Investors were once wooed by the promise of a long–term investment with seemingly inevitable healthy annual bonuses, as well as a terminal bonus at maturity. On top of this, with-profits funds offered security of diversification and were invested in a spread of asset classes, such as property, fixed income, and UK and overseas equities.
Over time however, managers encouraged by strong stock market performance increased annual bonuses to an amount that could not be sustained once the market began to slip. Cuts in bonuses ensued and many funds closed to new business.
Slippery slope
The number of providers that still accept new clients continues to fall. Of the 55 with-profits endowments policies included in this survey, only five are still taking on new business – Foresters Friendly Society, Healthy Investment, Kingston Unity, Scottish Friendly, and Sheffield Mutual.
Paul Osborn, chief executive of Foresters, says, “In today’s low interest rate environment, a with-profits fund can provide a much better return than a simple deposit account but without the volatility of the stock market. The fund invests in a mixture of equity, fixed interest, property and cash.
“The return, combined with tax advantages, life assurance cover and the fact that bonuses once declared cannot be taken away make with-profits policies an attractive savings vehicle.”
Despite the lack of access for new customers, many people still have large sums of money tied up in with-profits endowments. With terms typically between 10 and 25 years, there could still be a long way to go before clients see the maturity of their investment, and the fulfilment of the terminal bonus promised at the outset of the investment.
The options available
Due to the length of terms, some investors may be tempted to pull their money out of the fund early. Before doing so, clients need to be aware of any penalty charges that they may incur, as well as considering where they could alternatively put the withdrawn funds.
Table 1 demonstrates how with-profits funds compare on average to other popular investments. Keeping money in cash savings is the least profitable option across the board, amounting to less than half of the returns of a with-profits fund over the course of 25 years.
An investment in the IMA Mixed Investment 40-85 per cent shares or UK All Companies sectors would consistently outperform with-profits funds, as do passive UK equity tracker funds. While with-profits funds are not the worst thing clients could do with their money, there are more lucrative options available.
