More with-profits disappointment

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Millions of with-profits policyholders are being urged to consider cashing in their investments or face many more years of disappointing returns.

The call comes from financial advisers after some of the country’s biggest life offices once again cut bonuses and final payouts in spite of seeing stronger returns on their underlying funds.

An estimated 20m Britons save into with-profits plans, which were widely sold in the 1980s and 1990s to investors wanting to build retirement funds or a lump sum to pay off a mortgage.

But the projected final payouts on most policies have tumbled as annual bonuses, paid as part of the “smoothing” principle of with-profits funds, have become leaner over the past decade.

For example, an investor who began paying £200 a month into Prudential’s 20-year with-profits plan in 1993 would see the policy mature this year with a lump sum of £85,774, down from a projected £87,978 in 2012 and £117,469 in 2008.

A saver making monthly payments of £50 into a 25-year endowment policy with Standard Life would see their final payout in 2013 fall to £27,791 from a projected £37,763 five years earlier.

Legal & General, which operates one of the stronger with-profits funds, made a significant cut in endowment payouts at a time when it has a record number of maturities, with the payout from a £50-a-month endowment reduced from £33,601 in 2012 to £30,789 in 2013.

“In 2012 equities, fixed interest and property investments gave positive returns, which is reflected in all with-profits funds making money over the course of the year,” said Patrick Connolly, head of communications with AWD Chase de Vere, the independent financial advisers.

“Despite with-profits funds making money in 2012, we have seen more payout cuts, providing further disappointment for investors who have stuck with their with-profits policies.”

Connolly believes investors are likely to endure further disappointment in coming years with the trend of weaker bonuses likely to continue.

Other advisers agree the outlook is not looking rosy as most of the with-profits funds, though not all, are heavily invested in fixed interest.

“If bonuses are actually not terribly good right now; when bond markets turn down, which they will, frankly it will get worse for with-profits bonuses,” said Brian Dennehy, managing director of Dennehy Weller & Co, the independent financial advisers.

“In a nutshell, if you can get out without any penalty, that’s what you should do.”

However, advisers cautioned that getting out of a policy should be handled with care and may not be the right decision for all investors. “You must check your policy terms to make sure you are not giving up some kind of valuable guaranteed benefits,” added Dennehy.

“This is particularly important for people with pension plans which have guaranteed annuity rates, or GARs, built in – because they will not be matched in today’s market.”

He added that investors should check to see if exit penalties, known as market value reductions or adjustors, were also in force on their policy.

These exit penalties will lower the surrender value of the policy, although they have generally disappeared on most funds as a result of improved market conditions. MVR-free guarantee dates, which provide protection against MVRs, exist for most policyholders.

Another consideration is the strength of the with-profits fund which can vary widely between providers.

For example, Prudential’s with-profits fund has returned nearly 132 per cent over 10 years compared with Aviva’s 93 per cent.

“As with any investment, there are the good, bad and indifferent with-profit funds,” said David Smith, certified financial planner with Bestinvest, the independent financial advisers.

“Many with-profit funds are now closed to new business and have dire track records, so advice should be sought from an impartial adviser that can illustrate the worth, or otherwise, of holding a particular fund.”

Investors weighting up whether to cash in their policy should also ascertain whether their policy provider prioritises annual or final bonuses.

Some providers, such as Phoenix, which is closed to new with-profiits business, shun annual bonuses in preference of final payouts which only benefit policyholders who hold on to their policies.

In spite of the policies falling out of favour with many financial advisers, with-profits providers argue that the investments offer attractive returns to investors in the current low-interest environment.

“Investors seeking protection from the full impact of volatile market conditions have the added confidence of knowing that their savings are invested in a financially strong, well-managed with-profits fund,” said Prudential.

“Our fund has consistently outperformed the market over the long-term, compared with other providers’ with-profits products and with many other investment options.”

Advisers also point out that there are alternatives to cashing in a policy, for those investors who are not fully certain about surrendering.

One option may be to make the policy “paid-up”, which means that no further premiums need to be paid but the fund continues to grow through the addition of annual and terminal bonus rates, until normal maturity.

“Similarly, rather than surrender a plan, it is still possible to auction many with-profit endowment plans – which can lead to values being secured that significantly exceed the surrender values offered by the insurance company provider,” said Smith of Bestinvest.

“Of course, if you can secure more through auctioning a with-profits endowment this does rather suggest that you hold one of the better with-profits funds.”