News/Events

The drawback of With Profit investment bonds [29th May 08]

Up to the beginning of this century, many clients brought with profits investment bonds as they were a popular form of lump sum investment. They were then regarded as low risk, should provide a return in excess of that achievable from a Building Society and 5% could be withdrawn as a regular income. Also, this did not have to appear on the individual’s tax return and regarded therefore to be tax free albeit tax differed.

In addition, these with profits policies were issued by all the major insurance companies who were all thought to be “as safe as house” and many, of course, were owned by a major banking corporations which gave a further comfort factor – Wrong!

In 2001 there was a significant downturn in world investment markets and suddenly these plans became particularly unattractive. The annual bonus rate fell significantly and in some cases to nil, the terminal bonuses (an extra payment made on maturity or early encashment) disappeared altogether and even worse, the Insurance Company placed an exit charge on the policy if the client wanted to surrender or switch internally to another investment fund. This was known as the dreaded MVA (Market Value Adjustment) although I have always regarded it as a MVR (Market Value Reduction) as I have never seen a surrendered value adjusted upwards!

So, many clients have been quite simply stuck with the investment plan and continued taking income even though there may have been no bonuses being added and this has reduced their actual capital value.

There is now some sort of good news in the horizon as a number of the companies involved give a window of opportunity to withdraw funds without having this MVR taken into account. It is known as a MVR free date and normally on the 10^th anniversary and the Investor will receive the true face value upon encashment.

Any investor who has a With Profits Bond and has been blighted by a MVR should look into the policy conditions now especially if the plan was affected in 1998 or indeed shortly after. Some of the companies, off the cuff, were Royal Sun Alliance, Scottish Mutual and NPI/Pearl. Over the last few weeks, I have been contacted several times for advice and you must remember that this window may only last for a month so immediate action may have to be taken. Otherwise you will become trapped again and the MVR will be reinstated.

Having said that, some companies have managed to continue to provide a reasonable return and indeed one or two belie the tide has turned but I am not sure? Mind you, companies such as Prudential, for example, have seen their With Profits fund deliver an investment return of 91% over the last 5 years and 134% over 10 years thus consistently outperforming both the stock market and many competitors.

Of course in our industry, life is never as easy as that, as numerous Insurance companies such as Norwich Union and AXA Sun Life are now offering a “Special Bonus” to their policy holders in their With Profit fund. A carrot to keep them in the fund for a period of say three years when sums will be added each year dependent upon the size of the investment and the period it has been held for. This can make an encashment decision even more complex so you should take immediate advice from a qualified IFA.

Langtons is offering a free review of all With Profit Investment Bonds in June.

This article was written by Langtons - Published in the Western Morning News, Money, 29th May 2008