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.
Healthy investment performance over recent years has also helped. Roland Horton, senior actuary at LV, says: “With-profits bond sales have gone from strength-to-strength, with ABI statistics showing a 10 per cent compound annual growth rate over recent years. Coupled with pension freedoms, this has driven consumer appetite for stable, secure investments.”
Prudential’s PruFund, which it describes as a “more transparent” version of a with-profits product because it does not reassess values on a quarterly rather than annual basis, is a notable success story in terms of inflows. The fund has taken in £2bn in both 2015 and 2016. Annual premium equivalent sales rose by 65 per cent in the first nine months of 2016, according to the firm.
The key numbers
As with any other investment, the performance of with-profits bonds should be judged over a number of years. A long-term time horizon is particularly important for these products because of the existence of creation charges and early exit penalties. The individual performance of every bond surveyed, collated in Table 3, outlines this – many of the 12-month cash-in values are below the bonds’ current values as a result of these fees. Most of these fees have been fully erased after five years of holding or longer.
Another idiosyncratic element of with-profits bonds is the possibility of a terminal or final bonus upon maturity. Again, providers maintain discretion to adjust these to reflect market conditions. Table A shows the current terminal bonus rates applied by those providers surveyed. Results have been positive over the past 12 months, almost universally, with Foresters, Phoenix Life and Royal London all increasing rates from this time last year.
