Few products have seen such a sea change in interest as with-profits bonds. A decade or two ago they were all the rage, used to meet a whole range of needs and appealing to different types of investor. But after years of opaque products, poor performance and mis-selling scandals, it is little wonder that with-profits has struggled to regain its lost reputation.
Yet the product cannot simply be confined to the history books. There are thousands of with-profits bondholders entitled to know how their investments are performing and being managed. Some providers are reticent to supply information since they manage closed books only and no longer ‘actively market’ the product, but this is of little use to those still holding on to their investment.
With-profits bonds do, however, have some useful features, such as the ability to withdraw 5 per cent without any immediate tax liability. Although their popularity has dwindled, with-profits bonds are still being sold today in numbers that should not be ignored.
Open for business
Despite the temptation to think of with-profits bonds as an investment relic, an active market remains with new products continuing to launch. Table 1 shows the with-profits bonds open as at 1 November 2012, with a total of 18 bonds available from 13 different providers.
Of these, three launched within the past year – namely Aviva Select Investment, LV= Flexible Guarantee Bond Series 2 and Teachers Assurance Guaranteed Growth Bond – and another, the Healthy Investment With Profits Bond, is available from 1 January 2013.
Providers offering with-profits bonds show a clear bias towards unitised funds. Of those in the market, only the smaller friendly societies stick to the conventional model, such as Foresters and Kingston Unity. There is a certain benefit to policyholders in the unitised model as units are typically assigned a minimum value that will not fall, whatever else happens during the investment term. This provides some level of certainty in what is arguably still a rather opaque product.
The main point of difference is on charges. The cheapest option is at 0.5 per cent, available on the Sheffield Mutual Investment bond and, in some circumstances, on Aviva Select Investment. This most expensive option is on the Foresters bond at 2 per cent. Many have a tiered system, where charges become cheaper as more is invested.
Of course, charges should not be the only factor and may be higher for a reason, such as paying for a guarantee, a higher sum assured, or other plan options. Some plans administer no explicit charge, instead taking fees into account when setting bonus rates. Legal & General, Prudential and Royal London take this approach.
