Fixed Rate Account Five Year Bond £1,000 Yly

Coventry BS 08457 665522 4.75% Fixed Bond (128) 30/04/2016 £1 Yly

Coventry BS 3.05% eNotice 30 Days £1,000 Yly

Dunfermline BS 0845 733 6688 3.00% 60 Day Notice 60 Days (B) £1,000 Yly

Cheshire BS 0800 243278 2.95% 30 Day Postal Saver 30 Day (P) £1,000 Yly

:: Top five borrowers

Phone No Rate Period Max% Adv Fee Incentive

HSBC 0800 494999 2.29% (rem) variable for term 60% £99 Yes

Hinkley & Rugby BS 0800 774499 2.44% for two years 75% £795 Yes

ING Direct 0845 032 8800 2.50% disc until 31/03/13 70% none Yes

First Direct 0845 610 0100 2.79% variable for term 65% £99 Yes

Furness BS 0800 220568 3.29% (disc) for three years 80% none Yes


*K- Operated by Internet, Telephone, or Post

*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).

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