With-profits plans have been around for a long time. But lots of pundits are coming to believe that their appeal is getting past its sell-by date.
A with-profits plan follows a simple – and on paper, appealing – route. Each year, it pays out a bonus (called an annual or “reversionary” bonus) related to its performance over that period. It also pays a final (or “terminal”) bonus on maturity.
Although an attractive idea in principle, the problem is that the relation of the bonus to the performance is muddied. The actuaries who run these funds have some discretion over how much of a bonus is actually paid each year. It probably won’t give you the full amount gained because the actuaries want to ensure that the fund has room for manoeuvre in the future.
In a recent survey of independent financial advisers by the insurer Skandia, half of those questioned said that they expected bonus rates to stagnate this year. A third actually forecast falling rates.
The whole picture is further complicated by the fact that with-profits funds are very different. Some are good, some are bad – and some are downright ugly. A fund that’s been well invested, that has a good mix of assets and that pays generous bonuses may well be worth keeping. Strong funds can hold more money in more aggressive assets such as equities and property, yielding greater chances for long-term growth. Weaker funds have to safeguard the promises they’ve already made, which usually means placing more of their value in safer, less exciting assets such as bonds – with a resultant drop off in potential returns.
There again, funds differ in their approach to bonuses. Some pay generous annual bonuses that are guaranteed to be paid when the policy matures. Others put more emphasis on the final bonus – increasing the risk.
Last but not least, some funds impose charges if you leave early; and you might also lose possibly attractive policy guarantees.
All of this makes it vital to have any with-profits funds you have given the once-over by financial experts. At Welbeck, we are financial planning specialists who are adept in this area of the market. We can tell you whether you’ve got a graceful swan on your hands – or a lame duck. And if it’s the latter, we can point you in the direction of far more attractive possibilities. We’ll also tell you what the implications are for moving your investments.
To take advantage of this service, talk to us today.