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With Profit Bonds and Funds Guide
How Do They Work?Policyholders funds are pooled together and invested by the with profits fund manager into a variety of different stocks, shares and other securities with the aim of maximising the return whilst avoiding any unnecessary risks. A reversionary (also known as annual or regular) bonus rate is declared by the insurance company's actuarial department usually on an annual basis and bonuses at this rate are added to participating policies on a daily basis. The bonus rate (currently typically around 5.5%) is based on an assessment of what the fund is expected to achieve after allowing for all expenses and the retention of some profit to build up the reserves of the fund. Once added the reversionary bonus can not be taken away although it should be appreciated that the reversionary bonus rate is not guaranteed and could be changed at any time.In the event that the investments do not perform to the anticipated level in a particular year, the funds reserves are used to support the reversionary bonuses. It is this policy of smoothing investment returns by adding regular bonuses that makes these investments attractive. When policyholders encash their holdings after a number of years, a calculation is made to ascertain how much of the reserves built up over those years are attributable to their capital and then a proportion of this is paid to them by way of a final or terminal bonus. In extreme circumstances where a holding is encashed at a time when markets have fallen and the reversionary bonuses that have been added to clients policy exceed the amount that the underlying investments have increased by over the holding period, the insurance company may apply a Market Value Adjustment (M.V.A.) This is a charge that reduces the payout to bring it into line with the actual profits made by the fund. The imposition of M.V.A.s is rare and the chances of an M.V.A. applying on surrender reduce the longer the investment is held and never apply on death. What Do They Invest In?As mentioned above, With-Profits funds invest in a wide array of different assets and these can be split into five distinct categories:
How Much Can I Invest?The minimum investment levels vary for each provider but are typically around £5000. The is no statutory limit on the amount you can invest in a with profits bond and most providers have no maximum. Some providers do have a maximum investment limit set and these vary from £100,000 to £1 million.What Is The Investment Period?With Profits Bonds have no minimum holding period although most will apply early surrender penalties where investors surrender their investments within the first five years. In any event, as an equity backed investment they should never be considered for holding periods of less than five years.What Are The Charges?Every provider deducts charges from the fund and policyholders investments to cover day to day expenses of managing and administrating the fund, to pay commissions to advisers and to ensure the providers themselves profit from their activities. There are vast differences in the ways in which bond providers apply their charges and these fall into the following categories:Annual Management Charge (up to approximately 1.5%): This is deducted from the fund and is taken into account when setting annual bonus rates. The annual bonuses are net of this charge. Initial Charge (up to approximately 5%): This is often imposed through the bid/offer spread, that is the difference between the buying and selling price of units within the fund. Establishment Charge (up to approximately 1.5% for the first five years). This is often imposed where there is no initial charge. In some instances the establishment charge is a percentage of the fund value and in others it is a percentage of the original investment. Exit Penalties (up to 9% in the first year). Exit penalties are often imposed on a decreasing scale over the first five years of the bond. They are likely to be higher where there is no initial charge. Allocation Rates (Between 98% and 107.3%): The allocation rate is the percentage of your investment that is used to buy units in the fund. It is usual for the allocation rate to be higher, the larger the investment. Where the allocation rate is less than 100% it is a charge and where the allocation rate is above 100% it is essentially a reduction in charges. For example, if you invest with a company that has an initial charge of 5% but is offering an allocation rate of 105% the allocation rate will eradicate the charge. All With-Profits Bond providers must detail their charges in their product illustrations. What Are The Risks?To many investors the risk associated with an investment is the likelihood of not getting back what they invested. With most investments this likelihood of loss reduces the longer the investment is held.
Essentially there are three risks attached to With Profits Bonds
More InformationInsurance Companies help linesMany Insurance Companies are happy to answer queries and give help and information over the phone, some via special free phone help lines. They will be able to deal with general administrative queries about their bonds generally or your particular holding but cannot give advice.
An Independent Financial Advisor
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