Another year passes and with-profits bonds continue to defy the odds. Despite being written off time after time, one of the dinosaurs of the investment space is still showing little sign of extinction. The asteroid may have already hit the industry – in the form of the endowment-selling scandal in the early 2000s – but signs of life are on the increase again.
However, while this year’s survey indicates renewed growth in many quarters, with-profits bonds are likely to remain an endangered species for the foreseeable future. A lack of new products is one headwind, and the other is the inability to shake off a bad reputation.
With-profits bonds involve investors paying a lump sum into a fund that is able to smooth returns by holding back money in good years in order to pay bonuses from reserves in tougher years. As that implies, these reversionary bonuses are usually made on an annual basis. But the process is far from foolproof. As investors have found to their cost in the past, reserves can dry up.
A related problem is a lack of transparency. Bonuses, as well as the market value reductions (MVRs), which can be made to a product’s value, are introduced at providers’ discretion. Investors have little or no idea of what these changes may be until the point at which they are actually applied.
Peter Savage, chartered financial planner at Northern Ireland-based Fairstone Financial Management, explains: “With-profit funds are still very much like marmite. This is mainly due to the period post 1999/2000 when the dotcom bubble crashed, and all of the with-profit providers applied MVRs to their funds. These funds and their features still have a place within financial planning, but with the right provider.”
This year’s survey shows signs of an uptick in interest, though, as Table 1 shows, the number of open with-profits bonds remains relatively small. The last bond was launched in 2013 and there is little indication that more are on the way.
However, Table 2 indicates that business was brisk for existing products at the start of 2016. The figures are not directly comparable with last year’s survey because one big provider – Prudential – returns this year having been absent from the previous report.
Nonetheless, almost every provider enjoyed a strong uptick in new business in the first half of 2016 – most notably LV, which doubled its sales to £300m over the period.
Overall sales across all of the providers rose by 30 per cent year-on-year in the first half of 2016. But this was very much a year of two halves, with the latter period showing a 30 per cent drop in new business.
One caveat is that figures only run to the end of November. Next year’s data will reveal whether this was a blip or the start of something more serious for with-profits products.
For now, providers point to two main structural tailwinds for their business: the prolonged low-interest rate environment, and the pension freedoms that have created a large cohort of potential new customers. In this context, one particular attraction of investment bonds is the ability to take 5 per cent of original capital each year tax-free. This allowance, which rolls over if it is not used, can be particularly advantageous for clients who are higher-rate taxpayers at the time of their original investment, but on the basic rate at the time of their withdrawal.