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.

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.

In 2008, of course, we saw the start of what became to be known as the "Credit Crunch"

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.

Good News - perhaps?

This year, according to Skandia, £10 billion in With Profit Bonds will reach the ten year "MVR Free" date.

If you are one of these bondholders, what should you do. Put it in the bank and get 0.5% interest before tax? Re-invest it?

We will analyse your options and give you sensible, straightforward options. We are not led by commission and in fact we negotiate our fees with you, the client, first.

Simply contact us for more information

MVR free date with profit bond advice,MVR free date with profit bond advice