MORE INFORMATION INVESTMENT AND SAVINGS
10 THINGS YOU NEED TO KNOW ABOUT WITH PROFIT BONDS
1. The insurance companies who offered these investments managed
your money and through the use of a smoothing process unique
to with profit-funds, aimed to provide a regular and steady
bonus on investors’ savings. The calculation and payment
of any bonus was dependent upon the returns achieved on the
with-profit fund by the insurance company. Actuaries working
for the insurance company or fund manager would hold back some
profits in good years in order to make up the difference in
bad years when shares have performed poorly. This is how the
smoothing works and this is why the products are known as "with-profits".
2. These bonus payments generally took the form of a Regular
Bonus - normally declared annually in advance and added to
your savings on a daily basis. A Terminal Bonus was a further
bonus which may be added to your savings when you take your
money out of the fund. Many have now learned that a Terminal
Bonus is only applied at the discretion of the Insurance Company.
3. Over the past few years many people have become dissatisfied
with the performance of their with-profit bonds. Low, or in
some cases nil, bonus payments often mean that those who take
an “income” from their bond by way of withdrawals,
on average 5% of the original investment, have seen the capital
value of the bond eroded. Those who have opted for growth and
are looking to take income at a later date are also questioning
the wisdom of leaving their money in a fund that shows little
or no growth.
4. All returns from with-profits bonds have had basic-rate
tax deducted at source. In addition there will be no personal
liability to capital gains tax. However non-taxpayers cannot
reclaim the tax that has already been deducted. Regular withdrawals
of up to 5% of the original investment have no immediate tax
liability. Higher-rate taxpayers may, though, have a further
liability to tax for withdrawals that they receive over 5%
per annum with the excess being taxed at 20% (currently the
difference between higher-rate and basic rate).
5. On encashment if you are on the borderline between basic
and higher-rate tax, then the profit on the bond may take you
into the higher tax band and you would then have additional
tax to pay at the marginal rate (20%)
6. Given the current state of with-profit bonds, the natural
wish would be to move out of the with profits fund into another
fund offered by the same company. However there is a strong
possibility that penalties will be applied even for moving
money within the same company. If the investor is within a “closed
fund” then there are even less opportunities within that
company and the alternative would be to cash in the total investment.
Either way a penalty will now most likely be applied.
7. These penalties are known as a "market value reduction" ("MVR"),
or “market value adjustment” (“MVA”).
These penalties are designed to stop people receiving an unfair
advantage as the insurance companies use their reserves to
protect the with-profits fund during periods of poor investment
returns. Providers are less likely to apply the penalty the
longer your bond has been in force. The penalty is never applied
on death or on regular withdrawals sometimes up to 7.5% per
annum. A number of bonds have penalty free anniversary dates
but these generally occur after a longer period for example
10 years.
8. Many people are unaware of the level of charges they are
incurring within their with profits bonds, which of course
have a direct effect on net returns. Others may not have
reviewed their fund choice or fund performance for years believing
that they have no viable alternative. In these days of lower
returns, it is important to evaluate the charges incurred by
your bond and the performance of the fund to see where it may
be going in the longer term.
9. The dilemma has been that penalties have always been part
of the bond’s make up if the value of the fund had fallen
significantly. The 2001 to 2003 decline in stock markets caused
the assets of the with-profits funds to be seriously depleted.
The effect was that then almost every company began to impose
penalties on those investors who wished to leave, whilst those
who remained were, and still are, subject to years of low returns
whilst the with-profits funds rebuild.
10. A number of companies are now beginning to reduce and in
some cases remove MVA penalties altogether. Other companies
retain MVAs and are paying no or low bonuses. Whatever applies
we think investors should now review whether or not it is in
their interest to hold a with-profit bond where any of the
above applies.
Let us carry out a review for you. We will analyse your bonds past fund performance, we will also consider the charging structure and whether or not you are in a “closed fund”. Finally we will compare it to alternative bonds in the market. Please contact us at the office closest to you. If you have a copy of your last valuation statement we can review it, although we may need your written authority to contact the insurance company concerned to enable us to gather further information.
Our review of your with-profit bond requires
no commitment. Following our report we will be pleased to advise
you whether in our opinion you are better off staying
invested in your plan or whether a change would be prudent.
If in our opinion a change would be the best course of action
to take, we will thoroughly explain your situation and recommend
a suitable course of action to take.
| COMPANIES WITH CLOSED FUND FUNDS – REVIEW STRONGLY RECOMMENDED* | ||
| AMP NPI | Pearl | Scottish Provident |
| Brittanic | RNFPN | Equitable |
| Royal London | Eagle Star | Royal Sun Alliance |
| London Life | Scottish Mutual | |
*Ownership of company may well have changed – original
names shown to assist readers.
