Opinion  

Could with-profits be making a comeback?

Tony Hazell

Tony Hazell

Conceptually with profits would seem to be the ideal investment for those willing to take a bit of risk but uncomfortable with full stock market exposure.

Mix shares with fixed interest, add a sprinkling of property and a dash of cash and you have the perfect blend.

In practice it has, in the past decade or so, delivered disappointment, frustration and confusion to many investors.

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But is that the fault of with profits or a consequence of how it has been packaged, marketed and sold?

Has a sensible concept been undermined by high charges, mismanagement, inflexibility and opacity?

Returns were too often based on the whim of managers and actuaries who failed to spot economic, investment and demographic trends, some of which were obvious to anyone who spotted granny was still going strong at age 90.

Smoothing returns turned out to be sinking returns.

Promises were made that could never be fulfilled and sales were based not on investors’ needs but on the profits they would deliver to advisers and banks.

So can with-profits work without this baggage? In the post-RDR world Aviva is offering a bond with an annual management charge of between 0.5 and 0.8 per cent, depending on the amount invested

Investors can buy a capital guarantee for an extra annual charge of between 0.3 per cent and 0.5 per cent. This allows investors to cash in without loss after either five, six or seven years in a 60-day window centred on the particular anniversary they have chosen.

Crucially, Aviva will contact investors to remind them of the anniversary. If they choose not to cash in the extra charge is dropped going forward.

So that is clarity about what a guarantee will cost allowing an informed decision by the investor and their adviser.

This looks cheap compared with the charges on some bonds and structured products offering similar guarantees. Of course, there are adviser charges on top. But those are for you to negotiate.

The proof of the pudding will be in the eating. Can the fund – which is 52.2 per cent equities, 18.8 per cent property, 24 per cent corporate bonds, 3.7 per cent gilts and 1.3 per cent cash – deliver the returns investors expect, whether it be to beat inflation, savings rates or a balanced managed fund?

Will they be happy just to get their money back – and lose out to inflation and savings rates – if the market falters?

Aviva’s Portfolio Level Bond has turned £10,000 into £10,819 in one year £11,915 in five years and £17,604 in 10 years; steady but not spectacular.

With-profits is not for everyone – and certainly not for the massive numbers who were sold it in the 1980s and 1990s.

But a steady, balanced investment with as little risk as possible will undoubtedly fit the bill for some.