With-profits pensions beat the market

Savers who invested their pensions in with-profits funds in the past 20 years will be better off than those who invested on the stockmarket, according to a new survey.

However, payouts on mature policies are still less than they were a year ago, according to the figures compiled by Money Management, the FT publication.

Regular monthly payments into a with-profits policy over five, 10, 15 or 20 years would, on average, have produced a better pension this year than the same amount invested in a FTSE 100 or FTSE All-Share tracker fund.

Savers would also have found themselves better off in a with-profits pension than in a balanced managed fund – the most popular type of pension fund used by life insurance companies.

For example, anyone saving £200 a month for 20 years into a with-profits pension would have received £101,144 on average compared with £69,408 in the average balanced managed fund and £86,382 in a FTSE All-Share tracker.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said that although the results were relatively good news for with-profits pension savers, it did not mean that with-profits were a suitable investment choice.

“We shouldn’t be too surprised at this as it is what with-profits plans are supposed to do – they smooth returns during a downturn in the market,” he argued.

“I don’t think any of this changes our long term view that a with-profits plan still isn’t a particularly attractive investment.”

With-profits pensions are still paying out less than they did last year, often because life insurance companies are paying lower final bonuses.

Figures announced in January showed that the biggest bonus cut on a 10-year policy came from Prudential, which nearly halved its final bonus payment from the level declared last July. And the biggest cut on a 15-year policy came from Norwich Union, which reduced the final bonus from £8,666 to £721.

With-profits investments tend to be criticised by financial experts as it is difficult to know how much they will pay investors on maturity. This is because a large amount of the payout is made up of both annual and final bonuses, which are determined by actuaries and may bear little relation to actual stockmarket returns.