Investors in with-profits policies should take advantage of opportunities to exit their investments without penalty, according to financial advisers, as new figures show that the annual bonus rates on nearly 100 with-profits bonds are less competitive than returns on cash savings.
This advice came in the same week that Friends Provident announced it was freezing most of its regular bonus rates, in spite of improved investment returns. Bonus rates were held for policyholders in the Axa Sun Life and Sun Life Assurance with-profits funds that Friends acquired last year – although some unitised pension plan holders in Friends’ main with- profits fund will see modest increases in their bonuses.
With-profits policies are long-term pooled investments sold by insurance companies – usually in the form of endowments, bonds pension funds or annuities. Most guarantee to pay at least a minimum amount at maturity, but fund values can also be boosted through the payment of discretionary annual and final bonuses.
However, analysis from Skandia, the investment group, has found that 90 with-profits bonds paid an average bonus rate last year of just 1 per cent – less than the interest rate on an average cash individual savings account (Isa).
Skandia has therefore reminded policyholders that, this year, there will be dates on which they can cash-in their plans without the imposition of penalty charges known as Market Value Reductions (MVRs). These penalty-free exit dates are typically the 10th anniversary of a policy being taken out. In total, Skandia estimates that with-profits policies worth up to £5bn, held by hundreds of thousands of investors, will offer an MVR-free exit this year, having reached their 10th anniversary during 2011.
“As with any contract, it is important to be aware of any exit penalties that exist and avoid them where possible,” said Graham Bentley, Skandia’s investment spokesman. Financial advisers agree that investors should consider taking advantage of an MVR-free exit.
“You need to ask yourself some key questions about whether to cash in – as there are implications, for example, for tax – but I would expect that the average with-profits will have performed poorly compared with other cautious managed unit trusts, because of the lower equities exposure,” argued Miles Hendy, chartered financial planner with Fraser Heath Financial Management.
“I would forecast another fairly tough year because [with-profits policies] are heavily invested in those areas that other managers are avoiding,” he added. “I would expect bonus rates to go down.”
Even so, advisers have cautioned against rushing to opt out of all with-profits investments – as there can be vast differences in the returns and prospects for different funds.
Recent analysis from the FT magazine Money Management showed that the best with-profits bonds beat the average returns from balanced funds, deposit accounts and UK index tracker funds over one, five and 10 years. There were also big differences between the best and worst performances.
According to Money Management, the best cash-in value on a £10,000 investment after one year was £11,321 from Wesleyan – a 13.2 per cent annualised growth rate (AGR), compared with an average return of 0.5 per cent. Over five years, the best cash-in value was £13,240, also from Wesleyan – a 5.8 per cent AGR, against an average of 2.8 per cent. And over 10 years, the best cash-in value was £14,602 from Healthy Investments’ – a 3.5 per cent AGR – against an average of 1.7 per cent.
“Not all funds are poorly performing,” said Darius McDermott, managing dir-ector of Chelsea Financial Services.
“Companies like Aviva, Prudential and Legal & General are still actively selling with-profits bonds and have stronger annual bonuses each year. But, in aggregate, I would say leave with-profits, unless you are in one of those three funds.”
Advisers said that investors needed to consider the pros and cons of early encashment. Some with-profits pension products offer to convert investors’ funds into an income at a guaranteed rate – which can be a valuable option compared with the annuity rates currently on offer.
Investors who do wish to exit this year are advised to check their policy documents to see whether they can take advantage of an MVR-free anniversary.