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With-Profits Guarantees - Are Guarantees Important?

Guarantees are very important because they represent a safety position for investors. The recent Barclays Capital Equity survey evidenced that as things stand today (March 2009) equities, shares, have not performed any better than government bonds. With shares depressed, property in decline and interest rates at 0.5% the performance and prospects for asset values are now as bad as they have ever been.

The guarantees on with-profit plans effectively offer an investor or plan holder the chance to receive a value that is either a basic return above the amount originally invested or the amount originally invested or some other positive amount. A better way to put it might be that guarantees insure against losses. This is a generalised statement that may vary from plan to plan, company to company, but in essence guarantees nearly always offer the investor a chance to get something back which is better than a non-guaranteed value.

What Guarantee?

Are Guarantees Important? And how can I benefit?

How do I find out if I have a guarantee?

How do I exercise a guarantee?

Some examples

Our list of companies and their guarantees

Certainly as we stand today guaranteed values would normally represent a higher amount than the plan holder could expect without the guarantee. Therefore investors must consider whether NOT exercising a guarantee has any merits in light of future prospects.

The benefit of any guarantee is that it offers investors a known quantity.

If we were to take an extreme example imagine an investor who put money in a with-profits bond in a Japanese with-profit fund in 1988, who had a guarantee in 1998 that they could release their money without penalty. Given that Japanese interest rates were virtually zero during this period and their stock market crashed to about ¼ of its value then the guarantee in 1998 would probably have been very valuable. The only reason why it wouldn’t would be down to a view that things were going to get better, and probably very much better. Did they get better? No – the next ten years (to 2008) saw things get worse. We should point out that this is a purely hypothetical example in a market which did not offer with-profits, but the point is that long term returns are not necessarily positive even in a mature market and economy and that any guarantee (after the event) would normally represent fantastic value.

So investors in the UK today who can release money under a guarantee are quite likely to benefit greatly.

The information on this website is to be viewed as general information and does not constitute advice. Views and opinions expressed are those of the individual contributors. Individuals reading the site should not rely on any of the information contained within the site in making any decisions. DMP Financial cannot be held responsible for any liability suffered by any individual as a result of information contained within the site. In the event that advice or help is required then independent advice should be sought from a regulated independent adviser.