With Profit Bonds

The concept

The concept of the With Profit Bond was basically very good. You invested a lump sum into an investment bond and could either take an income or leave the bond for growth. Each year an annual bonus was declared which couldn’t be taken away and later, or on encashment, you could look forward to a terminal bonus.

The bonus depended on the underlying with profit fund’s investment performance. Lack of transparency was always a problem, in that you didn’t always know where the manager was investing the money, or how well he was doing. The bonus depended on the underlying fund’s investment performance. Unfortunately the annual bonus rate could sometimes mask poor performance as many providers had vast reserves that they used to bolster performance and to try to match more aggressive equity based funds.

We, as Independent Financial Advisers, are able to analyse clients' With Profit Bonds and provide appropriate advice.

Market Downturn

Then came the three year bear market in 2000. Suddenly, for some of the weaker companies, the reserves were gone (although some of the stronger players still have good reserves). In addition, the markets did not recover and a number of companies now had liabilities in excess of their assets. The weaker with profit providers cut their exposure to equities as a result of intervention from the Financial Services Authority to instead concentrate on fixed interest securities to underpin their liabilities in a less volatile asset class.

So before charges and without having to replenish the reserves they lost, the ailing (not all) with profit bond funds can only look forward to a gross return of 4.75% on the bulk of their portfolio (based on the medium term gilt yield April 2008)

Bonuses slashed

With some bonds, bonuses have been slashed, in many cases to zero, with little prospect for improvement in the short term. To make matters worse, the Market Value Adjustment clause in the with profit bonds’ terms and conditions, has been invoked, which means, in effect, a fine if you want to move your money away!

Worse still, many investors are still blithely taking income from their with profit bonds at the same levels they were when bonuses were running at 7.5% a year or more.

We can analyse the fund and the effects of the Market Value Adjustment for you on your with profit bond and suggest some alternatives.

If your fund is paying no bonus and you are taking 5% income from it, if inflation was 2.5% then each year you are losing 7.5% of the real value of your investment.

We can analyse your with profit bonds and give you sensible guidance on what to do. Please click here to get more details, or fill in our online enquiry form.

Independent financial advice in Norwich, Norfolk and Suffolk regarding with profit bonds, market value adjustments and falling bonuses.